Top-5 Transactions in Focus of Tax Authorities ~ U-Tax Blog

Friday, November 9, 2012

Top-5 Transactions in Focus of Tax Authorities

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Buying High-Priced Consultancy Services

If a company buys consulting services at a high price (several hundred thousands or even millions of hryvnias), the act/certificate on works performed will not usually suffice for the successful passage of the tax audit. It is necessary to have a detailed report or another similar document reflecting the content of the consultancy services received. Otherwise, the tax authorities can cancel your input VAT/expenses and charge the penalties amounting to 25% of the additionally assessed tax liabilities.

Transactions Involving Non-residents

Transactions involving non-residents is a vast field for finding tax violations. First, the tax authorities check the compliance with withholding tax rules. Has the taxpayer reasonably taken advantage of the provisions of the tax treaty exempting the non-resident from taxation in Ukraine or setting out a lower tax rate than under national law?

Secondly, the legislation provides for a myriad of restrictions in respect of the deductibility of expenses incurred while dealing with non-residents. A striking examples are (i) the limitation on the deductibility of consulting, marketing and advertising services purchased from non-resident and exceeding 4% of the revenue of the previous year and (ii) the total non-deductibility of such services purchased from non-residents having offshore status. It is clear that sometimes the taxpayer may stumble and fail to comply with these limitations.

Transactions with Related Parties

Transactions with related (affiliated) parties are subject to transfer pricing rules. That is, if it is established that the movement of goods/services between related parties has taken place at prices other than arm’s length ones, the tax authorities may adjust the tax consequences of the respective transactions by applying arm’s length prices. This, in its turn, may result in additional tax liabilities and penalties for the taxpayer.

There has been recently an outbreak in tax authorities’ attempts to apply transfer pricing rules. On 1 January 2013 the new (more "perfect", at least according to the tax authorities) transfer pricing rules will come into effect. So, we can only expect an increase of such attempts in the new year.

Unusual Transactions

Suppose that an enterprise specialising in construction works suddenly and for unknown reasons engages in the exportation of steel. It seems that there is nothing illegal in such kind of activity. But it is rather doubtful that these transactions will not be subject to special scrutiny of the tax authorities. The tax authorities can find sham companies in the chain of supply (at least ones in their understanding), ignore the respective supplies for tax purposes and finally deprive the taxpayer of the input VAT/expenses.

Transactions in Securities

Transactions in securities were and remain a popular tool for tax avoidance/mitigation and therefore always attract the special attention of the tax authorities.

What is worth a wide-spread scheme of selling securitised real estate through investment funds? The latter ensures considerable tax savings as investments funds are almost completely exempt from corporate income tax in Ukraine.

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