Recast Transfer Pricing Rules ~ U-Tax Blog

Friday, April 10, 2015

Recast Transfer Pricing Rules

In the scope of the tax reform of 2015 the transfer pricing (“TP”) rules incorporated in the Tax Code of Ukraine have been completely restated. The new TP rules have been in operation since 1 January 2015. However, taxpayers report in 2015 for the year of 2014 according to the old TP rules. The new TP reporting requirements will first apply in the year of 2016 when the taxpayers report for the year of 2015.

What follows is a brief account of the recast TP rules:

- The notion of “arm’s length principle” is now explicitly stated in the Tax Code of Ukraine. A transaction is considered to be in compliance with the arm’s length principle if its terms and conditions do not differ from those of comparable uncontrolled transactions carried out between independent parties.

- The new TP rules normally apply to the calculation of corporate income tax only. They do not generally apply for the purposes of the computation of VAT.*

- Domestic transactions (transactions between residents) are not normally viewed as controlled transactions anymore. Controlled transactions are only those involving non-residents.*

- The scope of controlled transactions involving non-residents has been significantly expanded. Nowadays, in addition to transactions with related non-residents and non-residents from low-tax jurisdictions, the following transactions with non-residents are caught:

1)    transactions of sale of goods through commission agents;

2)    transactions with residents in countries that do not make publicly available information on the ownership structure of their legal entities;

3)    transactions with residents in countries that do not have effective treaties with Ukraine enabling the exchange of tax information.

- Transactions involving artificially inserted intermediaries are now a separate type of controlled transactions. In order to determine whether an intermediary has been inserted artificially to lay the transaction outside the TP control, the functions, risks and assets of the intermediary are examined. Should those be insignificant, the intermediary will be most likely treated as artificially inserted one.

- The financial threshold for controlled transactions has been considerably remodelled. At present, it consists of two conditions that must be simultaneously met for a transaction to be considered as controlled. Those two conditions are as follows:

1)    Annual gross revenues of the taxpayer, taken along with those of all its related parties, in the current tax year exceed UAH 20 million; and

2)    Gross amount of all transactions conducted by the taxpayer/its related parties with any of their  counterparties in the current tax year exceeds either UAH 1 million or 3% of the  taxable income of the taxpayer.

- The new criteria of relationship have been introduced. First, taxpayers can be now recognised as related parties by means of debt-to-equity ratio (more than 10.0 times debt-to-equity ratio for banks, lease and financial companies, as well as more than 3.5 times debt-to-equity ratio for other taxpayers). Second, the state fiscal authorities can now claim “factual” relationship even where no one of the criteria of relationship set forth by the Tax Code of Ukraine is directly met. In this case, the state fiscal authorities should obtain a court order confirming “factual” relationship.

- The TP methods remain as earlier. Their description has been largely amended to fit in more closely with that of the OECD Transfer Pricing Guidelines.

- Taxpayers importing or exporting commodity exchange-traded products are supposed to apply comparable uncontrolled price method (method No 1) based on the price quotations of the commodity exchanges concerned. Such taxpayers may also apply other methods of TP, but subject to the full disclosure of their supply chains to the state fiscal authorities.

- There is no more division of informational sources to “official” and “non-official” ones. A taxpayer may use any informational source open to the general public.

- Further to a TP return, a new piece of TP reporting has emerged. This is a TP annex to a corporate income tax return that lists controlled transactions. The annex is mandatory and to be filed by all taxpayers having controlled transactions over the reporting year. As opposed to the annex, a TP return is not to be filed in all cases. It is to be filed only by those taxpayers whose amount of the controlled transactions with at least one of their counterparties exceeds UAH 5 million (excluding VAT).

Co-authored by Anton Babak
- The length of TP audit has been significantly prolonged. As for now, it may continue up to 30 months from its commencement.

- The maximum time for the issuance of TP-related tax assessments by the state fiscal authorities has been extended to 7 years.

- Penalties for TP-related violations have become much more severe. In particular, the failure to report a controlled transaction in a TP return can lead to a penalty of 5 % of the value of the non-reported transaction. The failure to provide TP documentation at the request of the state fiscal authorities can lead to a penalty of 3% of the value of the controlled transactions involved, but no more than 200  minimal statutory salaries (currently, UAH 243,600).

* - Due to the lack of clarity in the Tax Code of Ukraine, there is still the risk of the application of the TP rules in respect of VAT and domestic transactions in certain cases. This, in particular, may occur with reference to controlled transactions involving artificially inserted intermediaries. 

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