Bringing Cypriot Income Tax Law in line with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and within the framework of Action 13 of the BEPS action plan. The new Transfer Pricing guidelines are in effect retroactively as of 1 January 2022, and below is a summary of the key changes and the general transfer pricing rules which come into play: Transfer Pricing refers to the allocation of income/prices of goods and services to related companies and permanent establishments. Prior to this, section 33 of the income tax law and the arm's length principal was the basis used for addressing Transfer Pricing issues; The new law refers to related parties (both legal persons and individuals) and covers all types of transactions such as goods, services, financial services, intellectual property, and any other types of transactions between such parties which are in excess of €750.000 per category of transactions; The new law provides guidance to the meaning ''related parties'' which is the same as that of the Income Tax Law whereby two parties are considered related parties if one legal entity has direct or an indirect holding of at least 25% of the voting rights or of the share capital of another legal entity.
Cyprus tax resident companies or permanent establishments in Cyprus of non-tax resident persons have the obligation and are required to prepare and maintain the following TP documentation files: A Master File: An obligation to prepare a master file will arise if the taxpayer is part of a multinational group with a Country-by-Country Reporting obligation (e.g. with consolidated revenue above €750 million in the preceding accounting year) and the taxpayer is either the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE). Both conditions must be met in order for a Master File to be required.
The Master File should provide a standardized high-level overview of the taxpayer's global business operations, including its organisational structure, overall transfer pricing policies, profit drivers and the allocation of income and profits of the group as a whole. The master file needs to be updated annually to incorporate any significant changes with respect to the group and any market changes. A Local File refers to material transactions of the local taxpayer and would be required where intragroup transactions cumulatively per category are equal to or exceed EUR 750,000 per tax year.
The local file provides more detailed information relating to specific intercompany transactions. Such information would include the management structure of the Cyprus entity, financial information on specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method. The Local File also needs to be updated annually, specific reference made to any significant changes of the market conditions that may impact the information and data included in the local file.
The Summary Information Table is an additional form (TP return) that should reflect high-level information about the taxpayer's annual intercompany transactions, including details of the counterparties, category of intercompany transactions entered into, and amount per transaction category. The deadline for the submission of the local file is in line with that of the Income Tax Return submission deadline for the respective tax year, currently being 15 months after calendar year-end, and be submitted to the Cyprus Tax Authorities within 60 days when and if requested. The same deadlines exist for the master file if applicable.
Where a taxpayer has received a notice from the Cyprus Tax Authorities and has not made available the TP documentation to the Tax Commissioner within 61 days from the notification of a request until the 90th day, a fine of five €5,000 is imposed, and if it is not made available from the 91st day until the 120th day a fine of €10,000 is imposed, while if it is not made available at all or made available after the 121st day a fine equal to €20,000 is imposed. The Summary information table shall be submitted to the Tax Department simultaneously with the Income Tax Return. In the event of late submission of the summary information table, a €500 fine is imposed.
An Advanced Pricing Agreement (APA) is a voluntary agreement between a taxpayer and one or more tax authorities determining in advance the transfer pricing methodology for any given intercompany transaction(s) for a certain period of time, based on the fulfillment of certain terms and conditions. More specifically, an APA determines an appropriate set of criteria (e.g., method used, comparable and critical assumptions made) to be applied for a fixed period of time with respect to specific controlled transactions concluded based on the arm's-length principle. An APA provides certainty with respect to tax outcome of the tax payer's international transactions, by agreeing in advance the arm's length pricing or pricing methodology to be applied to the tax payer's international transactions covered by the APA and substantial reduction of compliance costs over the term of the APA.
There is also a benefit for the tax authorities, as an APA reduces cost of administration. An APA can be unilateral, bilateral, or multilateral. A Unilateral APA involves only the taxpayer and the tax authority of the country where the taxpayer is located.
A Bilateral APA involves the taxpayer, the connected counterparties of the tax payer in the foreign country, tax authority of the country where the tax payer is located, and the foreign tax authority. A Multilateral APA involves the taxpayer, two or more connected counterparties of the taxpayer in different foreign countries, tax authority of the country where the tax payer is located, and the tax authorities of connected counterparties. The APA will be valid for a period of up to four years.
Upon submission of an APA request to the Tax Department, the Tax Commissioner shall accept or reject the APA request within 10 months. The Tax Commissioner has the right to extend the timeframe up to 24 months upon notification of the applicant. A clear understanding of the above is important since if the transfer pricing study is not performed then this could lead to interest and penalties, increased examination from the tax authorities, corporation tax and VAT liabilities.
At A.G. Paphitis & Co we would be happy to provide required assistance and guidance regarding these new rules. The content of this article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstances.