Transfer pricing rules have been present for more than a decade in the Albanian Corporate Income Tax (CIT) Law, but specific and detailed regulations on the application of these rules was only published in the Official Journal No 70, dated 20 May2014. The recent changes have totally transformed Article 36 of the Law on Income Tax (No. 8438, dated 28.12.1998) by adding 7 more articles related to specific rules and actions.
Who is affected?
Companies and Group of companies with related party transactions are affected by Transfer Pricing rules.
Related Party Definition
An entity is considered a related party if there is a possibility of exercising control over or exerting considerable influence on business decisions made. The direct or indirect possession of 50% or more of the shares in capital shall mean that control over the taxpayer is possible.
The case of direct or indirect possession of at least 50% of the voting rights is considered as having an influence on business decisions.
Type of Transactions subject to transfer pricing are: product sales; product acquisition; lendings; borrowings; royalties; management fee payment; provision of management services; cost-sharing within the group; research and development activities; provision of other services; and use of other services.
Transfer Pricing Methods
The taxpayer should choose one of the methods described in the OECD guidelines. The taxpayers should also describe the decisive reasons for the determination regarding the method used for the reconciliation of the transfer prices with the “the arm’s length” principle for the transactions carried out with the associate enterprises.
The taxpayer should choose one of the following methods:
-Comparable Uncontrolled Price (CUP) method
-Resale Price Method
-Cost Plus Method
-Transactional Net Margin Method (TNMM)
-Profit Split Method
The taxpayer can use another method only in case when none of the above methods can be reasonably applied.
Transfer Pricing Audit and Penalties
In case of a potential tax audit, the Tax Administration should perform the same transfer pricing method used by the taxpayer.
Another important change is introduced in the Law no. 9920, dated 19 May 2008 “On Tax Procedures”, with penalties related to transfer pricing being added (art.115/1). Previously, no provision or penalties regarding transfer pricing were in force.
Reporting Deadlines
Transfer pricing documentation is to be submitted to the Tax Authorities in Albania on an annual basis by filling a “controlled transaction notice”. It may be submitted in hard copy along with the balance sheet and the financial statements or electronically, as required by the tax authority.