By Erinda Xhaferraj (Tax Manager, PwC, Albania) and Edland Graci (Transfer Pricing Senior Associate, PwC, Spain)
The amendment in 2014 of Albania’s Income Tax Law and the release of the Transfer Pricing Instruction introduced changes that are of importance to Albanian taxpayers performing cross-border transactions. For the first time taxpayers were faced with a complex and sophisticated legislation, which required the application of arm’s length in intra-group transactions.
Even though the concept of arm’s length concept is not new to the Albanian taxpayer, the previous Instruction on Transfer Pricing did not contain specific rules or methods on how to meet the arm’s length principle.
Reference to the OECD Transfer Pricing Guidelines of 2010
Article 36.1 of the Income Tax Law requires related parties to establish the remuneration of their inter-company transactions in line with the market price. This is achieved through applying transfer pricing methods – broadly in line with the OECD Transfer Pricing Guidelines (though the Income Tax Law prevails in case of any discrepancy).
Transfer pricing documentation
In Albania, there is no fix deadline in regards to the submission of transfer pricing documentation. The Transfer Pricing Instruction notes that documentation must be submitted within 30 days upon request from the tax authority.
Taxpayers engaged in transactions with related parties or with enterprises located in low tax jurisdictions exceeding EUR357,000 (approx.) must submit an Annual Controlled Transactions Notice by March 31 of the year following the year in which the transactions took place.
Penalties
A fine of EUR71 (approx.) per month applies to taxpayers who fail to submit an Annual Controlled Transactions Notice within the deadline.
While the submission of the transfer pricing documentation is not subject to a late submission penalty, the preparation of the file brings substantial benefits, especially where the controlled transactions are not at arm’s length.
There are two main benefits as outlined below.
Adjustment at any point in the market range
When the respective financial indicator, derived from related-party transactions, is deemed not to fulfil the arm’s length, the tax authority may adjust the respective firm’s indicator to be equal to the median of the market range.
Whereas, had the taxpayer performed the adjustment on its own and prepared the transfer pricing documentation (self-adjusted its taxable profit in addition to preparing the documentation), it would have been able to perform the adjustment up to the market minimum/maximum (depending on whether it provided or received the services).
Differences between the market range median and market range minimum/maximum could be significant and make self-adjustments important.
The market range is identified generally through benchmarking studies conducted by using data extracted from publicly available databases such as Amadeus and Orbico.
Waiver of fines
When taxpayers identify transfer pricing adjustments and subsequently perform a self-correction, they are liable to pay the additional obligation and interest, but not fines.
However, if the adjustment is performed by the tax authorities, the clear implication is that the taxpayer is liable for a fine for non-compliance.
Advance pricing agreements
The advance pricing agreement (APA) Instruction came into force in Albania in 2015.
APAs may be concluded for a time period of three or five years. However, the value of intra-group transactions must be greater than EUR30m for the entire period to be covered by the APA.
Nevertheless, applications for APAs that do not meet the threshold may be accepted by the General Tax Directorate, provided that the case is sufficiently complex and is of high commercial or economic significance to Albania.
The legislation defines that unilateral, bilateral, and multilateral APAs could be agreed in Albania.
Currently there is only one multilateral APA in negotiation process in Albania (in the energy sector).
Tax audits
In 2015, Albania participated in the Tax Inspectors Without Borders program organised by the OECD for the developing countries. The program facilitates inspections in developing countries by appointing international experts in transfer pricing, thin capitalization, advance pricing agreements, anti-avoidance rules, among others.
In the case of Albania, the Italian Revenue Agency was assigned to assist the Transfer Pricing Unit of the General Albanian Taxation Directorate in tax audit risk assessment and a tax audit addressing international tax, transfer pricing, and exchange of information issues.
The tax audit resulted in a transfer pricing adjustment for 2014 equalling seven percent of the EBIT of the Albanian resident subsidiary of a multinational enterprise (MNE). The company agreed with the conclusions of the tax audit and adjusted its transfer pricing policy.
The aforementioned tax audit is the only one concluded up to now, whereas another one is expected to start very soon. The Albanian tax authority seems to be following other tax authorities by first targeting companies operating in retail and distribution.
Moreover, the tax authority seems to not only audit specific companies but also analyse the profit level indicators of several others, after examining the transfer pricing documentation. Requests for transfer pricing documentation have been sent to various MNE subsidiaries, especially to those presenting low returns compared to others operating in the market.
BEPS and Albania
From January 2015, Albania and other non-OECD countries have directly participated in the development of the base erosion and profit shifting (BEPS) measures through meetings of the OECD Committee on Fiscal Affairs and the BEPS technical working groups.
There is no information whether Albania will sign the BEPS Multilateral Instrument and, if yes, when. Despite the work performed on drafting new laws and regulations we believe there is more to be achieved from the Albanian authorities in order to accelerate the country relation with the European Union and the OECD. One of those being the adaption of all the necessary changes related to BEPS and other international legal framework in order to comply with the European standards.
Views are personal.
Erinda Xhaferraj is Tax Manager at PwC, Albania. She can be reached at erinda.xhaferraj@pwc.com.
Edland Graci is Transfer Pricing Senior Associate at PwC, Spain.