Transfer Pricing: Administration, Inspections and Penalties ~ U-Tax Blog

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.


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.


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.


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.

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