Analysing transfer pricing developments and its possible implementation into Maltese law

Abstract

Transfer Pricing is the setting of the price for goods or services sold between related businesses. This occurs when, for instance, a subsidiary company sells goods or services to its parent company – the price arranged and paid by the parent company for such goods or services is the transfer price. Transfer Pricing arises when a transaction is effected between businesses under the control of the same shareholder, directors, or even family members and apart from subsidiaries it includes branches and companies that are wholly or majority owned by the same controller. Essentially, the transfer price should be similar to what a seller under comparable circumstances would charge an independent, third party customer or what a buyer would pay an independent, third party supplier, both dealing at arm's length. This scope behind this thesis is to explore the Arm’s Length Principle as introduced under the OECD Transfer Pricing Guidelines initially and how Transfer Pricing rules have been developing internationally and also in the European Union. In doing so, the thesis will also analyse how the European Union has adopted its own method of assessing Transfer Pricing through the State Aid mechanism. Albeit Transfer Pricing is extraneous to Maltese tax legislation, one may still find indirect references to the Arm’s Length Principle and some powers left at the discretion of the Commissioner of Inland Revenue Department to assess transactions between closely connected persons. Through the research conducted, this thesis will infer conclusions and suggest why the Maltese legislator should consider introducing broader and more comprehensive Transfer Pricing rules in Malta.