When related persons are transacting with each other, they must take into consideration Article 27 of the Corporate Income Tax Law, which deals with transfer pricing. The price applied by them will be examined by the tax authorities; therefore, in order to avoid reassessments and penalties, the legal requirements must be fulfilled.

The transfer price (ie, the price applied by related persons) should be compared with the market value. Article 27.3 of the law provides that "the open market value shall be determined under the comparable uncontrolled price method and, when this is not possible, the resale price method or the cost-plus method or any other method as defined by sub-legal act may be used".

Naturally, difficulties arise when implementing these methods in practice, especially in a recently developed legal environment, such as that of Kosovo.

In contrast to the 'best method' approach of the Organisation for Economic Cooperation and Development (OECD) and the United States, Kosovan legislation requires the taxpayer to determine the method according to a predetermined hierarchy. Specifically, the taxpayer should first assess if the comparable uncontrolled price can be used. If it cannot, the open market value should be determined by using the resale price method (which is more appropriate for entities engaged in the distribution sector) or the cost plus method (which is more appropriate for manufacturers). When a taxpayer has grounds to believe that neither of these methods can be used, tax authorities may allow use of the profit split method and then the transactional net margin method. Short descriptions of each method are given in the relevant Tax Administration Law Instruction, but this is not exhaustive.

The use of each of the above methods must be documented; unfortunately, the documentation required to show that a method produces an arm's-length result is not specified.

These uncertainties, as well as the low number of transfer pricing cases handled by the tax authorities and the lack of cosistency with OECD guidelines, have led to general confusion for taxpayers.

For further information please contact Andi Pacani at Boga & Associates by telephone (+355 42251050), fax (+355 42251055) or email (apacani@bogalaw.com).

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