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Wednesday, July 24, 2024

Transfer pricing in Cypriot business

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Charalambos Palaontas, Partner, EY Cyprus

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<p><strong>– How does the data change in Cypriot business with the advent of transfer pricing?</strong></p>
<p>The principle of equal distances (arm's length principle) is part of our legislation for decades. According to Article 33 of the Income Tax Law, the pricing of transactions between associated companies, i.e. companies belonging to the same group, must be carried out at prices corresponding to those that would be used if the companies were independent.</p>
<p> < p>What has changed from 2022, with the introduction of the documentation rules, is the taxpayer's obligation to keep records and submit reports to the tax authorities documenting that the prices of intraparty transactions are in line with the arm's length principle .</p>
<p>Therefore, groups that applied – and apply correctly – the provisions of Cypriot legislation, apart from the cost of preparing the documentation, are not expected to be negatively affected by the changes.</p>
<p ><strong>– Do you think that transfer pricing takes Cypriot companies “forward”? How exactly?</strong></p>
<p>When we talk about Cypriot companies, as the business model of Cyprus has been formed, it is correct to have a separation between purely Cypriot groups, i.e. groups that are exclusively recommended by Cypriot companies and international ones groups, i.e. Cypriot companies which have activities through subsidiaries outside Cyprus.</p>
<p>Regarding the purely Cypriot groups, I would say that transfer pricing is not expected to offer significant benefits to these companies. For this reason, the documentation process for these groups is expected to be more simplified within the framework of the OECD Transfer Pricing Guidelines.</p>
<p>For Cypriot groups with an international presence, considering that transfer pricing rules have been in place for years in most developed countries, including the member states of the European Union, groups with an international presence are expected to maintain said documentation for their transactions with these countries.</p>
<p>Cyprus transfer pricing rules are in line with international standards such as those set by the OECD and therefore Cyprus can enhance its reputation as an international business center through the implementation of transparent and fair pricing practices.</p>
<p>This is expected to strengthen the position of the Cyprus Tax Authorities during cross-border audits and will help to avoid double taxation. Therefore, I believe that the application of transfer pricing will help Cypriot companies with activities outside Cyprus.</p>
<p><strong>– The Europeans argue that the European transfer pricing directive will increase tax security and mitigate the risk of litigation and double taxation. Do you agree?</strong></p>
<p>At the level of the European Union, legislation and rules regarding Transfer Pricing are currently not harmonized, although all Member States have adopted national legislation that provides for the arm's length principle.</p>
<p> < p>For example, the definition of associated enterprises and the concept of control differ between Member States as some Member States, such as Cyprus, apply a minimum participation threshold of 25%, while others apply a participation threshold of 33%, such as Greece, and in others the participation limit extends up to 50%.</p>
<p>The above, as well as different interpretations and positions of the tax authorities, combined with the complexity of the pricing rules for intra-group transactions, causes certain problems, such as:</p>
<ul>
<li>Profit shifting and tax avoidance, as transfer prices can easily be manipulated to shift profits.</li>
<li>Differences between Member States and double taxation of profits.</li>
<li>High compliance costs, which result from the fact that businesses must determine what prices could be considered arm's length, conduct studies, and compile, maintain, and update relevant documentation.</li > </ul>
<p>The European Commission's proposal for harmonized rules on peer-to-peer pricing within the EU aims to ensure a common approach on various issues by incorporating the arm's length principle and core peer-to-peer pricing rules into EU law, clarifying both the role and status of the Directives OECD regarding intergroup pricing (OECD Transfer Pricing Guidelines).</p>
<p><strong>– When should the European transfer pricing directive be implemented in Cyprus and how ready are businesses to manage it? </strong></p>
<p>According to the draft of the European transfer pricing directive, member states must implement the provisions from January 1, 2026.</p>
<p>In terms of the readiness of businesses in Cyprus to manage the implementation of the directive, taking into account that businesses will have three years' experience of complying with local legislation, I believe they will be largely ready by 2026.</p>
<p >Based on our experience from the application of the documentation rules both in Cyprus and in other countries, usually, after the first years of documentation, companies create the internal procedures that allow them to comply with the documentation rules.</p>
<p> < p>This is achieved in cooperation with specialized tax advisors and by updating their accounting systems as well as training their staff regarding the new regulatory requirements and procedures.</p>
<p><strong>– After the implementation of the European directive it is expected change in the process of tax audits?</strong></p>
<p>I would say that the change in the way tax audits are conducted in the European Union has already started.</p>
<p>At a recent EY conference (EMEIA Transfer Pricing Forum) the increase in the number of joint transfer pricing audits has been extensively discussed.</p>
<p>Common controls for inter-party invoicing are an important tool for tax authorities in different countries to ensure compliance with regulatory requirements and avoid double taxation. These joint controls allow tax authorities from different countries to cooperate in the control of cross-border transactions between related companies. This can lead to a more consistent and co-ordinated approach to the assessment of peer-to-peer pricing and help resolve differences between countries.</p>
<p>Common intercompany invoicing controls are an important means of ensuring compliance with tax regulations and avoiding double taxation, while promoting transparency and cooperation between the tax authorities of different countries.</p>
<p><strong>– Is poor data quality the enemy of transfer pricing?</strong></p>
<p>Poor data quality can indeed be considered one of the main “enemies” of transfer pricing. Inter-party pricing requires detailed data to ensure that transaction prices between related businesses reflect market prices.</p>
<p>Data that is incomplete or inaccurate can lead to incorrect documentation, which may not properly support the values ​​that have been used.</p>
<p>However, managing and correcting poor data quality can require significant resources and cost, increasing the overall cost of compliance with transfer pricing requirements. Therefore the use of technology, including AI, can help to partially – at least – solve the problem.</p>
<p>Applying technological solutions to automate data collection and analysis reduces the risk of human error and achieves the collection of data from various systems and databases, ensuring completeness and consistency of data.</p>
<p>Technology and AI can help businesses manage their transfer pricing requirements with greater accuracy, efficiency and compliance. By integrating advanced technology solutions, businesses can improve their data quality, enhance their analytical capabilities, reduce compliance risks and optimize their processes, leading to better decisions and results.</p>
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Source: www.kathimerini.com.cy

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