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Introduction to transfer pricing in North Macedonia
Transfer pricing rules
- The North Macedonia transfer pricing (TP) legislation is regulated with Articles 12, 12-a and 12-b from Corporate Income Tax Law (CITL) and is based on the arm’s length principle that follows the OECD Guidelines.
- The TP Rules apply to Macedonian taxpayers.
- The threshold consists of realized revenues on an annual basis exceeding 4,877,628 EUR, (300,000,000 MKD)
- The CITL specifies which entities are considered as related parties, i.e. 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, the form and content of the transfer pricing report, the types of methods for determining the transaction price in accordance with the arm's length principle and the manner of their application are regulated with the Rulebook issued by the Ministry of Finance and follow OECD principles.
- North Macedonia is not OECD signatories 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 are all accepted but the method used must be in line with the functional and risk profile of the entity.
- The TP regulation prefers the CUP method as the primary method, in case of impossibility to apply the CUP method, it is determined which of the other transfer pricing methods can be applied and is the most appropriate for the respective transaction.
- The North Macedonia has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
Transfer pricing documentation
Preparation of transfer pricing documentation
- The North Macedonia legislation prescribes the form and the content of TP report. The form and content of the transfer pricing report, the types of methods for determining the transaction price in accordance with the arm's length principle, and the manner of their application are presented in the Rulebook from 2019, issued by the Ministry of Finance.
- The regulation provides a short report and a full form of a report. The form of the report is directly dependent on the realized revenues and transactions with related parties in one calendar year.
- Taxpayers with an annual income of over 4,877,628 EUR, (300,000,000 MKD) are obligated to reporting transfer pricing with the full form of report (MasterFile). While, the short version of TP report submits taxpayer, if the total value of the transactions with related parties during the year does not exceed EUR 162,588 EUR, (10,000,000 MKD).
- The deadline for submission of the report to the Public Revenue Office is 30 September.
- Transfer pricing documentation and TP report need to be filed in Macedonian language.
- As attachments to the report the taxpayer submits:
- Annual consolidated financial statements for the multinational enterprise group
- Annual financial statements for the taxpayer
- Copies of all agreements concluded by the taxpayer in relation to controlled transactions
- Copies of existing unilateral, bilateral and multilateral advance pricing agreements and other tax decisions to which the tax authority is not a party but which are related to the controlled transaction
- Data, reports and documents that are relevant for the selection of the TP method for the transaction between related parties in accordance with the arm's length principle
- Other data reports and documents that the taxpayer deems relevant to the report.
Master and local file
- The Master and Local file structure is prescribed by the Rulebook, issued by the Ministry of Finance.
- Transfer pricing documentation should usually include a background to the Group and local company, an ownership and organization structure, an outline of the key intercompany transactions under analysis, an analysis of the key functions, assets and risks of the company, industry analysis and economic analysis including supporting evidence such as comparable, (CUP method or benchmarking analysis).
Some risk factors for challenge
- Companies that have intercompany business transactions with related parties located in low tax jurisdictions.
- Financing transactions.
- 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.
- In case a taxpayer does not fulfill the requirements of Article 12-a from Corporate Income Tax Law, fine in the amount of 300 to 1,000 EUR to a taxpayer legal entity (micro), from 600 to 2,000 EUR to a taxpayer legal entity (small), from 1,800 to 6,000 EUR MKD counter value to a taxpayer legal entity (large) shall be imposed for a misdemeanor if the taxpayer fails to submit to the Public Revenue Office a TP report in the appropriate form within the prescribed period.
- Fine in the amount of 50 to 250 EUR of a responsible person in a legal entity (micro), from 100 to 500 EUR of a responsible person in a legal entity (small), from 150 to 500 EUR for a responsible person in a legal entity (middle) and in the amount of 200 to 500 EUR shall be imposed on the responsible person in a legal entity (large) for the misdemeanor referred to in above paragraph.
Economic analysis and how to demonstrate an arm’s length result
- TP administrative aspects are related to economic analysis and demonstration of arm’s length result are generally aligned with the OECD Guidelines.
- Local and regional comparable companies are preferred, European comparable companies can be accepted.
- Macedonian tax authorities are not permitted to use 'secret comparable'. There are also no published TP 'safe harbors’.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- North Macedonia does not currently have an APA program.
- Transfer pricing documentation and reporting is obligatory in North Macedonia, taxpayers are exempt in case annual revenues not exceeding a threshold of 4,877,628 EUR (300,000,000 MKD).
Digital services tax
- Based on legislation in force, digital services taxes are not specified and regulated as a specific type of service.
- So far, there is not official announcement or recommendations in connection with COVID-19 from Macedonian tax authorities.