The following article assesses Cyprus’ efforts to reinforce transparency and information exchange and transfer pricing issues and compares its progress to those of some of its neighbors in south-eastern Europe. .
Taxation plays a central role worldwide as countries are trying to increase their state revenues by raising taxes or increasing their scrutiny on transactions and activities taking place in the country.
Transactions with Cyprus-based companies were always under the microscope of foreign tax authorities due to its beneficial tax regime (i.e. low tax rate of 12.5%, no withholding taxes). Nonetheless, and despite certain cases in the past where Cyprus failed to exchange information with foreign authorities as per its DTTs, Cyprus is now trying to change the landscape and become one of the most trustworthy partners in the Eurozone.
On October 29, 2014 Cyprus was one of the 52 jurisdictions that signed the new OECD /G20 Standard for Automatic Exchange of Financial Information in Tax Matters at the annual meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes that was held in Berlin.
On the December 2, 2014, the Minister of Finance and the US Ambassador in Cyprus signed the Intergovernmental Model 1A Agreement (IGA) for the purposes of the application of the Foreign Account Tax Compliance Act (FATCA). The signature of this intergovernmental agreement is another step for the Republic of Cyprus towards progress in the area of tax transparency and information exchange.
With steps made by Cyprus to combat tax avoidance and to facilitate the receipt of information by other contracting states, Cyprus is trying to erase the non-compliant status with which it was labelled by the OECD at the Global Tax Forum in November 2013 (other countries branded with this “non-compliant” status were Luxembourg, British Virgin Islands and Seychelles). OECD based the compliance ratings for 50 countries and jurisdictions on the practical implementation of the Forum’s information exchange standard. Tax authorities made it a priority to become fully compliant with the requirements regarding the exchange of information with other contracting states and nowadays the situation is totally changed.
- Transfer Pricing Prospects in Cyprus
Currently the international tax environment is facing a number of significant changes. Multinational Enterprises (MNEs) are trying to find ways of minimizing their overall tax obligation, partly by exploiting the interaction of different national tax rules and systems.
OECD’s work on the Base Erosion and Profit Shifting (“BEPS”) Action Plan aims to create international solutions to address carefully planned strategies that use existing rules and international paths to allow profits to shift to low tax Jurisdictions—or remaining untaxed.
The increased volume and variety of intercompany transactions, accompanied by increased enforcement activities worldwide, have made Transfer Pricing issues an important challenge for tax authorities across the globe. By implementing transfer pricing rules and by providing specific guidelines to the taxpayers of Cyprus in respect of transfer pricing audits, Cyprus can create a comprehensive tax regime and attract more multinationals which would have a positive impact on the country’s investment environment.
On the other hand, the increased scrutiny from tax authorities worldwide has created the need for more tax-efficient structures and many MNEs are trying to divest themselves of dubious entities that may cause tax issues for the whole group. Taxation of MNEs is a notoriously complex matter and Cyprus continues to refine its tax regime, working towards the creation of a Transfer Pricing scheme that will meet the country’s needs as far as compliance and tax transparency are concerned. A circular with specific guidelines for taxpayers is soon anticipated.
- Watching some of our neighbors…
Transfer Pricing rules have been present for more than a decade in Albanian Corporate Income Tax (CIT) Law, but specific and detailed regulations on the application of these rules have only recently been published in the Official Journal No 70, dated May 20, 2014. The recent changes led to alignment of the local rules to the OECD Guidelines, eliminating the conflicting rules that have hitherto been applied. Taxpayers are obliged in respect of specific guidelines from the Albanian Ministry of Finance to prepare a Transfer Pricing Study for transactions which took place during 2014.
Bulgarian Transfer Pricing rules were initially introduced in the Corporate Income Tax Act (CITA), Tax and Social Security Procedures code, as well as in Ordinance № H-9 for the implementation of Transfer Pricing methods, issued by the Minister of Finance on August 29, 2006. Following international trends, a manual providing guidance on Transfer Pricing issues was published in 2010 by the tax authorities. The OECD guidelines are followed by MNEs to eliminate tax risks that may arise regarding Transfer Pricing issues. Even if in practice, companies operating in Bulgaria are not facing transfer pricing audits, cross-border transactions affect Bulgaria’s revenue and MNEs which want to have the right documentation in place choose to design their defense strategy by setting up the right intra-group policy.
Transfer pricing rules have been present in Serbia since July 1, 2001, while the latest amendments relating to interest rates came into force on February 15, 2014. The Rulebook was enacted on July 20, 2013 giving clarity to the Transfer Pricing Rules. Tax Authorities in Serbia pay significant attention to Transfer Pricing Issues and are authorized to adjust an entity’s income based on their own calculations in case of profit shifting.
Transfer pricing legislation was enacted in Croatia back in 2005 with amendments being effected in July 2010, March 2012 and June 2012. The law requires that Transfer pricing documentation is available and is submitted to the tax authorities upon request in a potential tax audit. In addition, the Croatian tax authorities have published the Guidebook for Surveillance of Transfer Pricing, which is designed for internal use but is also available to taxpayers.
In Greece, new Transfer Pricing provisions were introduced by Law 4110/2013 and the provisions of the article 26 of Law 3728/2008 were abolished from the date of publication of the new law January 23, 2013 in the Greek Government Gazette. The new Transfer Pricing law is applied for financial years starting from January 1, 2012, while for financial years 2010 and 2011 Greece had two Transfer Pricing regimes, one set by the Ministry of Finance and the other set by the Ministry of Development.
III. Transfer Pricing in Cyprus
According to the Income Tax legislation (118 (I)/2002 as amended), as per the provisions of Article 33, the Transfer Pricing concept in Cyprus is based on the arm’s length principle, therefore an adjustment in the taxable basis is required if conditions indicate that transactions are not valued as if they had been carried out between unrelated parties. The arm’s length principle is monitored by the Inland Revenue Department.
The definition of related parties is very broad, but specifically includes situations where one party directly or indirectly participates in the management, control, or capital of another party (no specific thresholds), or if the same parties participate directly or indirectly in the management, control or capital of another entity. Moreover the term ‘related party’ between entities includes situations ranging from statutory to economic dependency, and also certain family relations. Based on the abovementioned, there are no specific Transfer Pricing rules in Cyprus, other than that Cyprus applies the OECD model and guidelines to determine whether a transaction is at arm’s length.
- Tax Return Form in Cyprus
According to the annual tax return form of a company in Cyprus, there is an obligation to declare the inter-company balances, the balances with other related parties and the balances of directors and shareholders. Moreover, a Cypriot entity should confirm that all the sales, purchases and other charges linked with the above balances have been determined based on market prices in the company tax return form. Real guidance on how a taxpayer should prove that those charges are indeed in accordance with the arm’s length principle is still missing from the Law in Cyprus. Provisions regarding APAs and CCAs are not relevant.
Given the fact that jurisdictions with developed tax systems have adopted transfer pricing legislation it is now time for Cyprus to issue transfer pricing rules giving clarity and guidance on that international tax issue. Furthermore, by implementing those rules Cyprus will fill the gap in its Anti-Avoidance regime and will prove that it deserves to be considered as a team player in terms of tax transparency.
- What do we really expect from the Transfer Pricing Circular?
|· A new definition of related parties for Transfer Pricing purposes including a specific percentage.|
|· Specific reporting requirements and deadlines|
|· Preferred method of Documentation, if any|
|· Details regarding the comparability analysis|
|· Developed APAs and provisions in Respect of CCAs|