Wednesday, January 29, 2014

Ukrainian Revenue Ministry to Exchange Information with Secrecy Jurisdictions

The Ukrainian Revenue Ministry enjoys an opportunity to exchange tax information with the most popular "tax havens/secrecy jurisdictions" (the British Virgin Islands, Belize, the Isle of Man, Gibraltar, etc.)

These opportunities opened to the Revenue Ministry by the recent ratification of the Convention on Mutual Administrative Assistance in Tax Matters (hereinafter – the "Convention") by the Government of Belize as well as the extension of its application by the United Kingdom and the Netherlands to a number of their overseas territories. In addition, the Convention has been already signed, but not yet ratified by such popular secrecy jurisdictions as Switzerland, Luxembourg and Liechtenstein.

Jurisdiction
Subordination
(for dependent territories only)
Effectiveness
(according to www.offtax.com)
Aruba
The Netherlands
1 September 2013
Belize

1 September 2013
The Bermudas
The UK
1 March 2014
The British Virgin Islands
The UK
1 March 2014
Gibraltar
The UK
1 March 2014
The Cayman Islands
The UK
1 January 2014
Liechtenstein

Signed on 21 November 2013
(not ratified yet)
Luxemburg

Signed on 29 May 2013
(not ratified yet)
The Isle of Man
The UK
1 March 2014
Switzerland

Signed on 15 October 2013
(not ratified yet)

What follows is the possible ways of exchanging information in accordance with the Convention:

Exchange of information on request - information is being made available to the Revenue Ministry based on its request.

Automatic exchange of informationthe Revenue Ministry and revenue authorities of a secret jurisdiction exchange certain information automatically. In order for this to work, the relevant procedures should be agreed on by the parties. It seems to be clear that such procedures are not agreed on yet.

Spontaneous exchange of informationthe revenue authority of a secret jurisdiction detects certain activity that may adversely affect the tax revenues in Ukraine and forwards the respective information to the Revenue Ministry.

Simultaneous tax examinationsthe Revenue Ministry and the revenue authority of a secrecy jurisdiction conduct simultaneous examination of certain taxpayers. To make this possible, there must be relevant procedures approved. Such procedures are not approved yet.

Tax examinations abroadthe representatives of the Revenue Ministry are eligible, subject to the permission of the revenue authority of a secrecy jurisdiction, to take part in tax examinations conducted in such a jurisdiction.

Further to the exchange of information, the Convention enables the Revenue Ministry:

- To recover tax claims abroad (for example, where a secrecy jurisdiction-resident carries out its activities in Ukraine making up a permanent establishment without the registration of it with the tax authorities and accounting for corporate income tax);

- To forward documents for servicing them upon residents of secrecy jurisdictions.

Expectations and prospects. A great deal will depend on the approach of secrecy jurisdictions to exchange of information (on the one hand, there is an obligation to stick to their international commitments, on the other hand, they clearly understand that active disclosure could lead to an outflow of clients interested in their services).

In this context, it is worth mentioning the case of MH Investments and JA Investments v Cayman Islands Tax Information Authority decided in September 2013 by the Cayman Islands Grand Court.

The Australian Taxation Office asked the Tax Information Authority of the Cayman Islands to provide information on companies whose ultimate beneficial owners allegedly were two Australian accountants. The purpose of the request was to confirm the connection of the aforesaid accountants to such companies and issue them with additional tax charges based in light of this fact. The request was made based on a tax information exchange agreement between the Cayman Islands and Australia (very similar in nature to the Convention).

The Tax Information Authority of the Cayman Islands complied with the request. The requested information was demanded from the registered agent and given to the Australian Taxation Office.

