Montenegro: Guidance under new transfer pricing rules

The guidance stipulates the application of seven methods for determining the compliance of the transaction price with the arm's length principle.

Application of seven methods for determining the compliance of the transaction price

The Ministry of Finance on 2 November 2022 published in the official gazette the Instruction on the determination of transfer prices of transactions to provide guidance regarding the transfer price determination methods and the contents of transfer pricing documentation under the more detailed transfer pricing rules introduced in January 2022. Read TaxNewsFlash

Consistent with the new transfer pricing rules, the guidance stipulates the application of seven methods for determining the compliance of the transaction price with the arm's length principle:

  • Comparable uncontrolled price method
  • Cost plus method (cost plus gross margin method)
  • Resale price method
  • Transactional net margin method
  • Profit split method
  • Any other method that can be used to determine the compliance of the transaction price with the arm’s length principle, if it is not possible to use the above listed methods
  • A combination of above listed methods (if necessary)

Each of the methods is explained in more detail in the guidance, as well as the circumstances in which they are to be applied. When choosing a method, it is also possible to apply an aggregated approach for a larger number of individual transactions (i.e., a segregated approach in the case of complex transactions, where one transaction includes a larger number of individual transactions).

The guidance provides that transfer pricing documentation must contain:

  • Analysis of the group of related parties
  • Industry analysis, which includes a description of the activities in which business is conducted
  • Functional analysis in which related party transactions should be described and defined in detail, including the functions they perform, the assets they engage and the risks they assume
  • Selection of appropriate method for determining compliance of transfer prices with arm’s length prices
  • Conclusion with the amount of transfer pricing adjustments for individual transactions with each related party determined first, and then, after adding the adjustments amount, the total transfer pricing adjustment amount per each related party is calculated
  • Appendix that provides an overview of the data used to determine the arm’s length price or the price range determined in accordance with the arm’s length principle

Under the new transfer pricing rules, simplified documentation may be prepared if the amount of transactions with a related party that a taxpayer realized does not exceed the value of €75,000 in the year for which the tax return is submitted. In that case, the documentation must contain:

  • Description of transaction
  • Transaction value
  • Related party with whom the transaction was realized

For intercompany loans, the new transfer pricing rules contemplate application of either the arm's length interest rates prescribed by the Ministry of Finance or general rules on determining the price of transactions in accordance with the arm's length principle (by using one of the prescribed methods).

Transfer pricing documentation must be submitted by large taxpayers along with the tax return (other taxpayers are required to possess transfer pricing documentation at the time of submitting the tax return). The deadline for submitting the tax return is three months from the end of the period for which the tax is calculated. However, until 2027 the deadline for submitting (or possessing) transfer pricing documentation is 30 June of the current year for the previous year (e.g., for the financial year 2022 the deadline is 30 June 2023).

Read a November 2022 report prepared by the KPMG member firm in Montenegro


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