This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Maltese tax primer.

At the beginning of October, the podcast team traveled to Lisbon for the International Fiscal Association's annual congress. While there, we recorded several interviews, as well as some sounds of the city, which you heard at the beginning of the episode. We've been releasing these interviews over the past month or so, and you can find the other episodes in the show notes.

This week's episode features Trudy Muscat, a senior tax manager at Deloitte Malta. Our discussion focuses on the evolving Maltese tax landscape, particularly its transfer pricing system, which has recently been implemented. We also talk about the OECD's global minimum tax reform and how Malta's tax system is adapting to the updates.

Now, one note before we get to the interview: Since we were recording this on the road, the audio may sound a bit different than our usual interviews. All right, let's go to that interview.

Trudy, welcome to the podcast.

Trudy Muscat: Thanks, Dave, for the invitation. It's a pleasure to be here.

David D. Stewart: First, could you give our listeners a bit of background about yourself, what you do?

Trudy Muscat: That's great. So I'm from Malta. I'm a lawyer by profession. I'm admitted to the Maltese bar. I specialize in international tax law at the University of Vienna, and I've been an adviser for 15 years now, focusing on EU tax law and, more recently, transfer pricing. I'm active in working groups and a lecturer and examiner at the University of Malta and the Malta Institute of Taxation.

David D. Stewart: Well, it's great to have you. Could you tell us a bit about what it's like doing tax practice in Malta right now?

Trudy Muscat: Well, it's evolving as with the rest of the world. As you know, there's so much that's been going on internationally, regionally, and of course, locally. We've been following developments very closely with a view toward ensuring continuity, stability, and competitiveness. I think if I had to pinpoint two main developments — two fronts in terms of corporate income tax — I would say transfer pricing and pillar 2 have been on the agenda.

David D. Stewart: Well, those are some big topics, so I guess we could get into those a bit. First, let's talk a bit about transfer pricing. I know that Malta's only recently getting into the game on transfer pricing, so could you tell us what's happening there?

Trudy Muscat: Yeah, super, definitely. So Malta is an OECD inclusive framework member and has recently formally implemented international transfer pricing standards into its domestic income tax legislation —  which to be fair, we're not new to the tax system locally, despite their absence on the face of it from the law. So arm's-length recognition is not new. It's the rules, rather, that are new.

And therefore, what is new, I would say, is perhaps the statutory requirement for companies that are not SMEs [small and medium-sized enterprises] to prepare transfer pricing documentation to support their intercompany and intracompany arrangements, because this also applies to permanent establishments.

Therefore, as of 2024, we have transfer pricing documentation requirements for companies that are not considered to be small and medium enterprises under the stated regulations in the EU, and whose intragroup transactions exceed de minimis thresholds. Essentially, the aim is to cover cross-border arrangements and exclude small ventures.

David D. Stewart: This sort of raises one additional question for me. What was it like with transfer pricing before the rules were in place? How did companies know what they were expected to do?

Trudy Muscat: Yeah, that's a great question. So Malta expected anyway that pricing was at market rates, which essentially means at arm's length, but we did not have the requirement to prepare documentation locally. So essentially, we still have had antiabuse rules and the requirement to ensure market rates.

What we have now is an express requirement in the law to replace your contractual pricing values on the tax return with arm's-length values and support that with documentation upon the request of the taxpayer. So our guidelines specifically — and unsurprisingly from a continuity perspective — refer to the OECD transfer pricing guidelines for methodology application and documentary construct, and of course, the AOA, the Authorized OECD Approach, for PE attribution. Still early days in terms of revenue practice, but we don't expect seismic shifts, Dave.

David D. Stewart: And so why now? Why did Malta decide that this was now the time where they needed to codify these changes?

Trudy Muscat: I think it's just a development of where things are going internationally. We've seen an increase in focus since the BEPS [base erosion and profit-shifting] project on transfer pricing and even from an EU perspective. You, of course, know about the proposed transfer pricing directive within the EU, an initiative which hasn't really caught on, but which we're now following because of the waiting being discussed between the commission and council in a perhaps resurrected transfer pricing forum, which would issue arm's-length recommendations that the bloc will expect to follow. So essentially, it's making sure we're on [a] level playing field.

