Taxation by transfer pricing rules
A taxpayer who participates in a controlled transaction is obliged to determine the amount of taxable income for such transaction in accordance with the «arm’s length» principle, which lay in the fact that the terms of the transaction corresponding to the «arm’s length» principle do not differ from those used between unrelated persons in comparable uncontrolled transactions.
The purpose of transfer pricing is to level the possibility of using differences in the tax systems of different countries in order to minimize taxes and dilute the tax base on a transnational scale.
Criteria for recognizing controlled transactions
Controlled transactions are the taxpayer’s business transactions that may affect the taxable object of the taxpayer’s profit tax.
In 2019, the criteria for recognizing transactions as controlled were subject to only one significant change, which concerns the expansion of the list of persons whose transactions can be considered as controlled.
Starting from 2018, the list of controlled transactions was expanded by transactions between a non-resident and its permanent representative office in Ukraine, if the volume of such transactions, determined according to accounting rules, exceeds 10 million UAH (after deduction of indirect taxes) for the corresponding tax (reporting) year.
Other criteria for the recognition of transactions as controlled, which were in force before 2018, have not changed. That is, the business transactions of the taxpayer continue to be controlled transactions, which may affect the taxable object of the tax on the profit of the taxpayer’s enterprises, namely:
|business transactions with related parties – non-residents;|
|foreign economic transactions for the sale and/or purchase of goods and/or services through non-resident commissioners;|
|business transactions carried out with non-residents registered in the states (territories) included in the list of states (territories) approved by the CMU (Cabinet of Ministers of Ukraine) according to paragraphs 22.214.171.124 of the TCU, or being residents of these countries;|
|business transactions carried out with non-residents who do not pay income tax (corporate tax), including income received outside the state of registration of such non-residents, and/or not being tax residents of the state in which they are registered as legal entities.|
The criterion for the volume of such operations remained unchanged. That is, the above transactions are considered controlled under the simultaneous observance of two conditions:
|the annual income of the taxpayer from any activity, determined according to the accounting rules, exceeds 150 million UAH (minus indirect taxes) for (reporting) year;|
|the volume of business transactions of the taxpayer with the relevant counterparty, determined according to the accounting rules, exceeds 10 million UAH (minus indirect taxes) for the (reporting) year.|
From 2018, prices are used to determine the criterion in terms of the volume of business transactions, which correspond to the «arm’s length» principle. Thus, the volume of business transactions, determined at prices established by the «arm’s length» principle, may not always correspond to the volume of business transactions determined by accounting rules.
The list of states (territories) defined according to paragraphs 126.96.36.199 of the TCU, and the list of legal forms of non-residents who do not pay income tax (corporate tax), is approved by the CMU. In case of changes in the specified lists, new states (territories) or organizational and legal forms of non-residents begin to be controlled from January 1 of the year following the calendar year in which the following changes are made.
Lists of states (territories) that meet the criteria established by paragraphs 188.8.131.52 of the TCU, and acted in different periods, approved by:
|Resolution of the Cabinet of Ministers of Ukraine as of September 16, 2015 No. 977-p (valid from 16.09.2015 till 31.12.2017);|
|Resolution of the Cabinet of Ministers of Ukraine as of December 27, 2017 No. 1045 (valid from 01.01.2018 till now).|
The Resolution of the Cabinet of Ministers of Ukraine as of December 27, 2017 No. 1045 was amended in accordance with the Resolution of the Cabinet of Ministers of Ukraine as of January 31, 2018 No. 108, which entered into force on 07.03.2018, and in accordance with the Resolution of the Cabinet of Ministers of Ukraine as of April 11, 2018 No. 295, which entered into force effective from 25.04.2018
The list of organizational and legal forms of non-residents who do not pay income tax (corporate tax), was approved by the Cabinet of Ministers Resolution as of July 4, 2017 No. 480 (valid from 27.07.2017 till now).
It should be taken into account that controlled transactions between a taxpayer and a non-resident include transactions when ownership of the subject (result) of such transactions, before moving from taxpayer to such non-resident (in case of export transactions) or before switching from such non-resident to taxpayer (in the case of import operations), goes to one or several unrelated persons, if these persons:
|do not perform in such a set of transactions essential functions related to the purchase (sale) of goods (works, services) between related parties;|
|do not use significant assets in such a set of transactions and/or do not assume significant risks for organizing the purchase (sale) of goods (works, services) between related parties.|
Report on controlled transactions
In 2018, the deadlines for submitting the Report on Controlled transactions, which must be submitted by electronic communication in electronic form before October 1 of the year following the reporting year, remained unchanged.
Taking into account clause 49.20 of the TCU, the deadline for submitting the Report on Controlled transactions for 2018 is October 1, 2019.
Transfer Pricing Methods
When establishing compliance of the conditions of a controlled transaction with the «arm’s length» principle, one of the following methods is applied:
|comparable uncontrolled price method;|
|resale price method;|
|cost-plus pricing method;|
|net profit method;|
|transactional profit method.|
The criteria for selecting the transfer pricing method is:
|the expediency of the chosen method according to the nature of the controlled operation, which is determined, in particular, on the basis of the results of the functional analysis of the controlled operation;|
|the availability of complete and reliable information necessary to apply the selected method and/or transfer pricing methods;|
|the degree of comparability between controlled and uncontrolled operations, including the reliability of comparability adjustments, if any, that can be used to eliminate discrepancies between such operations.|
Preparation and submission of transfer pricing documentation
Not earlier than the deadline for submission of the Report on Controlled Transactions, that is, not earlier than October 1 of the year following the year in which controlled transactions were carried out, the central executive body implementing state taxation and customs policy has the right to request the taxpayer on transfer pricing.
Within 30 calendar days from the date of receipt of such a request, the taxpayer is obliged to submit documentation regarding controlled transactions, which must meet the requirements established by the TCU.
The results of the transfer pricing implementation
According to the information of the SFS of Ukraine, almost 2-3 thousand taxpayers report annually on accomplished controlled transactions. As at 28.02.2019, five reporting periods on transfer pricing were completed.
For non-submission or late submission of reports on controlled transactions and documentation for 2013 – 57 payers were fined in the amount of 13 million UAH, for 2014 – 140 payers were fined in the amount of 55 million UAH, for 2015 – 489 were fined in the amount of 160 million UAH, for 2016 – 161 taxpayers were fined in the amount of 26 million UAH, for 2017 – 36 taxpayers were fined in the amount of 2.5 million UAH.
For 2015 – 3 inspections were completed, for 2016 – 6 inspections, for 2017 – 25 inspections, for 2018 – 19 inspections.
The total amount of independent taxation by taxpayers of the tax base is 8.2 billion UAH (in 2018 – 1.7 billion UAH).
What do we offer
In order to avoid controversial issues with regulatory authorities, HLB Ukraine offers the following transfer pricing services:
|analysis of transactions with related parties and contractors from low-tax jurisdictions;|
|identification of controlled transactions;|
|identification of risks associated with transfer pricing;|
|methodological assistance, consulting and drafting of the Report on controlled transactions;|
|analysis of the company’s price correspondence to the market range of prices and profitability;|
|development of transfer pricing provisions and the use of regular prices, development of business processes;|
|determination and evaluation of the correctness of the choice of methods for determining the normal price;|
|consultations on changes in the structure of transactions in order to reduce the risks associated with transfer pricing;|
|training of the company’s specialists in transfer pricing;|
|automation of filling in the Report on Controlled Transactions and other processes in the field of transfer pricing.|
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