Following the publication of Administrative Instruction MF No. 02/2017 on Transfer Pricing which sets out rules and procedures for the implementation of the transfer pricing provisions of Law No. 05/L-029 on Corporate Income Tax, the Tax Administration of Kosovo has published an announcement for the submission of the annual controlled transactions notification as per the template provided in the Administrative Instruction.
These rules are based on the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD).
The Administrative Instruction does not specify the version of OECD guidelines to be followed in case of lack of internal provisions. However, it appears that different provisions of the Instruction have been influenced by different versions of the Guidelines. For example, the Instruction provides for a “limited” version of hierarchy of applicable methods (in line with the 1995 OECD Guidelines) by specifying that the open market value is determined by the comparable uncontrolled price method and that the other approved OECD methods may be used only if CUP is not applicable in the specific case.
On the other hand, the Instruction, in line with the 2017 OECD Guidelines, provides for specific treatment and certain safe harbours for the so called low value services provided by headquarters.
If suitable to the specific case, the Instruction lays down the possibility to use other methods not explicitly described in the Instruction and OECD guidelines. In addition, the Instruction has tried to mediate between the need to have sufficient proof that the arm’s length principle is respected in the controlled transaction and the principle that the burden imposed on the taxpayer should not exceed the tax benefits actually deriving from the application of the TP legislation.
In this regard, the Administrative Instruction has confirmed that a minimum 50% ownership or voting right test should exist for the transaction to be considered a controlled transaction. Other cases may apply but the burden of proof remains with the tax authorities. The Instruction has excluded internal controlled transactions (it applies only to cross border transactions) and has provided for certain safe harbors to prove that the arm’s length principle is respected.
Based on the Instruction, taxpayers performing controlled transactions above the amount of EUR 300,000 within a calendar year must submit with the tax authorities an annual controlled transactions form (ACTF) by 31 March of the following year. For the transactions of FY 2016, the notification deadline to the tax authorities is 30 November 2017. The Administrative Instruction also sets out the template of the ACTF.
Furthermore, the Administrative Instruction provides that a taxpayer is obliged to prepare and present to the tax authorities within 30 days and upon their request, the necessary documents and analysis in order to prove that the controlled transactions are in compliance with the arm’s length principle. Detailed provisions on what the local documentation should contain are laid down in the Administrative Instruction.