David D. Stewart: And so how have things gone? How has this process happened as Malta has been implementing its new transfer pricing rules?

Trudy Muscat: Essentially, there's not been, as I mentioned, a seismic change. It's just informing taxpayers to ensure that their arm's-length values are properly supported, and supported on the basis of the OECD transfer pricing guidelines. So it's nothing overly new. I would say people we speak to are used to applying arm's-length anyway. This is an international standard as it's expected internationally. And even in Malta, there was always the expectation that international standards were applied.

So from our perspective, while yes, we have new rules, while yes, now we have a framework, nothing much has changed, except for the fact that you would need to maintain your master file and your local file locally.

David D. Stewart: Now, when Malta was doing this, were they looking at examples of other countries that have recently adopted transfer pricing rules?

Trudy Muscat: Yes, Malta does do its homework. It does look at other jurisdictions, especially jurisdictions where we typically have parallels in [our] statutes. So for example, the U.K., Ireland, etc. That is natural for Malta. But then with a view to ensure that there's no big bang, with a view to ensure that there are de minimis thresholds, that it doesn't apply to SMEs so that it doesn't become overcomplex for companies.

David D. Stewart: Is there anything going forward that you're concerned about? Anything that companies may have difficulty adopting? Or does this seem like it's more business as usual, just more formality?

Trudy Muscat: Yeah, I would say the latter, Dave. I think the concern, rather than local, is regional and international. We've all seen the development of the BEPS project on the pillar 1 side.

Recently, the European Parliament Economic Committee also issued some new proposals on the BEFIT [Business in Europe: Framework for Income Taxation] directive, which revolved around the resurrection of the economic significant presence PE, [as] I'm sure you've heard. So the proposal is for there to be a permanent establishment where you have more than €1 million [in] revenue in a jurisdiction. And this does dovetail to an extent with the thought process behind pillar 1. So we've got to see where that takes us and how that impacts transfer pricing within the EU.

So from a Malta perspective, I think the discussion revolves very much around the preference for global rather than regional alignment. So for example, we recently had the inclusive framework amount B commitment in the context of the OECD transfer pricing guidelines, something that was implemented via international political commitment.

David D. Stewart: Could you explain that just for listeners that may not know what amount B is within that context?

Trudy Muscat: Yeah. So amount B essentially is an internationally agreed[-upon], under the OECD inclusive framework, standard, whereby there is a simplified and streamlined methodology for pricing, baseline distributing, and marketing activities. This makes it easier when you have low-risk, for example, distributors in developing countries.

David D. Stewart: So since we've just talked a bit about pillar 1, let's change gears and let's talk a bit about pillar 2. We have this globally agreed on, I guess, two-system standard now of minimum taxation. So how are things playing out in Malta? How is that being implemented?

Trudy Muscat: Yes. So in terms of pillar 2 adoption, as an EU member state, Malta has agreed to adopt the global minimum tax rules as adapted by the EU for the internal market. We have availed of the article 50 deferral, which turned out to be wise, I would say, given the turmoil.

I'm not sure whether you've heard, but for example, a number of German [businesses] just came out and asked the EU for, potentially, the suspension of the directive within the EU until there is a bit further clarity about how the EU is going to consider the U.S. rules. So, for example, now we're speaking about a new net CFC [controlled foreign corporation] tested income rules, which are the successor of the GILTI [global intangible low-taxed income] rules. And we're speaking about whether they can be equivalent in terms of parallels with QDMTT [qualified domestic minimum top-up tax] systems, or whether it could merely be a safeguard for EU purposes, for the directive's purposes. And over there, you start thinking about then what else could be a safe harbor for EU purposes. So there's quite a lot of turmoil, so it's not a bad thing that perhaps Malta has applied the deferral.

Perhaps one important thing locally is that in the interim, Malta has domestically introduced an elective tax system — so this is quite new — to facilitate essentially the GlOBE [global anti-base-erosion] transition for entities taxed and Malta. So essentially, the tax base is the same. It's your normal corporate income tax base.

