Case of use of methods consistent with the comparable uncontrolled price method

Summary of business of corporation and foreign-related person
China corporation P is a manufacturer and distributor of product A, and 10 years previously it established company S in Albania as a subsidiary to supply raw material for product A.

Summary of foreign-related transaction

Company S sells its entire output of raw material a to company P, and company P manufactures product A from this for sale to third-party agents in China.

Functions and activities of corporation and foreign-related person

Company P receives no supplies of raw material a from any source except company S.

State of market and other factors

Raw material a for product A is sold worldwide on the commodities exchanges, and it has a quoted market price on these exchanges.

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 and other relevant provisions produced the following findings:

• Company P receives no supplies of raw material a except from company S, in addition to which company S supplies its entire output of raw material a to company P. It was therefore not possible to find any comparable transactions for application of the CUP method. It was also not possible to find any comparable transactions for applying the CUP method from publicly available information.
• As company P performed a manufacturing function in producing product A from raw material a supplied by company S, it is also not possible to apply the RP method to
  company P.
• Of the traditional transaction methods, one possible option would be to apply the CP method to company S. However, the comparable transactions in this case would be uncontrolled transactions in Albania. As sufficient information to adjust for differences in the impact on the profit margin for gross profit on sales could not be obtained, the CP method could not be applied.

Selection of method of calculation to substitute for traditional transaction methods

Based on the above, in this case it was found that the traditional transaction methods could not be applied. After considering the application of methods consistent with the traditional transaction methods prescribed in Article 36/2 in the Income Tax Law, however, it was found that worldwide transactions on commodities exchanges and the existence of a market price for raw material a meant that a method consistent with the CUP method could be applied, after adjusting for differences in the particular transaction terms (e.g. transportation costs), to calculating the arm’s length price.

Explanation

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.

If no transactions exist between unrelated persons that are comparable to the foreign-related transaction and the traditional transaction methods cannot be applied, it is possible to apply a method consistent with the traditional transaction methods where objective and realistic indicators of variables such as market prices (e.g., the quoted market price in this case) are available by using these transactions as the comparable transactions in order to calculate the arm’s length price.