The tax implications of transfer pricing : an analysis

Abstract

Purpose: This study aims to analyse the current practice in Malta in light of the lack of formal transfer pricing regulations. The lack of local literature emphasized the need for such a study. Given the increased importance that transfer pricing has gained internationally, the research will also analyse the implications that might arise due to the subject, especially due to the BEPS project. As a result, the study will seek to understand the issues current tax practitioners face when dealing with transfer pricing. Design: Due to the nature of this study, the objectives were attained through a qualitative approach. After the literature available was analysed, seven face-­‐to-­‐ face, semi-­‐structure interviews were conducted with local tax practitioners, three from the Big 4 firms and four with mid-­‐tier firms. Findings: From this study it emerged that local tax practitioners do possess some knowledge on the subject. It was highlighted that due to the lack of formal local transfer pricing regulations on transfer pricing the practice in Malta is very limited. In the findings, the importance of the subject globally was emphasized, especially due to the BEPS project. The interviewees stated that before it was an opportunity for companies to come to Malta, due to the lack of regulation but now, since all eyes are on tax avoidance and anti-­‐abuse provisions it has become problematic. Furthermore, the majority of the tax practitioners agreed for the need for Malta to introduce some form of regulation. It was highlighted that this was mainly due to the potential introduction of BEPS, which may affect Maltese tax structure. The lack of expertise and lack of human resources within the Inland Revenue Department could be problematic for such an implementation to occur. Conclusion: This study concludes that one would need to provide training to all local tax practitioners as well as staff within the Inland Revenue Department. It was also concluded that there is a need for further focus on the subject from different academic and professional institutes. Following this the Inland Revenue Department should start thinking of implementing formal guidelines on the arm’s length principle as well as some form of regulation on transfer pricing. Value: At the moment there is no local research on the potential effect transfer pricing could have on the local scenario. The international pressure will result in necessary changes to the Maltese tax system, which will include either directly or indirectly the introduction of guidelines or rules regarding transfer pricing. This study addresses potential problems for future introduction of transfer pricing in Malta.