Specifically, the Rules provide that they will not apply where:
a) the aggregate arm’s length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in the year preceding the year of assessment does not exceed six million euro (€6,000,000); and
b) the aggregate arm’s length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in the year preceding the year of assessment, does not exceed twenty million euro (€20,000,000).
In interpreting this provision, the following need to be analysed:
- One needs to take into consideration all cross-border arrangements in the year in question in order to determine whether the thresholds are exceeded. The Guidelines clarify that this should not include dividend payments to an associated enterprise, however, may need to consider, distributions in kind;
- The value to be taken into consideration is the arm’s length value, which is not necessarily the book value that is generally available. This implies that the arm’s length principle and potentially transfer pricing methods may need to be applied before determining whether an entity is in scope and has transfer pricing obligations. This is in line with the expectation under the general anti-abuse provisions;
- In applying this provision, determining whether an item is of a capital or an income/expenditure nature is pertinent, which in practice, may be challenging at times;
- Being excluded by way of this provision means that both the income/expenditure threshold and the capital threshold are not met.
Whilst the de minimis threshold provision is a practical mechanism to target bigger transactions, it may, in practice, be difficult to interpret its application.
Moreover, these thresholds should not be viewed as removing the need for businesses to consider transfer pricing on an ongoing basis. Groups should continue to monitor the nature and value of their related-party transactions, particularly where transaction volumes are increasing or arrangements are changing.
How BDO Malta can help
Assessing whether the de minimis thresholds apply requires consideration of the nature and arm’s length value of cross-border transactions. BDO Malta can help businesses assess their transfer pricing obligations and develop and implement effective transfer pricing policies, supported by documentation aligned with OECD guidelines and local tax laws.
Contact our team to discuss your transfer pricing requirements.