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| Co-author Anna Bukvych (associate of Lavrynovych and Partners Law Firm) |
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
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