Transfer Pricing Requirements
The rising volume and variety of intercompany transactions and transfer pricing regulations, accompanied by increased regulation worldwide, have made transfer pricing a leading risk management issue for global businesses. Although Albania does not have a deadline for the preparation of transfer pricing documentation, following the submission of the Annual Controlled Transaction Notice for the financial year 2019 within the deadline on March 31st 2020 - a proactive approach on preparing updated transfer pricing documentation and/or reviewing the current transfer pricing documentation package - has clear benefits on tackling transfer pricing risks. For more information on the benefits resulting from compliance with the transfer pricing regulations, and the risks associated with noncompliance, read the article prepared by Blerina Memo, Tax Director, and Gerhard Teli, Tax Manager.
Compliance Requirements in Albania
Taxpayers engaged in controlled transactions including loan balances, which in aggregate within the fiscal year exceed 50,000,000 Lekë (approx. EURO 400,000), are required to complete and submit within the 31st of March of the following year the ACTN to the Regional Tax Directorate.
Albania has transfer pricing documentation requirements in place that require related parties to apply market prices (i.e. arm’s length principle) for their cross-border intercompany transactions. The related party transactions are required to be supported through market studies and proper transfer pricing documentation that justify the fair market value.
Best practices and risk exposure minimization
Based on the Instruction No. 16 “On Transfer Pricing”, tax authorities have the right to request the transfer pricing documentation, and the taxpayer should provide such documentation within 30 days following the request. However, taking a proactive stance and preparing the documentation in advance, in addition to enhancing compliance, may also lead to other benefits. Based on the Albanian legislation, OECD Guidelines and also the best practice should be reviewed and updated on a yearly basis.
In view of the approaching deadline for corporate income tax declaration and payment, this may be the optimal moment for taxpayers to review and reevaluate their transfer pricing policies. This may include reconsidering existing policies, identifying potential areas for improvement, and evaluating the potential for transfer pricing adjustments. All of these actions may improve a company’s transfer pricing position and thus minimize risks that might arise during transfer pricing audits.
The risks associated with noncompliance with transfer pricing regulations are:
- Tax authorities have the right to adjust revenues and expenses to reflect the market value of transactions. As a result, a company’s taxable income may increase if the transfer prices for controlled transactions are not set at arm’s length.
- Additional taxable income assessed will be subject to corporate income tax at 15%, penalties up to 21.9% (when applicable) and late payment interest charges.
- Penalties also apply for failing to submit the ACTN.
- Failure to present the transfer pricing documentation in time, when requested, may result in the tax authorities performing their own assessment of the market prices.
The benefits associated with compliance to transfer pricing regulations are:
- Preparing documentation in advance is the best defense against potential negative consequences of transfer pricing audits.
- Once the transfer pricing documentation is submitted, the taxpayer’s initial burden of proof is completed.
- Awareness of exposure areas in order to allow for possible and allowable measures before a transfer pricing audit starts.
- Self-adjustment of a transaction not at arm’s length can be performed at any point in the market range, whereas the tax authorities reassess transaction prices at the market median.
- Any self-adjustment is subject to payment of additional corporate income tax liability and interest, while providing for a possible penalty protection.
Our dedicated transfer pricing team will be happy to set up conference calls or virtual meetings with you to further clarify the above requirements.