Case of use of cost plus methodALTax
Summary of business of corporation and foreign-related person
Italian corporation P is a distributor of product A and product B, and 10 years previously it established corporation S in Albania as a subsidiary to distribute product A.
Summary of foreign-related transaction
Company P sells product A to company S, which then sells it to around 200 third-party retailers in Albania.
In conjunction with having established company S, company P sells product B to agent T, which is a third party in company X, and company T sells this to retailers in Albania. Product B differs somewhat from product A in specifications, but the two products are similar in terms of properties, construction, function, and so forth.
The volume of product A sold by company P to company S and the volume of product B sold by company P to company T are about the same.
Functions and activities of corporation and foreign-related person
The function performed by company P is that of purchasing inventories of product A and product B, which it sells to company S and company T. However, it does not appear to engage in unique activities, and does not use trademarks or other such properties.
There are no differences in the functions performed by company P in the sales transaction with company S, and the sales transaction with company T.
Terms of contracts for sale of product A and product B
The terms and conditions of the contracts for sale of product A by company P to company S and product B by company P to company T (e.g. delivery terms, payment terms, product warranties, and conditions for returns) are, with the exception of the transaction price, the same.
Treatment for transfer pricing taxation purposes
Consideration of applicability of traditional transaction methods
As precedence is given to application of the traditional transaction methods when selecting the method of calculation of the arm’s length price under the provisions of Article 36/2 of the Income Tax Law in Albania, an examination of comparable transactions in accordance with other relevant provisions produced the following findings:
– Product A and product B have similar properties, constructions, functions and so forth, and were deemed to be similar inventories.
– Company S and company T are both wholesale traders selling products to retailers in Albania, and no difference was found in the market level regarding sales to company S and sales to company T by company P (hereinafter referred to as the two transactions).
– The two transactions are substantially the same in volume and also the same in regards to the terms of contracts, and no differences were found in the volumes and contract terms of transactions.
– No differences were found in company P’s business strategies toward product A and product B.
-No differences were found in the role and functions of P in the two transactions, and no use was made of intangible properties.
– As both company S and company T are corporations located in Albania, the market conditions are the same, and there are no government regulations on either product A or product B.
Selection of method of calculation of arm’s length price
It was found that the sale of product B by company P to company T could be used as the comparable transaction for the sale of inventories of product A by company P to company S.
Based on the above, it was found that among the traditional transaction methods, it was appropriate to apply the CP method to company P, as the seller of inventories involved in the foreign-related transaction, to calculate the arm’s length price.
Regarding points to note when considering the applicability of the traditional transaction methods (including methods equivalent to the traditional transaction methods) and judging whether transactions corresponded to comparable transactions.