Ukraine to Enact First Transfer Pricing Law Following Passage by Parliament on July 4

Bloomberg BNA,
by Eric J. Lyman

ROME—The Ukrainian parliament passed the country's first-ever transfer pricing law July 4, setting the stage for it to go into effect Sept. 1.

Viktor Yanukovych, Ukraine's president, must still sign the legislation before it can officially become law. But that step is considered nearly perfunctory, since it was Yanukovych's allies in the Verkhovna Rada—Ukraine's parliament—that pushed for the measure to be adopted.

Passage comes after several procedural delays. An earlier version had been expected to be passed nearly two years ago, and an earlier version of the final legislation had been expected to be approved by the Verkhovna Rada in time for it to go into effect by July 1 (21 Transfer Pricing Report 1068, 3/7/13).

More Investment Expected

Still, the measure is expected to make the Ukraine a more attractive destination for investments from multinational companies: the Ukrainian Ministry of Income and Tax said earlier this year passage would attract as much as 20 billion Ukranian Hryvna ($2.5 billion) in new investments in the first three years after passage without increasing the verall tax burden.

“It is not exactly based on the OECD guidelines, but it is very close,” said Slava Vlasov, a partner with PricewaterhouseCoopers in Kiev, referring to the Paris-based Organization for Economic Cooperation and Development. “There is no doubt that most of the benefits from this law are intangible in that it will significantly simplify the process of doing business in Ukraine from a tax perspective.”

The central part of the law will apply for all transactions involving residents of countries where the corporate tax rate is at least 5 percentage points lower than in Ukraine and that meet the criteria of the law.

Focus of Debate

The Ukraine corporate tax rate is 13 percent now, and will be lowered to 11 percent next year. Sources working in the Verkhovna Rada during the passage told BNA that debate centered around two key areas:

  • whether the threshold for transactions that trigger an automatic review should be set at 50 million Ukranian Hryvna ($6.1 million) or 100 million Ukranian Hryvna ($12.3 million), and
  • whether a requirement allowing for the monitoring of domestic transactions between related parties should be included in the law.

Businesses had been pushing for the higher threshold, but in the end the 50-million level was adopted. The monitoring requirement was also adopted, but only in cases where one of the parties has reported a tax loss or uses a special tax regime.

According to PricewaterhouseCoopers, the law also provides for high penalties—of up to 5 percent of a transaction amount—if a report is not filed (but not for errors in a report).

According to Vlasov, the law is likely to see changes in the future only where it applies to “consolidated groups of tax payers.” He said a future amendment to the law could eventually treat such groups as single taxpayers, making it more likely that transactions related to the group would reach the minimum thresholds.

The final vote was 321 in favor of the measure and 226 against.