Cayman-registered companies that were subject to the information request believed that the information had been provided in violation of the established procedures. They appealed to the court so as to compel the Tax Information Authority of the Cayman Islands to withdraw the information from the Australian Taxation Office. At the hearings, the court found the violations of procedures and allowed the claim. The violations include, among other things, as follows:

- Providing information for a period not covered by the agreement on exchange of information;

- Failure to obtain a prior consent of the court of the Cayman Islands for the use of the information during court proceedings in Australia;

- Failure to notify the companies of the informational request (in accordance with the domestic laws of the Cayman Islands the provision of information without the knowledge of the companies concerned is only possible for criminal matters, which was not the case in the situation in question).

Interestingly, the Australian Taxation Office ignored the judgment of the Cayman Islands Grand Court. They appealed to the Australian court with a request to permit the use of the information obtained from the Cayman colleagues in their tax evasion proceedings. In October 2013 the Australian Federal Court allowed the claim.

* - Photo from wikipedia.org

Thursday, January 23, 2014

“Amendments to Amendments”: What has been in Force since 1 January 2014

 
In the post of 3 December 2013, it was already talked of the tax novelties taking effect from 1 January 2014.

The Parliament of Ukraine did not avoid the temptation of changing many of them by its Act of 19 December 2013 “On Amending Tax Code of Ukraine in Relation to Some Tax Rates”. What follows is a brief account of the pivotal changes brought by the said Act:



- The VAT rate in 2014 remains at 20%, the rate reduction to 17% was postponed to 2015;

- The corporate income tax rate in 2014 is reduced to 18%, rather than to 16%, as was previously set out. In 2016 the tax rate will amount to 17% and finally in 2017 will constitute 16%;

- The VAT exemption for scrap metals and wood (certain items) was extended until the end of 2014;

- The VAT exemption in respect of supplies and exports of certain cereals (save for those made by producers and first-tier intermediaries) which was intended to cease on 1 January 2014, became permanent;

- А ban for 2014 on the utilization of securities-related losses accounted for as at 1 January of this year;

- Outlawing an excise duty avoidance scheme involving the import of exempt cargo vans into Ukraine with their further rearrangement into the cars.

Friday, January 17, 2014

Transfer Pricing: Some Topical Issues

Co-author Anna Bukvych
(associate of Lavrynovych
and Partners Law Firm)
Please see below answers to some topical issues on transfer pricing. 
 
Should a contract price be equal to the arm’s length price (a price at which the tax consequences of controlled transactions, hereinafter – «CTs», are reflected)?

There is no such requirement. One price can be indicated in a contract with a counterparty, whereas another price can be used for the purposes of transfer pricing.

How will the value limit in the amount of UAH 50 million, the achievement of which is required for a transaction to be recognized as controlled, be applied for the period of September–December 2013 (UAH 50 million in full or in proportion to the number of the months concerned, i.e., in the amount of UAH 16.66 million)?

This issue is dealt with in the Generalized Tax Advice approved by the order of the Ministry of Revenue and Duties of Ukraine (hereinafter – the “Generalized Tax Advice» and the “Ministry of Revenue”, respectively).

The approach of the Ministry of Revenue limit must be used in full, but in respect of the whole year 2013, rather that of its September-December. In order for a transaction to be treated as controlled the two following conditions should be simultaneously met:

- The total amount of transactions with one counterparty over the year 2013 makes up not less than UAH 50 million;

- At least one of such transactions was carried out during September-December 2013.

How will the previously mentioned limit of UAH 50 million be applied to loan and commissionaire arrangements?

The law does not provide any specific rules for this case. Pursuant to the Generalized Tax Advice the relevant calculation should include not only interest, but also the principal of the loan, and not only commissionaire fees, but also the full value of the goods sold/bought under the commissionaire arrangements.

How do proportional and reverse adjustments work?

Proportional adjustments work where the tax liabilities of your counterparty have been adjusted due to the application of the arm’s length prices (either by your counterparty himself or by the tax authority as a result of the tax inspection). In such a case, you should adjust your tax liabilities based on the level of the arm’s length prices applied by your counterparty or by the tax authority. This adjustment is called proportional since it is made in proportion to the counterparty’s adjustment.

