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Introduction to transfer pricing in Kosovo
Transfer pricing rules
- The Minister of Finance in Kosovo issued an Administrative Instruction on Transfer Pricing, entering into force on July 27, 2017. The Administrative Instruction is based on Article 27 of the Law on Corporate Income Tax that applies in Kosovo (hereinafter: the CIT Law). This alert is to highlight the mandatory requirement aspects and to summarize the most significant impact between related parties, rising from the said Administrative Instruction.
- The purpose of the Administrative Instruction is to establish rules and procedures for the implementation of transfer pricing in line with the provisions of aforementioned Article 27 of Law no.05/L-029 on Corporate Income Taxes (hereinafter: the Law). The provisions of the Administrative Instruction shall be applicable to controlled transactions between related parties.
- Related parties entities are considered as related parties, ie generally direct or indirect ownership greater than 25 percent based on voting rights, share capital, common control. As related parties are considered as well as other related persons (such as person participating in the management or control; family connection, etc.).
- Further on, the Administrative Instruction provides explanation for 'transaction' - meaning a deal, understands, agreement or practice between the parties directly or indirectly, whether legally binding or not, or with the intention to be legally binding and includes any business relationship between related persons.
- Kosovo is not an OECD signatory yet, although TP rules are based on OECD Guidelines which reflected the arm’s length principle.
Transfer pricing methods
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods. Initially, comparable uncontrolled price method is used, and in cases where this method cannot be used, other most appropriate methods are used and it is not required to apply more than one method.
- Kosovo has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
- Tax Administration of Kosovo based on its assessment of the information made available assesses that the adjustment carried out by the tax administration of another country is not in line with the value of the open market and gives an explanation to that effect.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Taxpayers with controlled transactions exceeding EUR 300,000 in a calendar year are required to Prepare TP documentation as per the EU Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union (2006/C176/01).
- The deadline for filling of the annual controlled transaction notice is the date prescribed for the submission of the annual declaration form and payment of corporate income tax by 31 March of the following year of the tax period.
- Transfer pricing documentation must be made available to TAK at there request, within thirty (30) days of receiving the request.
- The TP documentation should include at least the following:
- Summary of taxpayer activities and organizational structure.
- Description of controlled transactions.
- Explaining the selection of the most appropriate transfer.
- Pricing method and, the financial indicators.
- Comparability analysis.
- Explanation of any economic analysis and support project.
- Conclusion on the compliance of controlled transactions terms within arm's length principle.
- Any other information that may have a material impact on the determination of the taxpayer's compliance within arm's length principle in relation to controlled transactions.
Master and local file
- Ministry of Finance on 2017 has aligned documentation requirements with the OECD Transfer Pricing Guidelines.
- The mandatory documentation must be presented in two parts corresponding to a master file and a local file format and content. This documentation must be made available in electronic and hard copy.
Some risk factors for challenge
- Some risk factors for challenge may include:
- market risks
- risks of loss related to the investment and use of property, plant and equipment
- risks of the success or failure of investment in research and development,
- financial risks such as those caused by exchange rates of currencies and variability interest rates.
- Credit risk and similar. Management Fees or licensing fees paid to foreign parent entities.
- Limited risk distributor and contract services/ contract R&D arrangements could also potentially be affected.
- If the taxpayer fails to prepare documentation in line with this Administrative Instruction and fails to submit to TAK within the deadline is subject to fine under paragraph 1 of article 53 of Law no. 03/L-222 on Tax Administration and Procedures.
- TP Documentation or the TP file may be submitted in one of the official languages (Albanian or Serbian), as well as in English in special circumstances and upon agreement with TAK, within 30 days.
- If the taxpayer fails to present the documentation in time may be subject to administrative penalties up to EUR 2,500.
- In case the TP documentation does not prove, that the prices between related entities are according to the arm leigh principal then the difference is recognised not recognized for CIT purposes.
Economic analysis and how to demonstrate an arm’s length result
- The Kosovar Tax Authority analyses the searching criteria applied in the database in order to assure their compliance with the local practice.
- The list of comparable companies to be provided to the Tax Authority should contain some information to allow the Tax Authority to proceed with its revision, such as financial details, VAT number, NUI number, address.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between one or more taxpayers and one or more Competent Authorities to govern the appropriate transfer pricing method for a forward-looking period.
- The Tax Administration of Kosovo manages APAs or similar arrangements in other countries, applicable to controlled transactions.
- There is no exemption for the application of the arm’s length principle and documentation provisions.
- SMEs (as defined by the European Union recommendation (2006/C 176/01) have to prepare the Local File on a annual basis in order to comply with the Kosovar TP documentation requirements, however the taxpayer may use the same benchmark analysis for a three-year period, conditional upon no significant changes in the FAR analysis occurring during the said period.
The profit diversion compliance facility (PDCF)
- In determining the open market value for services within the low value-added group, the multinational company's service provider shall apply a margin of profit for all accumulated costs, excluding any overdrafts for which it is not attributable any gain/profit.
- Margin should be equal to 7% of the relevant expenditure, within the framework of the simplified approach does not need to be proved by a study of the comparison made.
- The Tax Administration will not be obliged to accept the simplified approach if the level of service tariffs within the low value-added group exceeds the 7% margin and may require a full functional analysis and comparability analysis.
Tax authorities and taxpayer behaviour
- TAK is improving the standards of transfer pricing documentation and economic analyses via reviews of taxpayer.
- The intercompany transactions should be documented sufficiently in the Transfer Pricing File, as set by the legislation otherwise taxpayer may be subject to penalties.
- The economic fallout of COVID-19 is likely to have a widespread impact and an increase in TP, DPT and Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and DPT and updating documentation accordingly.
- It is also likely that the Kosovar Tax Authority will continue to focus challenges towards companies with commissionaire/LRDs and 'cost plus' service entities, especially where they are claiming losses because of the pandemic.
- No guidelines have been published as of now by the Tax Administration of Kosovo.