Price transfer
In accordance with this law and the implementing regulations adopted pursuant to it, an entity that participates in one or more controlled transactions must determine whether the terms of a controlled transaction are in accordance with the arm's-length principle. When the terms set or dictated in one or more controlled transactions conducted by an entity are not in accordance with the arm's-length principle, then that entity's taxable profits may be increased to the extent necessary to comply with the arm's-length principle.
The term “controlled transaction” means:
- any transaction between related parties when:
- one of the parties to the transaction is a resident and the other is a non-resident;
- one of the parties to the transaction is a non-resident that has a permanent establishment in the Republic of Albania to which the transaction is attributed, and the other party is another non-resident;
- one of the parties to the transaction is a resident and the other party is a resident who has a permanent establishment outside the Republic of Albania, to which the transaction is attributed;
- any business relationship between a non-resident and that non-resident's permanent establishment in the Republic of Albania;
- any business relationship between a resident and his permanent establishment outside the Republic of Albania;
- Any transaction between a resident or a non-resident who has a permanent establishment in the Republic of Albania, to which the transaction is attributed, and a resident of a jurisdiction listed by order of the minister responsible for finance.
The terms of a transaction include, but are not limited to, the financial indicators measured in the application of the appropriate price transfer method.
Comparability
An uncontrolled transaction is comparable to a controlled transaction in the following cases:
a) when there are no material differences between them that could materially affect the financial indicators under review, according to the appropriate transfer pricing method; or
b) when such differences exist and a reasonable adjustment is made to the relevant financial indicator of the uncontrolled transaction, in order to eliminate the effects of these differences in comparison.
To determine whether two or more transactions are comparable, the following factors are taken into account, to the extent that they are economically appropriate for the facts and circumstances of the transaction:
- the characteristics of the transferred property, goods, or services;
- the functions undertaken by each party in relation to the transactions, taking into account the assets used and the risks assumed;
- the contractual terms of the transactions;
- the economic circumstances in which transactions take place; and
- The business strategies pursued by the parties in relation to the transactions.
Price transfer methods
The compliance with the arm's-length principle of a controlled transaction is determined by applying the most appropriate transfer pricing method, based on the circumstances of the case, as specified in the instructions issued by the minister responsible for finance. Except as provided in paragraph 2 of this article, the most appropriate method of price transfer is selected from among the following methods:
a) the comparable uncontrolled price method, which consists of comparing the price set for goods or services transferred in a controlled transaction with the price set for goods or services transferred in a comparable uncontrolled transaction;
b) the resale price method, which consists of comparing the resale margin that a purchaser of goods in a controlled transaction realizes from reselling that property in an uncontrolled transaction with the resale margin realized in comparable uncontrolled sale transactions;
c) the cost-plus method, which consists of comparing the increase (the profit margin) on the direct and indirect costs of supplying goods and services in a controlled transaction with the increase, the profit margin on those direct and indirect costs of supplying goods and services in a comparable uncontrolled transaction;
c) the net transaction margin method, which consists of comparing the net profit margin to an appropriate base, e.g., costs, sales, assets, that a party achieves in a controlled transaction, with the net profit margin to the same base achieved in comparable uncontrolled transactions;
d) the method of allocating the transaction's profit, Under which each related party participating in a controlled transaction is allocated the share of the joint profit or loss arising from that transaction that an independent party would earn from participating in a comparable uncontrolled transaction.
The taxpayer may apply a transfer price method other than the above-mentioned methods, when he demonstrates that none of the approved methods can reasonably be used to determine market conformity for the controlled transactions and that this other method yields a result consistent with the market principle. The taxpayer who uses a method other than the approved methods set forth in paragraph 1 of this article bears the burden of proof to demonstrate that the requirements have been met.
To determine compliance with the arm's-length principle for a controlled transaction, it is not necessary to apply more than one method.
When a taxpayer has used a transfer pricing method to determine the remuneration of his controlled transactions and this transfer pricing method is in accordance with the provisions of this article, then the tax administration's determination of whether the terms of the taxpayer's controlled transactions comply with the arm's-length principle is based on the transfer pricing method applied by the taxpayer.
Assessment of combined controlled transactions
If a taxpayer carries out, under the same or similar circumstances, two or more controlled transactions that are economically closely linked to each other or that constitute a continuity/a specific combination, in such a way that they cannot be reliably analyzed separately, these transactions may be combined:
- to carry out the comparability analysis, as defined in Article 33 of this law; and
- to implement the price transfer methods specified in Article 34 of this law.
Range of market indicators
A market range is a group of relevant financial indicators, including prices, margins, or profit shares, derived from the application of the most appropriate transfer pricing method to a number of uncontrolled transactions, each of which is substantially comparable to the controlled transaction, based on a comparability analysis conducted in accordance with Article 33 of this law.
A controlled transaction or a group of transactions is not subject to adjustments under paragraph 1 of Article 32 of this law when the relevant financial indicator derived from the transaction/controlled transaction(s) being tested under the most appropriate transfer price method is within the market range.
When the relevant financial indicator, which stems from controlled transactions, falls outside the market range, the tax administration may adjust it in accordance with paragraph 1 of Article 32 of this law, and any such adjustment shall be at the median of the market range, except in cases where the tax administration or the taxpayer can prove that the circumstances in that case warrant an adjustment at a different point within the market range, in accordance with the provisions set forth in the guidance of the minister responsible for finance.
Documentation requirements
A taxpayer must provide sufficient information and analysis to demonstrate that the terms of his controlled transactions are in accordance with market principles. Price transfer documentation must be made available to the tax administration upon its request, within 45 days of receipt of the tax administration's request. The content and form of the price transfer documentation are determined by directive of the minister responsible for finance.
Taxpayers involved in controlled transactions exceeding a specified value must submit an annual notification or form for controlled transactions. The minister responsible for finance shall, by directive, determine the aforementioned threshold or value, the format, and the deadline for submitting information on controlled transactions.
Corresponding adjustments
When, under the conditions of controlled transactions, an adjustment is made by the tax administration of another country and this adjustment results in the taxation in that country of profits for which the taxpayer has already been taxed in the Republic of Albania, and the country proposing the adjustment has an agreement with the Republic of Albania or the Council of Ministers for the elimination of double taxation, then under these conditions, upon receiving a request from the Albanian taxpayer, the Albanian tax administration will verify the conformity of that adjustment with the principles of the market, as defined in Article 44 of this law. If the tax administration concludes that the adjustment is in accordance with market principles, it will make the appropriate adjustments to the amount of tax charged to the Albanian taxpayer.
The procedure for submitting a request for a corresponding adjustment under this article is set forth in the instructions of the minister responsible for finance.
Advance pricing agreements
An advance pricing agreement is a procedural agreement between one or more taxpayers and one or more tax authorities, with the aim of resolving potential advance pricing transfer disputes by establishing, before controlled transactions, a set of appropriate criteria for determining the compliance of those transactions with market principles.
A taxpayer may request that the tax administration enter into an advance pricing agreement to establish an appropriate set of criteria for compliance with the arm's-length principle for future controlled transactions over a specified period of time.
When the tax administration enters into an advance pricing agreement with a taxpayer, no transfer pricing adjustment shall be made under paragraph 1 of Article 32 of this law for controlled transactions that fall within the scope of the agreement, provided that the deadlines and conditions established by the advance pricing agreement have been met.
The minister responsible for finance is charged with approving the guidance on advance pricing agreements.
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Source: General Directorate of Taxes.