It should be noted that proportional adjustments can be made only on the basis of the notification of the Ministry of Revenue of the possibility of doing so. In its turn, the sending of such a notification is only possible after the full remittance of the additional tax liabilities charged in connection with the application of arm’s length prices.

In case that a proportional adjustment has been made in accordance with the decision of the tax authority which has been subsequently canceled, a reverse adjustment should be made accordingly. As just as a proportional adjustment, a reverse adjustment is made only on the basis of the notification of the Ministry of Revenue of the possibility of doing so.

To which commodity items should special rules apply in accordance with the transitional provisions and what is their effect?

The transitional provisions:

- remain in effect until January 1, 2018

- allow taxpayers to use simplified transfer pricing procedures;

- apply to the following items: (i) cereal crops; (ii) fats and oils; (iii) ironstones, slags and ashes; (iv) mineral fuels, coal, petroleum; (v) cast iron, steel, ferrous-based alloys etc.;

- apply to international transactions with non-residents registered in the low-tax jurisdictions only (the list of such jurisdictions has been approved by the resolution of the Cabinet of Ministers of Ukraine No 1042-p dated December 25, 2013).

One of the simplified procedures put forward by the transitional provisions is the possibility to avoid the application of transfer pricing methods and to compute an arm’s length price based on either:

- commodity exchange quotations – for goods quoted on a commodity exchange, or

- reference prices published in specialized business periodicals – for goods not quoted on a commodity exchange (the list of such periodicals has been approved by the resolution of the Cabinet of Ministers of Ukraine No 865-p dated October 25, 2013).

Will the 5% penalty for the failure to file the transfer pricing (TP) return be applied either in case of any mistakes in the TP return or failure to include all CTs into the return?

The penalty constituting 5% of the total amount of CTs is quite significant. It is impossible to come to the definite conclusion as to whether this penalty will apply to the improper filing of the TP return or failure to indicate all CTs in this return. The Ministry of Revenue has expressed its opinion on failure to indicate all CTs in the return in the Generalized Tax Advice. In its point of view, the penalty should cover such cases. With regard to the improper filling of the return, the issue is still outstanding.

Nevertheless, to our way of thinking, there are no grounds for the extended interpretation of the relevant provisions of the Tax Code of Ukraine (para 120.3). The literal interpretation must apply pursuant to which the penalty is charged only in the case of the failure to file the TP return and not in the cases of any errors occurring in the return or the failure to indicate all CTs in the return. Court practice will show whose stance is right. 
 
*- Photo from allshewrote.ca

Wednesday, January 15, 2014

Transfer Pricing: Administration, Inspections and Penalties

Co-author Dmytro Savchuk
(senior associate of Lavrynovych
and Partners Law Firm)

On September 1, 2013 the Law on Amendments to the Tax Code of Ukraine governing the matters of transfer pricing (hereinafter – «TP») entered into force becoming virtually epochal for the economy of Ukraine. Since the main purpose of the law is to raise the state revenues by eliminating the artificial lowering of income in controlled transactions (hereinafter – «CTs»), the law prescribes special characteristics of administration, additional inspections and penalties for these transactions. Let us consider the aforementioned innovations in a more detail.

ADMINISTRATION

The important point is that the administration of CTs is carried out directly by the Ministry of Revenue and Duties of Ukraine (hereinafter – the «Ministry of Revenue»), and not by local tax authorities. TP returns and TP documentation are to be filed specifically with the Ministry of Revenue which monitors the prices in CTs and schedules inspections of CTs.

The mechanism of CTs administration works in the following manner.

Filing of TP returns. If any CTs have taken place, the TP return must be filed in electronic form (in the absence of CTs the filing of the said return is not required). The reporting period is a calendar year. The TP return must be filed by May 1 of the year following the reporting year (by May 1, 2014 for the calendar year 2013). The form of the return has been already approved by the order of the Ministry of Revenue No 669 dated November 11, 2013.

