Transfer Pricing refers to the setting of prices for transactions between related parties, which may be companies that share ownership or control. For example, if a company in Albania purchases goods from its parent company abroad, the price of these goods must align with the price that would be applied in the market between independent parties.
This principle requires that the prices and conditions of controlled transactions be similar to those that would be established between independent parties. This avoids price manipulation that could lead to tax avoidance.
Controlled transactions are economic relationships between related parties and may include:
To evaluate whether a transaction complies with the arm's length principle, five main methods are used. The choice of method is based on the nature of the transaction and the available information:
These methods help tax authorities and taxpayers ensure that transfer prices are reasonable and comply with market conditions.
An Advance Pricing Agreement (APA) is a prior agreement between a taxpayer and the tax administration that determines the methodology for calculating transfer prices for future transactions.
Taxpayers seeking to enter into an APA must submit an official request and supporting documentation that justifies the proposed prices.
Documentation helps taxpayers justify transaction prices and prove compliance with the arm’s length principle. It is mandatory for taxpayers who conduct controlled transactions exceeding 50 million ALL per year.
Taxpayers who meet the criteria must submit an annual notification to the tax administration detailing their controlled transactions.
The tax administration has the right to audit reported transactions to ensure compliance with the arm’s length principle. In the event of non-compliance, the administration may perform adjustments.
In the case of international agreements for the avoidance of double taxation, corresponding adjustments are applied to ensure that taxpayers are not unfairly penalized.