Transfer Pricing News Issue 37 - December 2021

Transfer pricing rules to be codified

The Cyprus House of Representatives is debating a bill that contains provisions to codify the country’s transfer pricing rules. The proposed rules are based on and would be applied in accordance with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as well as actions 8-10 and 13 of the OECD BEPS project. The House is expected to pass the bill into law in early 2022.  

The proposed legislation would require that domestic and international transactions between associated persons be on arm’s length terms, as stated in article 9 of the OECD model tax treaty and as explained in the OECD transfer pricing guidelines. Under the proposed rules, taxpayers would be required to prepare and maintain transfer pricing documentation, which would ensure that the Cyprus tax authorities have the information needed to assess the arm’s length nature of intragroup transactions. In addition, an advance pricing agreement (APA) program would be introduced.  

Covered taxpayers 

Transfer pricing documentation would have to be provided for all related party transactions entered into by Cyprus resident companies and foreign entities operating through a permanent establishment in Cyprus, subject to certain exemptions. “Related parties” for this purpose would have the same meaning as under the Income Tax Law, i.e., where one party has a direct or an indirect relationship of at least 25% of the share capital or voting rights of another party. 

Documentation requirements 

Taxpayers would be required to prepare and maintain both a local file and a master file as follows:

  • A local file would be required where intragroup transactions cumulatively per category are equal to or exceed EUR 750,000 per tax year. The rules do not contain any guidance on the information that would have to be included in the file but based on the OECD transfer pricing guidelines, 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 master file would provide a 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 multinational group as a whole. As drafted, the rules state that entities that are part of a multinational group should have a master file for the relevant year prepared by the ultimate parent entity or another entity of the group where the consolidated revenue exceeds EUR 750 million in the preceding accounting year. 

Transfer pricing documentation would have to be prepared within 12 months of the end of the tax year and be accompanied by a summary table of information. The taxpayer would have to submit the table electronically to the Cyprus tax authorities within nine months after the end of the tax year. The documentation would not have to be submitted to the tax authorities, unless so requested, and once a request is made, the taxpayer would have to submit the documentation within 60 days. Additionally, it should be noted that the responsible entity would be required to update all transfer pricing documentation, if necessary.  

Advance pricing agreements 

The bill would introduce a new APA program, under which a taxpayer could apply to the Tax Commissioner for pre-approval of the transfer pricing methodology selected, and/or the pricing of specific or existing cross-border transactions with related parties.  

Angelos Petrou