In case a CT has taken place, but no relevant return has been filed, a local tax administration (in case of independent identification of such a CT) sends a notification on the CT concerned to the Ministry of Revenue and informs the taxpayer of sending this notification. The dispatch of the said notification is viewed as an independent basis for the carrying out of the inspection of the taxpayer in accordance with the procedure given below.

Submission of TP documentation. The TP documentation includes source documents, other documentation, and information relating to CTs, namely information on related parties, goods/services, delivery terms, the results of economic analysis for the substantiation of the price used in the CTs.

TP documentation is submitted only upon a written request of the Ministry of Revenue and solely upon the availability of the grounds for issuing such a request. The grounds for issuing the said request are as follows: (i) establishing the deviations from the arm’s length price in the course of the monitoring conducted by the Ministry of Revenue, and (ii) failure to file the TP return by the taxpayer or its filing with violations. The request at issue can be sent only after the expiry of the time limit for filing the TP return, i.e. not earlier than May 1 of the year following the reporting year.

The time limit for the submission of TP documentation is one month from the date of the receipt of the request (two months for large taxpayers). It is important to note that in addition to the TP documentation requested by the Ministry of Revenue, the taxpayer may submit any other documentation that he deems appropriate for the purpose of the substantiation of the CT’s price.

INSPECTIONS

For exercising control over CTs, there has been a new type of tax inspections introduced, namely inspections of CTs. These are conducted separately from scheduled and unscheduled inspections. The new type of inspections has following characteristics:

- An inspection of CTs is conducted based on the decision of the Ministry of Revenue;

- A taxpayer is informed about the inspection of CTs ten calendar days prior to the date of its commencement;

- An inspection of CTs is not conducted on-site (the documents provided by the taxpayer upon the request sent at the beginning of the inspection are checked);

- An inspection of CTs can be conducted in parallel with other types of tax inspections;

- The duration of the inspection is up to six months with the right to extend the inspection for other six months where provided for by the Tax Code of Ukraine (carrying out an expert examination, requesting information from foreign government bodies, etc.);

- One CT can be inspected only once a year; in addition, if according to the results of the CT inspection, no TP violations have been identified, the inspection of the counterparty cannot be conducted in respect of this very CT.

Apart from the introduction of the new type of inspections, the grounds for the exercise of documentary unscheduled inspections (on-site and off-site) have been expanded so that they can catch the TP matters. It should be noted that the grounds for the performance of CT inspections and documentary unscheduled inspections regarding TP are almost the same. Thus, the taxmen, in fact, are granted the right to choose the type of the inspection in each particular case. Notices of assessment based on the results of CTS inspections and documentary unscheduled inspections regarding CTs are issued and challenged according to the standard procedure.

PENALTIES

According to the Tax Code of Ukraine special penalties for the breach of the TP legislation are established. Thus, for the failure to file the TP return the tax payer will be imposed a penalty in the amount of 5% of that of the CT, and for the non-submission of the TP documentation the taxpayer may be fined 100 minimum wages (approximately USD 15,000).

This being said, it should be remembered that if based on the results of a CT inspection the tax liability in respect of a particular tax is assessed by the tax authority, the taxpayer will be charged a penalty amounting to 25% (50% for a repeated breach) of the amount of such a liability. However, for now the Tax Code of Ukraine has fixed the tax concession period for charging the above penalty: up to September 1, 2014 the penalty will be charged in the amount of 1 UAH.

