There is no denying that transfer pricing is considered as one of the essential issues confronted by multinational corporations. For companies, it is a major tax issue. In Europe, Cyprus has become the last nation to execute the rules of transfer pricing in a scenario where base erosion and profit shifting (BEPS) problems are in a main position, and new requirements on the documentation of transfer pricing are being adopted by various governments. The features of the proposed Transfer Pricing of the Cypriot Legislation 2021 are summarised in this report.
- Introduction
For the purpose of establishing the legislative provisions in order to codify the transfer pricing (TP) regulatory regime in Cyprus, a bill was submitted in June 2021 to the House of Representatives. It is important to apply the rules of transfer pricing in accordance with the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (henceforward “OECD TPG”). The put forward legislation needs international as well as domestic transactions among associated individuals to be consistent (for the purpose of tax) with the "arm's length" principle, as referred to in OECD Model Tax Convention's Article 9 and as expounded by the OECD TPG. The taxpayers are obliged under the proposed Regulations to prepare as well as maintain the documentation of transfer pricing. The purpose of documentation is to enable the tax administration to evaluate the intragroup transactions' arm’s-length nature.
- Documentation criteria and preparation
2.1. Taxpayers subject to this new requirement
As per the Regulations, the obligation is pertinent for every transaction between related parties with particular exemptions. In Section 33, the meaning is assigned to the ‘Related parties,’ as amended and modified, of the ITL. Those parties which have an obligation to prepare the TP documentation are individuals that are foreign entities operating by means of permanent establishments in Cyprus and the tax residents that are residing in Cyprus.
2.2. Documentation requirements
The required documentation that should be prepared as per the Regulations is the Local File and Master File.
2.2.1. Local File components
It is the obligation of taxpayers to prepare as well as maintain a Local File, provided that the intra-group transactions accumulatively per specific category amount to or must amount on the basis of the arm’s length principle, around € 750,000 per tax year. No guidance with regards to the information is provided by the Regulations which is to be mentioned in the file; however, on the basis of the OECD TPG, a piece of more comprehensive information relevant to the particular intercompany transactions is provided by the Local File. This type of important information would involve pertinent financial information with regards to those particular transactions, analysis of the comparability, and the selection and implementation of the most suitable method of transfer pricing.
2.2.2. Master File components
In comparison to the Local File, the Master File can offer a high-level overview of the operations and functioning of the global business, which may include its general policies of transfer pricing and the allotment of profits and income of the MNE group business all in all. It was also made clear by the Regulations that those entities which are part of multinational groups must possess Master File of the specific year that the ultimate parent entity (UPE) or any other kind of entity of the group will prepare, only if the combined revenue is over € 750,000 in the previous accounting year.
2.3. Preparation and submission
The documents are required to be prepared during the period of 12 months of the conclusion of the tax year and should also include the summary table of the information, which will be submitted to the Tax Department electronically before the period of nine months after the conclusion of the tax year. There exists no kind of obligation with regards to submitting the documentation of the transfer pricing to the relevant tax authorities. It is important to keep the TP documentation with the taxpayer and must be provided to the relevant tax authorities only when requested. With that being said, it is important to submit the documentation to the tax authorities within two months from the day it is requested. In addition to this, it is also worth noting that the entity which is responsible is obliged to renew and update the TP documentation only if it is required. The update must be done within one year after the conclusion of the tax year, during which it was essential to have an update.
- Advance Pricing Arrangements (APA’s)
As per the mentioned Regulation, the taxpayers are required to submit an application to the Tax Commissioner for the purpose of pre-approval of the methodology of the arm’s length for the pricing of existing or any particular cross-border transactions with related individuals. This procedure is referred to as an “Advance Pricing Agreement.”
- Advance Pricing Arrangements (APA’s)
A few of the important new compliance obligations in Cyprus are introduced by the new TP legislation. The taxpayers who are engaged in any of the transactions with the relevant parties will be required to review and analyze new rules and take important steps in order to make certain that they are able to act in accordance with the new requirements. The corporations have intragroup transactions cumulatively per specific category, up to almost € 750,000 per tax year are required to review and examine their notification requirements and filling. Organizations that are members of Multinational groups are also required to examine and review their notification regarding and filling in Cyprus.
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