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North Macedonia: Recent Development of Transfer Pricing Legislation

North Macedonia: Recent Development of Transfer Pricing Legislation

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If certain statutory conditions are fulfilled, companies obliged to pay the Macedonian Corporate Income Tax (CIT) should submit reports for their 2019 transactions with related parties to the Public Revenue Office before September 30, 2020. The 2019 financial year is the first for which CIT payers are obliged to file such reports, according to the CIT Law.

For many years, the Macedonian authorities kept the transfer pricing regime simple and under-regulated. Thus, before the CIT Law was amended in December 2018, it stipulated that only two methods were acceptable for determining the potential difference between the transfer price and the price determined under the arm’s length principle in transactions between related parties: the comparable uncontrolled price (CUP) method and the cost-plus method.

This approach was not in line with methods presented in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Additionally, before the law was amended in 2018, CIT payers were only required to present information and analyses for the execution of transactions between related parties according to the arm’s length principle when requested to do so by the Public Revenue Office.

However, the amendments to the CIT Law change the course of transfer pricing rules significantly. In particular, the scope of the categories of persons/entities which are considered “related” for tax purposes has been extended, immediately increasing the number of CIT payers subject to the transfer pricing provisions. The current definition stipulates that two persons/entities will be treated as related parties for transfer pricing purposes if there is an ownership, managerial, personal, financial, organizational, or business relationship between them which fulfills the statutory criteria.

Additionally, the Macedonian legislator decided to extend the number of available methods for determining the prices at arm’s length in transactions between related parties. Related parties now can use the CUP method, the cost-plus method, the resale price method, the transactional net margin method, the profit split method, or any other method (in case the prior five methods are inapplicable for some reason). This amendment improved the position of taxpayers needing to choose an appropriate method because the applicability of any method is limited by the type of transaction and the availability of financial information for comparable independent companies.

The updated transfer pricing legislation may potentially impose additional obligations on a large number of CIT payers, in the process increasing their compliance expenses. Therefore, the Macedonian legislator decided to limit the obligations for reporting of transactions with related parties only to CIT payers with a total annual income higher than MKD 60 million (approximately EUR 975,600). This reporting should have been completed together with submission of the annual CIT return for the prior year (thus, no later than March 15 for this current year). 

However, stakeholders objected to many aspects of the new obligations, primarily that the deadline for their reports is too short to allow the preparation of documentation for transactions with related parties. As a result, the legislator adopted new amendments to the CIT Law in December 2019, extending the deadline for submitting their reports until September 30 of the current year for the reports drafted for the previous year, and increasing the threshold for the reporting so that only CIT payers with annual income higher than MKD 300 million (approximately EUR 4.9 million) will be subject to them.

Additionally, the legislator exempted transactions between related parties that are both tax residents of North Macedonia from reporting. Hence, only cross-border transactions are affected by the transfer pricing provisions.

The 2019 amendments also divided CIT payers with Reporting Obligations into two groups. The first group consists of taxpayers whose annual transactions with related parties do not exceed MKD 10 million (approximately EUR 162,600). These taxpayers should submit a shortened report for transactions with related parties. The second group includes the taxpayers whose turnover with related parties exceeds that threshold, who are now obliged to submit a detailed report for transactions with related parties, including data about multinational enterprises, data about the taxpayer, and appendices.

The recent amendments to the CIT Law represent a significant development of the local transfer pricing legislation. However, considering the current tax measures endorsed by the OECD and EU, many opportunities for Macedonian authorities to improve the country’s tax system remain.

By Aleksandar Josimovski, Head of Tax, CMS North Macedonia

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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