Additionally, given that the deadlines for TP returns on one part and VAT and corporate income tax returns on the other part are not the same, there can apparently be a situation where taxpayers would have to make self-adjustments after filing the VAT and corporate income tax returns and pay 3% (5%) penalty in respect of the voluntary elimination of tax errors. For example, at the time of the filing of a VAT return the taxpayer did not have the substantiation of the CT price and used the contract price. At the time of the filing of the TP return he understood that this price did not correspond to the arm’s length price. Therefore, for the purpose of avoiding additional charges from the tax authorities and the associated 25% (50%) penalty, the taxpayer decided to make a correction to the VAT return with the resulting 3% penalty.

* - Photo from http://www.dreamstime.com

Friday, January 10, 2014

Transfer Pricing Methods

Co-author Anton Babak
(junior associate of Lavrynovych
 and Partners Law Firm)
On September 1, 2013 the amendments to the Tax Code of Ukraine related to transfer pricing entered into force. The said amendments have particularly affected the methods of the computation of an arm’s length price, which thereafter started being referred to as the methods of the computation of a price in controlled transactions (hereinafter – «CTs»).

The list of methods remains unchanged. They are as follows:

- Method of comparable uncontrolled price;
- Resale price method;
- Cost plus method;
- Transaction net margin method;
- Transaction profit split method.

However, with the amendments to the Tax Code of Ukraine the rules for the application of each of the above-mentioned methods have been worded in a much greater detail. Furthermore, there have been introduced some new terms related to the application of the methods. These are such terms as gross margin of costs, net margin, net margin of expenses, etc.

Since September 1, 2013 the hierarchy of the said methods has been in operation. A taxpayer may apply any method, however if there is a possibility to employ the method of comparable uncontrolled price, this particular method must be applied. It is also possible to use several methods simultaneously (i.e. a combination of methods).

Next we shall give a brief consideration of each of the methods in accordance with the amendments.

Method of comparable uncontrolled price or «method No. 1» as it is often referred to by tax advisors, is based on the comparison of the prices of goods/services applied in a CT with a market range of prices for identical goods/services in comparable transactions. In order to determine the market range of prices, the information on the sales of identical (and in their absence – homogeneous) goods/services implemented by the taxpayer or other persons under comparable conditions is used.

It should be emphasized that before the entry into force of the amendments to the Tax Code of Ukraine, the comparison had been made with the prices of identical (homogeneous) goods/services and not with the market range of prices. Hence, one can note here a facilitation in that there is no need to ensure the accordance of the transfer price with a specific figure anymore, the taxpayer is just required to be within the range of prices.

Resale price method can be applied in one case only, namely when goods/services are purchased within a CT (for example, from related parties) and then are resold to unrelated parties. This method is used solely for the purpose of the determination of the arm’s length price of goods/services purchased within the scope of such a CT.

The method is based on the gross margin figure (a ratio of gross profit to net revenue), which is calculated relating to the purchase and resale of goods/services described above. The obtained gross margin figure is compared with the market range of gross margins (for the purpose of the determination of the latter, the gross margin figures of at least three comparable transactions with unrelated parties is taken into account).

«Cost plus» method is very similar to the resale price method, however, unlike the latter, it has a multi-purpose application (practically any transaction related to the sale of goods and services). The application of this method is not limited to transactions regarding the purchase of goods/services from a related party and their subsequent resale to unrelated parties, as is the case with the resale price method. Additionally, this method allows determining the arm’s length price not only in respect of the purchase (as the resale price method), but also in respect of the sale of goods/services in a CT.

Gross margin figure is also at the heart of this method, but now it is a gross margin of costs (defined as the ratio of the gross profit to the cost of sold goods/services). The same as in resale price method, the obtained gross margin of costs is compared to the market range of such gross margins.

Transaction net margin method is the third and the last method associated with the use of the profit margins. This method is the kind of «auxiliary» or «back-up» method, if compared to resale price method and «cost plus» method, and is used in case of absence or insufficiency of information for the application of the two latter methods. By its economic nature transaction net margin method is almost identical to the «cost plus» method with the difference that the latter uses the gross margin figures, whereas the former uses one of the net margin figures.

