Tax News Kosovo: New Administrative Instruction on Transfer Pricing
Tax News Kosovo
KPMG's Tax News outline and highlight legislative changes and trends in the area of tax.
Administrative Instruction No. 02/2017 introduces new obligations related to transfer pricing.
Transfer pricing rules
The new Administrative Instruction sets out rules and procedures for the implementation of the transfer pricing provisions of Law No. 05/L-029 on Corporate Income Tax. These rules are based on the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD).
The arm’s length principle
Based on the Administrative Instruction, the arm’s length principle is emphasized as a transfer pricing standard to be applied for intra-group transactions/controlled transactions. Pursuant to the Law, controlled transactions for transfer pricing purposes are considered the transactions between parties who have a special relationship that may materially impact the economic results of the transactions between them (e.g., if one entity holds or controls 50% or more of the shares or voting rights in the other entity, or if both entities are directly or indirectly controlled by a third entity).
Transfer pricing methods
According to the Administrative Instruction, the open market value is determined by the comparable uncontrolled price method. However, in cases where this method is not applicable, the following methods may be applied as the most appropriate method:
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method.
Submission of an annual form for controlled transactions
The taxpayers performing controlled transactions above the amount of EUR 300,000 within a calendar year must submit with the tax authorities an annual controlled transactions form (ACTF) by 31 March of the following year. The Administrative Instruction also provides the template of the ACTF.
Transfer pricing documentation
According to the Administrative Instruction, a taxpayer is obliged to prepare and present to the tax authorities within 30 days upon their request the necessary documents and analysis in order to prove that the controlled transactions are in compliance with the arm’s length principle.
The documentation must contain the following:
- An overview of the taxpayer’s business operations (history, recent developments and general overview of the relevant markets of reference) and an organizational chart (details of business units/departments and organizational structure)
- A description of the corporate organizational structure of the group in which the taxpayer is a member (including details of all group members, their legal form, and their shareholding percentages) and the group’s operational structure (including a general description of the role that each of the group members carries out with respect to the group’s activities, as relevant to the controlled transaction(s))
- A description of the controlled transaction(s), including analysis of the comparability factors specified in the Law, and details of the applicable transfer pricing policy (where relevant)
- An explanation of the selection of the most appropriate transfer pricing method(s), and, where relevant, the financial indicator
- A comparability analysis, including a description of the process undertaken to identify comparable uncontrolled transactions, an explanation of the basis for rejection of any potential internal comparable uncontrolled transactions (where applicable), a description of the comparable uncontrolled transactions, an analysis of comparability of the controlled transaction(s) and the comparable uncontrolled transactions, and details and an explanation of any comparability adjustments made
- An explanation of any economic analysis and projections relied on
- Details of any advance pricing agreements or similar arrangements in other countries applicable to the controlled transactions
- A conclusion as to the consistency of the conditions of the controlled transactions with the market principle, including details of any adjustment made to ensure compliance
- Any other information that may have a material impact on the determination of the taxpayer’s compliance with the market principle with respect to the controlled transactions.
Entry into force
The new Administrative Instruction enters into force seven days after the date of its publication, i.e. 28 July 2017.
KPMG in Kosovo would be delighted to support Kosovo taxpayers in complying with the new rules introduced, including assistance in the preparation of the local transfer pricing documentation, review of transfer pricing files, benchmarking of the transactions and assistance in completing the annual notification form.
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