Debate on Ukraine’s Transfer Pricing Law Likely Delayed; Threshold for Audit in Play

Bloomberg BNA
Tax Management Transfer Pricing Report, Vol. 21 No. 17, 1/10/2013
Slava Vlasov, Partner, Tax and Legal services

Debate on Ukraine’s Transfer Pricing Law Likely Delayed; Threshold for Audit in Play

The debate on Ukraine’s first-ever transfer pricing law could face a new set of delays after a government shake-up in late December cast some uncertainty over the parliament’s plans, according to a Ukrainian lawmaker.

The Verkhovna Rada—Ukraine’s parliament—had been scheduled to take up the issue when its first session of 2013 opened Jan. 10. But President Viktor Yanukovych dismissed and reassigned several ministers Dec. 24, making the immediate fate of the transfer pricing legislation unclear, although indications are that it still will be voted on in time to go into effect either July 1, 2013, or Jan. 1, 2014. It would have to be approved over the first three months of the year to take effect by the earlier date.

The legislation, a first in Ukraine, was presented to Ukrainian business leaders in mid-2012, with an eye toward implementation by Jan. 1, 2013, but the process was delayed for technical reasons. At that point, the government called on PricewaterhouseCoopers for help in overcoming the obstacles, then again sought input from businesses with a goal of having the legislation take effect in July 2013 or January 2014.

The latest set of delays is political, according to one member of the parliament. ‘‘The government is seeking to make sure that key decisions are made by those closest to President Yanukovych and this change could create delays for some kinds of legislation,’’ Mykola Tomenko, a member of the Verkhovna Rada, told BNA.

Threshold for Automatic Investigation. Lawmakers said there is little opposition to establishing a transfer pricing regime in Ukraine, but Slava Vlasov, PwC’s lead partner on the transfer pricing project, told BNA there will be debate on some aspects of the law: most notably, a provision that would set a threshold of either 50 million ($6.2 million) or 100 million ($12.4 million) Ukranian Hryvna as the amount of total transactions that would trigger an automatic investigation.

Businesses have been pushing for the higher threshold. ‘‘The final law will be in line with best European practices and [Organization for Economic Cooperation and Development] transfer pricing guidelines, but some of the specifics, such as the thresholds, will be the result of an eventual compromise between business and tax authorities,’’ Vlasov said.

Under the terms of the draft, transactions between subsidiaries of the same parent company doing at least some of their business in Ukraine will be monitored if the annual sum of the transactions in question meets the threshold, although the State Tax Service of Ukraine retains the right to look into any transactions, even those not meeting the agreed threshold.

Companies will be required to submit a report on flagged transactions every year by May 1, including detailed information about the transactions in question, counterparties, risk analysis, and the justification of the price level used. If a company fails to report a transaction accurately, it can be fined up to 5 percent of the value of the transaction in question.

The draft also allows for inspections from the State Tax Service of Ukraine, including new powers for tax officials.