The application of methods based on gross margins (resale price method and the «cost plus» method) is preferable, since these methods allow making more reliable comparison of profitability ratios and thus may be viewed as those determining the arm’s length price more accurately. The basis for net margin ratios is operating profit, which, unlike gross profit lying at the root of gross margin ratios, takes into account administrative, marketing and other operating expenses. The indicated group of expenses can vary greatly for different economic entities and therefore can adversely affect the accuracy of the computation of the arm’s length price.

Transaction profit split method is the last method in the given list. The present method is directed at measuring the actual distribution of total profits between the parties to a CT and the further redistribution of such profits in a way similar to that done between unrelated parties on economically justified basis. The method involves the evaluation of the contribution made to the total profits according to the functions fulfilled by each party, the assets involved and economic (commercial) risks borne during the performance of a CT.

Finally, it is worth mentioning the adoption of the procedure for calculation and application of market ranges of prices and profit margins which form the basis of the application of transfer pricing methods. The procedure was approved by the Resolution of the Cabinet of Ministers of Ukraine No. 763 dated October 17, 2013.


Thursday, January 9, 2014

Transfer Pricing: from Sources to Sources

Co-author Andriy Kuleba
(junior associate of Lavrynovych and Partners Law Firm)


The Law of Ukraine No. 408-VII «On Amendments to the Tax Code of Ukraine regarding Transfer Pricing» dated July 4, 2013 (hereinafter – the «Law on TP») defines two categories of information sources to be used for determining the price of controlled transactions (hereinafter – «CTs»):

• Officially recognized sources;
• Other sources.

Officially recognized sources. This category includes informational sources on market prices, the list of which has been approved by the Resolution No.866-p of the Cabinet of Ministers of Ukraine dated October 23, 2013.

According to the abovementioned Resolution the officially recognized sources, in their turn, are divided into two following groups: (i) the basic sources and (ii) the auxiliary sources. The latter are used where there is no information on market prices in the basic sources or where the information available in the basic sources is insufficient.

The basic sources include: the monthly newsletter «Review of Prices of Ukrainian and World Commodity Markets», the periodical analytical products «Commodity Monitor. Ukraine» and the «Digest of Commodity Prices on World Markets», the weekly bulletin «Steel Market: Analytics, Forecasts, Scenarios», the official web-site of the Ukrainian Agrarian Exchange and the Bulletin of the Ministry of Revenue and Duties.

The auxiliary sources embrace: the official web-sites of the Ministry of Regional Development and the Ministry of Agrarian Policy.

Other sources. Under the Law on TP these, in particular, include: statistical data of the government authorities and institutions, commodity market quotes; reference prices of specialized business periodicals and publications (including online periodicals and electronic publications), informational programs (software); information on prices and quotes made public in mass media, and other publicly available informational sources.

Such sources as informational programs (software), among which the databases can be reckoned, deserve special attention. For example, the databases the «Ruslana» and the SPARK are widely used in Russia and the CIS, whereas Amadeus is so used in Europe.

One may note the SPARK which is the largest in the CIS corporate database of registered legal entities of Russia, Ukraine, Kazakhstan and other countries. It was created in 2002-2003 by the experts of group of companies «Interfax Group» based on the information of the State Statistics Service of the Russian Federation. The said database uses only publicly available information acquired upon contractual terms from official sources. In Ukraine the SPARK started being actively promoted towards the end of 2012.

Rules for using information sources. Ultimately, a few words have to be said about the general rules for using information sources. Based on the Law on TP, two main rules can be pointed out:

Rule No. 1 – other sources can be used only in case of absence of information in officially recognized sources or where the information available in such sources is insufficient.

Rule No. 2 – in the case that a taxpayer uses officially recognized sources, the Ministry of Revenue and Duties of Ukraine must also use the same officially recognized sources, except where the Ministry has proved that the taxpayer had to use another officially recognized source.



* Photo from http://tvi.ua