Transposition of Tax Transparency Regulations into our LegislationMEDIA ROOM
Binding rulings provide greater certainty to the taxpayers. By virtue of a ruling, before activities are started, or a certain structure is established, the tax consequences are known. One would be able to estimate the consequences of a decision in regard to the investment before it is taken. Tax rulings are also a positive development because they are means for further explanation of unclear tax regulations which without access to rulings are capable of giving rise to an element of uncertainty.
An advance tax ruling (ATR), is a specific kind of ruling. ATRs are legal instruments under which taxpayers may obtain a binding statement from the tax authorities concerning the treatment of a transaction or a series of contemplated future transactions. They are addressed to the particular taxpayers who requested them.
An advanced pricing agreement (APA) can be regarded as a branch within ATRs. This type of agreement is reached between the tax authorities and a taxpayer regarding the appropriate transfer pricing method that will be applied for pricing future transactions. The pricing agreement is advanced in nature, again, due to the timing of events. The particular characteristic of an APA is that it is opted for in instances of transfer pricing, and concerns the agreement on an arm’s length price for one or a series of transactions.
The Commission has a reputation and history of taking action to promote good governance in tax matters. Therefore, while supporting the BEPS project and efforts for cooperation with the OECD and G20 to develop internationally agreed standards to combat base erosion and profit shifting, the EU has the political and legislative strength to set its own strategies and standards in order address taxation matters, this is evident in Directive 2011/16/EU as recently amended by EU Council Directive 2016/881.
The ‘Cooperation With Other Jurisdiction On Tax Matters Regulations’ which is being amended by Legal Notice 400 of 2016 now makes reference to the exchange of information on rulings as required by the European Directive.
Mandatory Automatic Exchange of Information
The terminology used in the European sphere is the ‘mandatory automatic exchange of information on cross-border advance tax rulings and advance pricing arrangements’. This is defined as the ‘systematic communication of predefined information to another Member State, without prior request, at pre-established intervals’.
Definitions in the Directive
The Directive puts forward a definition of a tax ruling covering both ATRs and APAs, which includes, but is not limited to
- unilateral advance pricing arrangements and/or decisions;
- bilateral or multilateral advance pricing arrangements and decisions;
- arrangements or decisions determining existence or absence of a permanent establishment;
- arrangements or decisions determining existence or absence of facts with a potential impact on the tax base of a permanent establishment;
- arrangements or decisions determining tax status of a hybrid entity in one Member State which relates to a resident of another jurisdiction;
- as well as arrangements or decisions on assessment basis for depreciation of an asset in one Member State that is acquired from a group company in another jurisdiction.
The vehicle for these ATRs and APAs can be ‘any agreement, communication, or any other instrument or action with similar effects’, thus encompassing informal rulings.
To this effect, LN 400 of 2016 describes an advanced cross-border ruling as one which:
- is issued, amended or renewed by the Commissioner, or on behalf of, the Government of Malta, irrespective of whether it is effectively used;
- is issued, amended or renewed, to a particular person or a group of persons, and upon which that person or a group of persons is entitled to rely;
- concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of Maltese law relating to taxes;
- relates to a cross-border transaction or to the question of whether or not activities carried on by a person in another jurisdiction create a permanent establishment; and
- is made in advance of the transactions or of the activities in another jurisdiction potentially creating a permanent establishment or in advance of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
Authorities in Receipt
The exchange of information shall be executed to all EU Member States and the European Commission. In this respect, the Commission is assuming a leading role in the process, which is that of overlooking the process and examining the types of rulings being granted in the EU’s context based on the information received. This monitoring role ensures that the Commission will be equipped with enough information to suggest review to the process while also in a better position to tackle harmful tax practices capable of eroding the tax base and shifting profits from one jurisdiction to another.
The Regulation lists the following as the information subject to exchange:
- the identification of the person, other than a natural person, and where appropriate the group of persons to which it belongs;
- a summary of the content of the advance cross-border ruling or advance ricing arrangement, including a description of the relevant business activities or transactions or series of transactions provided in abstract terms, without leading to the disclosure of a commercial, industrial or professional secret or of a commercial process, or of information whose disclosure would be contrary to public policy;
- the dates of issuance, amendment or renewal of the advance cross-border ruling or advance pricing arrangement;
- the start date of the period of validity of the advance cross-border ruling or advance pricing arrangement, if specified;
- the end date of the period of validity of the advance cross-border ruling or advance pricing arrangement, if specified;
- the type of the advance cross-border ruling or advance pricing arrangement;
- the amount of the transaction or series of transactions of the advance cross-border ruling or advance pricing arrangement if such amount is referred to in the advance cross-border ruling or advance pricing arrangement;
- the description of the set of criteria used for the determination of the transfer pricing or the transfer price itself in the case of an advance pricing arrangement;
- the identification of the method used for determination of the transfer pricing or the transfer price itself in the case of an advance pricing arrangement;
- the identification of the other EU Member States, if any, likely to be concerned by the advance cross-border ruling or advance pricing arrangement;
- the identification of any person, other than a natural person, in the other EU Member States, if any, likely to be affected by the advance cross-border ruling or advance pricing arrangement (indicating to which EU Member States the affected persons are linked); and
- the indication whether the information communicated is based upon the advance cross-border ruling or advance pricing arrangement itself or upon the request.
Entry into force
The entry into force of the EU mandatory automatic exchange of information on cross border ATRs and APAs is expected on the 1st of January 2017 for all valid rulings and APAs issued and, similarly to the OECD’s approach, this is also applicable to past rulings dating back to 1 January 2014. This means that all Member States will have to transpose the new rules into national law before the end of 2016.
The greater call for transparency, disclosure and exchange of information seems consistent with the underlying moral dimension which is nowadays a driving policy in the field of taxation, and which certainly is a force behind the entire BEPS project. In view of this, one should point out that Malta’s commitment towards establishing a credible and respectable reputation has been constant throughout the past years and remains to be so by such measures. This amendment puts Malta in a BEPS compliant standing in terms of the spontaneous exchange of information requirement placed by virtue of Action 5.