The New Switch Pricing (TP) Laws In Cyprus & Its Anticipated Impression – Tax Authorities

Change

Expected impact

1.

Change of Related parties’ definition

As per the proposed legislation “related parties” will
be considered companies with a 25% direct or
indirect relationship. Relationship is assessed based on share
ownership, voting rights, or profit participation. Previously
related parties’ relationship was assessed based on share
ownership (>50%) or through voting rights, only.

Expected impact: High

The scope of related party transactions broadens since the % for
share ownership, voting rights is reduced (from 50% to 25%) and
profit participation is introduced.

2.

Assessment of pricing based on OECD Transfer Pricing
guidelines

Introduction of a new paragraph (par.6), that states that
pricing between related parties might be assessed
(and hence adjustments to apply), based on the OECD Transfer
Pricing guidelines (as issued and amended from time to time).

Expected impact: High

The proposed amendment introduces the OECD TP guidelines as a
tool for assessing pricing for related parties’ transactions.
Previously there was not any provision other than the general
“arm’s length” principle. The use of the word
might instead of should or must, indicates that
there would be cases where the OECD TP Guidelines might not be
necessarily applied. (i.e., based on the value of the transactions
– see below).

3.

3. Introduction of Filing requirements

1. Related parties need to prepare and submit an informative table
   with their related party transactions, prepare, and keep in their
   records a Master File, and a Local File, subject to the exemptions
   below:

Exemptions

1. Related parties are not subject to Local file documentation
   requirements if their transactions in aggregate, per category, are
   (or should be, based on OECD TP Guidelines) less than
   €750.000.
2. Related parties are not subject to Master File requirements if
   they are not the Ultimate Parent Entity or the Surrogate Parent
   Entity of a Multinational Enterprise Group (MNE) as per the
   definitions of the law for the Automatic Exchange of Information in
   the field of taxation.

3. Filing

   The informative table needs to be submitted with the
   company’s tax form for the year.

   Update of documentation:

   Local files/Master files need to be updated on a yearly
   basis.

   Transfer Pricing Audits:

   In case of a transfer pricing audit request the relevant
   documentation should be submitted to the tax authorities within 60
   days.

Expected impact High – Local Files.
Low – Master Files

It is expected that for most of the cases Local files will be
needed to be prepared for Cypriot taxpayers. Note that,
transactions between Cypriot entities only, are not excluded from
the filing/reporting requirements.

The impact for Master files is expected to be low given the fact
that Ultimate or Surrogate parent entities of MNEs covered by the
Automatic Exchange of Information directive should probably have
such documentation already in place in case of request from other
jurisdictions that have operations.

The informative table needs to be submitted in case that there
are transactions with related parties, irrespective of their value
(the €750.000 cap does not> apply for the
informative table).

4.

Regulations

Introduction of Regulations for the
implementation of the OECD TP Guidelines and the related filing
requirements.

The main provisions as per the Regulations are presented
below:

3. The filing requirements (informative table, Master File, Local
   file) need to be ready by the date of submission of the tax form
   (currently 15 months from the yearend).
4. The Local File needs to be quality reviewed by a Cypriot
   Registered Audit Firm/Person.

Expected impact High – Local Files.
Low – Master Files

5.

APAs

Introduction of article 33Γ, which gives the possibility
to taxpayers to apply for pre-approval to the Tax Department of the
methodology for the pricing of cross border transactions with
related parties. This is what is known as Advance Pricing
Arrangements (APAs)

The procedure for application for an APA is based on the
Regulations.

As per the Regulations:

1. The Tax commissioner issues a decision within 10 months from
   the application. In certain cases, the timing for the issue of a
   decision can be extended to 24 months. The APA can be valid for a
   period of 4 years maximum from the date of application.
2. In case that the application involves parties that are tax
   residents in countries where a double tax treaty with Cyprus exists
   then a similar application needs to be made to the other countries
   as well. In case that the application in CY includes a request to
   deal with the foreign tax authorities the Commissioner may conduct
   the competent authorities of the other countries based on the
   Mutual Agreement Procedure of the respective double tax
   treaty.

The APA may be revoked by the Commissioner in certain cases such
us when there is a material breach of one or more of the critical
assumptions; or when there was a change in tax law, including a
treaty provision materially relevant to the APA or due to provision
of wrong information, data etc.

Expected impact: Low

Advance Pricing Arrangements are introduced for cross border
transactions. The APAs are giving certainty to taxpayers for the
pricing of the transactions. However, given the timing requirements
for the application’s examination and the requirement for
communication and agreement with the competent authorities of the
other countries involved, will keep the number of applications at
low levels. This is also observed internationally. As per EU
statistics for 2020 (
Statistics on APAs and MAPs in the EU (europa.eu)) there have
been a total of 1.753 new APAs requests within EU for 2020, 1125
involving only EU members and 628 involving third countries as
well. The 60% of these applications relate to requests to Belgian
Tax authorities.