In relation to recently introduced Transfer Pricing rules and documentation, Cyprus tax authorities published a Notification.
Following the enactment of transfer pricing legislation, the Tax Commissioner released a notice (the Notification), effective as of January 1, 2022, that includes instructions on how to comply with the transfer pricing (TP) documentation requirements as introduced in Article 33 of the Income Tax Law.
The Notification provides instructions on the format, language, deadlines for preparing and submitting the TP Documentation Files (Master and Local Files) and the Summary Information Table (SIT).
The content criteria for the Master and Local Files are generally in line with the recommendations for Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines).
Master Files
According to the Notification, the master file must contain the following data, which can be divided into five categories.
- The organizational structure, which includes the group structure and, the jurisdiction of incorporation and tax residence of each group entity,
- Detailed information about the multinational enterprise (MNE) business, including:
- Significant group business drivers;
- A description of the supply chain for the group’s major products/services;
- List of Important service agreements between MNE group companies;
- Description of the group’s primary geographic markets for its products and Services;
- A brief functional analysis of the group (including the main functions performed, significant assets are used, and, significant risks are assumed;
- Important corporate restructurings.
3. Intangibles of MNE,
- List of intangibles relevant for TP purposes and their legal owner;
- Description of the group’s overall strategy on intangible property development, ownership, and exploitation, including R&D functions;
- A summary of the group’s TP policies for R&D and intangibles;
- A list of significant intragroup agreements relating to intangibles;
- An overview of the group’s TP guidelines for R&D and intangibles;
- An overview of any significant intragroup transfers of interests in intangible.
4. MNE’s financial intercompany activities,
- General description of the group’s funding;
- Identifying the group’s entities that provide the main finance function for the group;
- General description of the MNE’s TP guidelines for intragroup financing agreements.
5. Financial and tax positions of MNE
- The yearly consolidated financial statements of the MNE (if prepared for any other reason);
- List of the group’s current unilateral Advance Pricing Agreements or any other tax decisions related to the distribution of income among countries, together with a brief summary of each one.
Local File
According to the Notification, the local file must include the following details:
Group Information
General description of the group’s operations and organizational structure, including the group structure, jurisdiction of incorporation, and each group entity’s tax residence.
Local Entity
- Detailed description of the local entity’s management structure, local organizational chart, description of the individuals that local management reports to, along with the jurisdiction(s) where those individuals maintain their main offices,
- Detailed description of the local entity’s operations and overall business strategy, highlighting any changes compared to the previous year,
- Detailed description of any group business restructurings or intangible transfers that have affected or been related to the local entity in the recent past or current year,
- List of main competitors.
Controlled transactions
- Controlled transactions’ detailed description including:
- A description of the controlled transactions’ nature (g., sale of goods, provision of services, financial transactions, licenses for intangibles, etc.) including their context in which such transactions take place,
- The total amount of intragroup transactions, split down by associated counterparty, for each category of controlled transactions involving the local entity (e.g., payments and receipts for goods, services, royalties, interest, etc.).
- Identification of related businesses engaging in each category of controlled transaction and the relationship amongst them,
- Copies of intercompany agreements relating to the controlled transactions,
- Analysis and documentation for every category of controlled transaction, which must include:
- Detailed functional and comparative analysis of the local entity and pertinent affiliated enterprises with regard to each recorded category of controlled transactions (functions carried out, assets used, risks taken), including any changes compared to previous years;
- Description of the transfer pricing mechanism that is best suited for the category of transaction, together with the justifications for choosing that method;
- List of the key presumptions used when applying the transfer pricing methodology;
- An indication of which linked enterprise is chosen as the tested party, if applicable, and an explanation of the selected process;
- If applicable, a justification for performing a multi-year analysis;
- List and description of any selected comparable uncontrolled transactions (internal or external), if any, as well as information on pertinent financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information;
- Description of any comparability adjustments made, as well as a statement of whether changes have been made to the results of the tested party, the comparable uncontrolled transactions, or both;
- Description of the factors that led to the conclusion that relevant transactions were priced on an arm’s length basis based on the application of the chosen transfer pricing technique;
- An overview of the financial data used, to apply the transfer pricing methodology;
- Copy of any current unilateral, bilateral, or multilateral advance pricing agreements (APAs), as well as any other tax decisions relating to controlled transactions of the local entity to which the Cypriot tax authority is not a party.
Financial information
- Information and allocation schedules demonstrating how the financial data from the local entity’s financial statements are used for the determination or the transfer pricing documentation of the controlled transactions;
- Annual audited financial statements of the local entity for the relevant accounting year;
- Details and allocation schedules outlining how the transfer pricing method is applied using similar financial data, and, how it might be connected to annual financial statements;
- Analysis and justification of the use of TP results in figuring out the local entity’s tax base.
Preparation, retention and submission deadline
The Master and Local Files must be prepared by the Income Tax return submission deadline (currently 15 months after the end of the calendar year) and kept for a time period equivalent to that of the applicable provisions for maintaining books and records, which is six years. Upon request, the files must be provided to the tax authorities within 60 days.
Language
The TP Documentation Files must be available in an internationally recognized language, preferably English, in either hardcopy or electronic format. Upon request, the liable taxpayer is required to provide the TP Documentation Files in Greek within 60 days.
Frequency of documentation updates
The TP Documentation Files may be used for subsequent years under the condition that they be updated as needed, to reflect all necessary changes. The amended Local TP file must be updated no later than the deadline for submission of the income tax return for the respective tax year. Any adjustments to the original TP Documentation Files, including changes in market conditions compared to the previous tax year, must be disclosed in the updated TP Documentation Files. The Local TP file will most likely need to be updated annually, in reality.
Summary Information Table (SIT) content and submission method
The SIT must be electronically submitted by the responsible taxpayers to the tax authorities by the Income Tax return submission deadline for the respective tax year (currently 15 months after the end of the calendar year) and, annually.
The SIT should not be considered as a complete and extensive documentation, as stated in the Notification.