As a member of the OECD, Albania has developed its internal legislation on transfer pricing (hereinafter: TP) regulations following OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
Currently, the TP legislation is provisioned in two main legal acts: (i) Law no. 8438, dated 28.12.1998 “On Income Tax” (hereinafter: ITL 8438/1998), amended, Article 36-36/7, and (ii) Instruction of Ministry of Finance No. 16, dated 18.06.2014 “On transfer pricing”.
Arm’s Length Principle
Article 36 of the ITL 8438/1998 provides that the arm’s length principle is fundamental in regards of guaranteeing that transactions between related parties provide a fair market value, just as it would be the case if the parties were not related. As a result, if commercial or financial relations between related parties are different from those that would exist between independent parties, taxable income may be adjusted by the tax administration. Specifically, where these conditions result in a lower taxable profit, tax authorities may add to the taxpayer’s income the profit which would have arisen under market conditions.
In order to ensure compliance with the arm’s length principle, taxpayers involved in controlled transactions are obliged, under Albanian law, to file the “Notice of Annual Controlled Transactions” form. Additionally, foreign related party exchange for more than 50 million lekë annually will need to be reported individually.
Related Party Definition
As per article 36 of the ITL 8438/1998 parties to be related when:
- One entity directly or indirectly participates in the management, control, or capital of another entity.
- The same person(s) directly or indirectly participates in the management, control, or capital of two or more entities.
An entity is considered to be engaged in the management, control, or capital of another person when it owns 50% or more of the capital or voting rights or has effective control over business decisions of such a person. Furthermore, after a party is determined to be related, all transactions between such parties must be in accordance with transfer pricing rules. The scope of such rules is broad, covering all types of commercial and financial dealings. This includes the sale of goods and services, where prices between related parties must be commensurate with market prices. It also includes intellectual property licensing, where fees or royalties between related parties are consistent with what would be agreed by independent companies. Loans and cost-sharing arrangements are also subject to transfer pricing regulation, and companies need to prove that terms and conditions are consistent with transactions conducted at arm’s length.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Albania are:
- Comparable Uncontrolled Price Method (hereinafter: CUP)
- Resale Price Method (hereinafter: RPM)
- Cost Plus Method (hereinafter: CPM)
- Transactional Net Margin Method (hereinafter: TNMM)
- Profit Split Method (hereinafter: PSM)
Albania does not prioritize methods but rather relies on the most appropriate method. In addition, the legislator recognizes that option to apply another method other than the above, when it can be proved that none of the above methods can be reasonably applied.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Albania:
The comparability analysis in Albania, as outlined in Instruction No. 16 of 2014, ensures that transactions between related parties are assessed under market conditions. This process helps determine whether a controlled transaction follows the arm’s length principle.
The law recommends a structured nine-step process, similar to the OECD Guidelines, but emphasizes that the outcome is more important than the process. Key steps include:
- Analyzing the taxpayer’s circumstances and understanding the controlled transaction,
- Reviewing internal and external comparable transactions,
- Selecting the appropriate transfer pricing method, and
- Making necessary adjustments to reflect market conditions.
When selecting comparable transactions, the law gives preference to internal comparables—uncontrolled transactions within the same company—if available. If these are not sufficient, external comparables may be used, but their reliability must be carefully assessed.
Documentation Requirements
Transfer pricing documentation requirements in Albania are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Albanian tax authorities
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master and Local File
Although there is no explicit reference to a Master File and Local File in the law, the transfer pricing documentation guideline suggests a two-tier approach similar to OECD Guidelines. The Master File would typically include global transfer pricing policies, a description of the business, and details of intangible assets and intercompany financing. The Local File would consist of detailed analysis of specific transactions, supporting the pricing methodologies and comparability studies applied in Albania.
Transfer pricing documentation can be submitted in Albanian or English within 45 days from the requested date to the General Directorate of Taxes (hereinafter: DAP). It may occur that DAP can request an Albanian translation at the taxpayer’s cost. The law allows electronic or paper filing, which is convenient for taxpayers. However, incomplete or incorrect documentation does not fulfill legal requirements, and companies are subject to adjustments and penalties.
Country-by-Country Reporting
Albania has implemented Country-by-Country (CbC) reporting in line with the OECD/G20 BEPS Project (Action 13). This requirement applies to multinational enterprise (MNE) groups whose ultimate parent entity is a tax resident in Albania. If the group’s consolidated turnover in the preceding fiscal year was at least 105 billion lekë, the parent entity must submit a CbC report no later than 12 months after the end of the relevant accounting period.
The CbC report must contain key financial and tax-related data for each jurisdiction where the MNE operates. This includes:
- Revenue and profit (loss) before income tax,
- Income tax paid and accrued,
- Number of employees,
- Stated capital and total retained earnings,
- Total tangible assets (excluding cash or cash equivalents), and
- Identification of all constituent entities within the group, along with their business activities.
All Albania-resident constituent entities of an in-scope MNE group must notify the Albanian tax authority about the identity and tax residence of the group’s CbC reporting entity. If there are multiple constituent entities, one may be appointed to file the notification on behalf of the others. The notification deadline is the end of the group’s reporting fiscal year. Once submitted, additional notifications are only required if circumstances change.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Albania uses both APA and MAP procedures to manage and resolve international tax disputes, in compliance with OECD guidelines. APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology. The authority managing the agreements is the Minister of Finance, who determines how Albanian tax law will be applied to a specific situation or transaction that has not yet occurred from a tax perspective.
The APA process in Albania includes the following steps:
- a pre-filing meeting;
- a formal application with full information required;
- an evaluation of the application by the DAP;
- a negotiation (a formal meeting to reach an agreement depending on whether the APA is unilateral or bilateral or multilateral); and
- drafting and agreement.
APAs in Albania typically cover a maximum period of five years, beginning from the first tax year following the agreement’s signing date. Unlike some jurisdictions, Albania does not permit rollbacks, meaning an APA cannot retroactively apply to past tax years. However, if the APA is concluded after the first proposed tax year, that year will still fall within the agreement’s scope.
Penalties
A key requirement for businesses engaged in related-party transactions is the submission of the “Notification of Controlled Annual Transactions.” If a taxpayer fails to submit this notification on time, they face a fixed monthly penalty of 10,000 ALL (approximately 82 EUR) for each month of delay.
When tax authorities adjust taxable income due to transfer pricing violations, additional financial consequences apply. If a taxpayer has not fulfilled their tax obligations on time, standard penalties for late tax payments will be imposed, including interest and potential fines.
Taxation at a Glance
Albania, located in the South Eastern Europ, is home to a population of 2.7 million and operates with the local currency of the Albanian Lekë (ALL). Fiscal policies are administered by the official tax authority named the General Directorate of Taxes. The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 15% |
VAT | 20% |
Withholding tax on dividends to non-residents | 8% |
Withholding tax on interest to non-residents | 15% |
Withholding tax on royalties to non-residents | 15% |
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