A law in Ukraine concerning transfer pricing, that is effective 1 January 2015, enhances the compliance rules for taxpayers.
Concerning transfer pricing, the law:
In addition to an ownership standard, parties can be recognized as “related parties” based on financial criteria—i.e., if the amounts of all loans provided (and/or guaranteed) by one party to another exceed a ratio of 3.5 of the recipient company’s own capital.
Moreover, the rules allow the tax authorities to maintain a court proceeding to show that the parties are related “based on facts and circumstances” by demonstrating that one legal entity (or physical person) had practical control over another entity’s (or both entities’) business decisions.
Business transactions concluded between residents of Ukraine (except transactions performed through intermediaries) are excluded from the scope of controlled transactions.
Transactions with non-resident related parties as well as with non-related parties registered in certain jurisdictions, as listed by the Cabinet of Ministers of Ukraine, are deemed controlled if the following criteria are satisfied:
The list of jurisdictions is expected to be published by the Cabinet of Ministers of Ukraine in the near future, and is expected to include (but not limited to): (1) countries with tax rates lower than the tax rates in Ukraine by 5 percentage points; (2) countries that do not require disclosure of corporate ownership information in the public domain; and (3) countries that do not have a tax information exchange agreement with Ukraine.
Given the devaluation of the Ukrainian currency, it appears that the vast majority of business transactions of all types involving (non-resident) related parties will be deemed to be controlled transactions, thereby imposing an additional compliance burden on Ukrainian companies with foreign capital.
Under the new transfer pricing law, an arm’s length principle is introduced, and this standard must apply to all controlled transactions.
Prices in controlled transactions are assumed not to be at arm’s length, unless otherwise proved by the taxpayer.
Taxpayers must also prove that the commercial and economic conditions of a controlled transaction are comparable to those for transactions between unrelated parties. The burden of proof, thus, shifts from the tax authorities to taxpayers engaged in controlled transactions.
All taxpayers engaged in controlled transactions during the reporting year must disclose the controlled transactions on their filed corporate income tax return.
Taxpayers whose controlled transaction volume exceeded 5 million UAH in the reporting year must additionally submit a separate report on controlled transactions before 1 May of the year following the reporting year.
Finally, beginning 1 January 2015, all taxpayers engaged in controlled transactions are required to prepare and keep transfer pricing documentation with regard to such transactions and to provide such documentation to the Ukrainian tax authorities within 30 days of a request.
The penalty for failing to (timely) submit the transfer pricing documentation report on controlled transactions is equal to 100 x the minimal wage amount (approximately €4,200) and 5% of the amount of each individual transaction if such transaction is not disclosed in the transfer pricing report.
The penalty for failing to submit transfer pricing documentation when requested by the tax authorities is 3% of the respective transaction volume, but not more than 200 times the minimal wage amount (approximately €8,400).
In situations when prices/profitability of a controlled transaction are found to be outside the arm’s length range, the tax authorities can adjust the prices/profitability for tax calculation purposes to the median of the range, as opposed to the upper/lower limit of the range for purchase/sale transactions under the prior transfer pricing rules. The original financial amounts will not be modified. Also, such adjustments will only be made if the adjustment does not decrease the taxpayer’s tax liability.
The duration of special tax audits with regard to transfer pricing issues can be 18 months—an increase from the prior limit of six months—and with the possible addition of another 12 months (instead of six months), for a possible audit timetable of 30 months.
The statute of limitations for audits and/or challenges of controlled transactions is increased to seven years, up from three years.
Additionally, new monitoring activities are introduced, such allowing for tax authorities’ interviews of the company’s management and employees or interviews of the management and employees of a taxpayers’ counterparty under controlled transaction.
Ukrainian companies need to review their intra-group transactions and prepare thorough transfer pricing documentation (in the Ukrainian language) so as to confirm that the arm’s length principle has been applied in such transactions.
An advance pricing agreement (APA) between the taxpayer and the tax authorities can provide a level of certainty against adjustments and penalties.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in Ukraine:
Konstantin Karpushin | KKarpushin@kpmg.ua