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Transfer Pricing Guidelines 

As from July 2017, transactions between related parties are reviewed under Transfer Pricing Guidelines in order to identify the tax treatment and compute any tax amounts. Therefore all related companies’ transactions in which Cyprus Tax Resident Companies are involved, are obliged to follow the arm's length principle.
 
Transfer Pricing and Arms’ Length Transactions

Transfer prices are the prices at which companies transfer goods and provide services to related companies.

Arm’s Length Transactions (ALT) are defined as the transactions that should be valued as if they had been carried out between unrelated parties, each acting in its own best interest.

Article 9 of the OECD provides that in the case where the terms of two related companies in their commercial or financial relations differ from those of independent parties, then any profits that should have been accrued, (provided that the same terms of independent parties applied), may be included in the profits of the company and taxed accordingly.
 
Why Transfer Pricing is required
 
  • Growth of Multinational Enterprises (MNEs);
  • Countries right to tax profits where the income and expense arises.

Transfer Pricing Study (TPS)

TPS is defined as the document to be provided to the Cyprus Tax Authorities as a supporting document, evidencing that the transaction which took place, was based on the Arms’ Length Principle.
 
There are two key steps:

1. To identify the commercial or financial relations between the related companies and the conditions and economically relevant circumstances, and
2. Compare the comparable transactions between the unrelated companies. 

There are two main transfer pricing methods in relation to the first step:

1. Traditional transaction method – comparable uncontrolled price method, resale price method and cost-plus method.
2. Transaction profit method – transactional net margin method and transactional profit split method.
The choice of a transfer pricing method, in relation to the first step, always aims at finding the most suitable method for the specific case. 

For the second step the usual process is as follows:

a. determination of years to be covered
b. broad-based analysis of the taxpayer’s conditions
c. functional analysis
d. review of existing internal comparable
e. determination of external comparable transactions
f.  selection of the most appropriate transfer pricing method
g. identification of potential comparable transactions
h. determination of and making comparability adjustments and
i. determination of the arm’s length remuneration

The OECD guideline includes standards for the transfer pricing documentation. OECD recommends three transfer pricing documentation as follows:

1. A master file
2. A local file and
3. A country by country report




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