However, instead of applying the full imputation credit system that we have in Malta, one would apply a final 15 percent tax. So this is not a QDMTT, Dave. It merely allows MNEs [multinational enterprises] to easily, or at least more easily, bridge the gap between a non-implementing jurisdiction and an implementing jurisdiction by reaching the minimum rate.

David D. Stewart: So how much of a tax change is it for Malta to go from the tax regime that they had before pillar 2 to — I guess, now we have this elective tax going forward, what changes can we expect to make Maltese tax compliant with pillar 2?

Trudy Muscat: Yeah. So as with every other jurisdiction, our tax system needs to live up to the expectations of the directive to the extent that it will remain in place. So this approach is a step-by-step approach. So we're looking at 2029 for full adoption of the directive and therefore the implementation of a QDMTT.

So in the meantime, companies at least have the option if they wish to still use the income tax base, which, of course, would be different when calculated under the GlOBE rules, but at least reach the minimum tax applied in other implementing jurisdictions of 15 percent. So it is a phased approach, Dave, to avoid shocking, if you wish, the market.

David D. Stewart: So how does this new pillar 2 system interact with the new transfer pricing rules that Malta has?

Trudy Muscat: That's a great question. So I would say, increasingly, Dave, the nuances of the interaction of the arm's-length principle with pillar 2 are stealing the spotlight, to be honest. So given that transfer pricing drives profit allocation, there's a lot of sensitivity around the arm's-length computation of a tax base that is subject to the minimum tax assessment. So groups find themselves faced with additional top-up tax, even where the transfer pricing is at arm's length. This is definitely one of the issues we're facing.

And I would say another issue is the effect of transfer pricing adjustments on the income inclusion rule. So you have exposed transfer pricing adjustments that can lead to double taxation and retroactive top-up tax if the tax information return — meaning the pillar 2 return — has already been filed. And therefore, consider attempting, in a mutual agreement procedure, to reach a compromise, not only on the cross-border profit allocation, but also on the effective tax rate and the top-up tax calculations. You can imagine that that would add to several other layers of complexity. And this is where we expect complexity to arise in terms of the relationship between the arm's-length principle that is enshrined in the GlOBE directive and the global minimum tax directive, and of course, transfer pricing rules, which are becoming increasingly relevant and increasingly under scrutiny by the tax authorities.

David D. Stewart: So I guess one of the major issues for all companies going into all these tax regimes that are in transition is getting to some level of certainty. And so what is Malta doing as far as giving companies that certainty?

Trudy Muscat: Yeah. So, as part of the introduction of the transfer pricing rules, the tax authorities have also introduced formal unilateral transfer pricing rulings and also a framework for advanced pricing agreements under bilateral tax treaties. Of course, again, this was already there. These were already available under previous rules, but now you have a formal framework.

So in terms of the unilateral transfer pricing rulings, these, for example, are intended to assist the taxpayer on the application of the rules or on the tax treatment of cross-border arrangements. And the rulings can be valid for five years, unless the commissioner considers that they should be valid for less, and they could also look at three years prior. So with advanced pricing agreements, the framework is quite similar, but of course, this is a bilateral or a multilateral scenario. And from my experience, at least, revenue tends to align quite closely with international standards and tends to listen to the taxpayer.

David D. Stewart: Another issue that's out there is the question of tax transparency. So what is Malta doing in that space?

Trudy Muscat: Precisely. And as you know, the EU has introduced an amendment to the accounting directive whereby certain groups are now required to report certain information, tax information, under the public country-by-country reporting system. And for example, for countries with a December year-end, their first reports start coming out in December of 2026.

So I would say that it's becoming increasingly important to base your transfer pricing strategies, your group strategies, on commercial rationale. And as we always say, to document and defend, particularly when the reporting framework is becoming increasingly transparent.

David D. Stewart: Well, it sounds like there are a lot of moving parts going on in Malta, so it's going to be a country to keep an eye on. Trudy, thank you for walking us through everything that's happened so far.

Trudy Muscat: Most welcome. Pleasure to be here.