Taxable profit, the market principle, and long-term contracts

This is the article that links accounting with taxation. Taxable profit is not the profit reported in the financial statements, but the one after applying the rules of the law. How to go from one to the other, step by step, is explained on our page. taxable base.

The market principle applies to any company that buys or sells with a linked pair, even when both are Albanian. The methods and documentation are on the page. transfer of the price, while the known expenses are on the page of deductible expenses.

Taxable income

Taxable income includes any income realized by a person, subject to this chapter, during the tax year, less deductible expenses.

Taxable income and deductible expenses are determined based on financial statements, which are prepared in accordance with the applicable legislation for accounting and financial statements, with the provisions of this law, as well as with the subordinate acts implementing it.

Market principle

Transactions between related parties must comply with the arm's length principle. The taxable profits of a person who participates in one or more controlled transactions are considered to comply with the arm's length principle if the conditions of these transactions are not different from the conditions that would have been applied between independent parties in comparable transactions, carried out in comparable circumstances.

Under the direction of the minister responsible for finance, the rules and procedures for the implementation of this article are approved.

Long-term contracts

A long-term contract is a contract that meets the following conditions:

• related to manufacturing, installation, construction, or service performance;
• its duration exceeds or is expected to exceed 12 months.

Income related to a long-term contract should be recognized by the responsible tax authorities for the purpose of personal income tax and corporate income tax, in the amount corresponding to the portion of the contract completed in the respective tax year. The percentage of contract completion is determined either by referring to the costs of that year in relation to the overall estimated expenses or by referring to national and international accounting standards.

Tax-deductible expenses related to long-term contracts are considered in the tax year in which they are incurred, in accordance with accounting standards determined by order of the minister responsible for finance.

Source: General Directorate of Taxes.

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