On 4 July 2013 the Parliament of Ukraine passed in the second reading the Law ‘On Changes to the Tax Code of Ukraine in respect of transfer pricing rules’ (hereinafter – the Law on TP). The Law is currently awaiting the President’s signature and is expected to come into force on 1 September 2013.
Further to our previous communications, below we list the most important provisions of the Law on TP.
TP rules apply only to controlled transactions. According to the Law on TP, the list of controlled transactions will include:
The threshold for controlled transactions will be UAH 50 million, net of VAT (will apply cumulatively for all transactions with one counterparty per year). It is unclear how this rule will apply in case of loan and agency arrangements.
The contracting price in uncontrolled transactions should be accepted by the tax authorities.
The following current rules are removed:
The Law on TP provides five methods for determining the market price.
The CUP method is the primary transfer pricing method to be used over all other methods. If this method is not relevant, the taxpayer is entitled to chose the most appropriate method. This should be accepted by the tax authorities provided the choice of the method is justified.
The taxpayers are entitled to use the combination of two or more than two methods provided in the Law on TP. Using methods or combinations of methods that are not prescribed in the Law on TP is not allowed.
For the purpose of applying the chosen TP method to a particular transaction, the taxpayer should compare the price or profit indicators prescribed in the Law on TP in a controlled transaction with those in transactions between non-related parties.
The tax authorities should use the same method (combination of methods) used by the taxpayer, unless it is proven that the taxpayer chose an incorrect method.
The criteria of comparability are listed in the Law on TP. In particular, they include:
For TP control purposes, the authorities shall use the “official sources of information” set by the CMU. In cases where there is an absence/lack of information in the official sources, the following sources of information can be used:
In case the information on comparable transactions of the taxpayers with non-related parties is available, such information should be used only for determining the range of the market prices.
The tax authorities should use the same sources of information as the taxpayer uses, unless it is proven that taxpayer should have used other official sources of information.
In other countries, taxpayers use international financial information databases (AMADEUS, RUSLANA) that have been accepted as official sources of information.We would expect similar confirmation from the CMU/tax authorities.
All affected taxpayers should file a report on controlled transactions by the first of May (each year) of the year following the reporting year. The format of the report should be introduced by the Ministry of Revenues and Duties.
The documentation on TP, substantiating the market level of prices, should be submitted only upon the request of the tax authorities based on the conditions for an unscheduled tax audit (Article 78 of the Tax Code).
Taxpayers (except for large taxpayers) should provide primary documentation and other documentation on TP upon the tax authorities request within one month from the day of obtainment of the request. TP documentation can be prepared in any format.
Large taxpayers (as a general rule a large taxpayer is a company that has UAH 500 mil revenues in prior year) should provide TP documentation upon the tax authorities request within two months. TP documentation can be prepared in any format, but should include the following:
The request on provision of TP documentation can be sent to the taxpayer only after the first of May (each year) of the year following the calendar year in which the controlled transaction was performed.
If the prices of the controlled transaction do not correspond with the market level, the taxpayer performs the respective TP adjustment and pays the additional tax. The other party of the controlled transaction is entitled to perform a proportional TP adjustment after receiving the respective approval from the tax authorities. A proportional adjustment is also allowed in case of TP assessments by the tax authorities and based on the provisions of double tax treaties.
According to the Law on TP, the tax authorities will monitor the TP documentation provided without the involvement of the taxpayer.
The Law on TP introduces a specialised TP audit, which will be conducted in the following cases:
The duration of a TP audit cannot exceed 12 months.
The tax authorities will not be allowed to examine pricing in controlled transactions during normal full-scope tax audits.
The Law on TP establishes the following penalties for non-compliance with the TP rules, including:
Large taxpayers have the right to agree in advance on the prices in controlled transactions with the Ministry of Income and Charges. The subject of the advance pricing agreement may include:
The procedure for the conclusion of bilateral and multi-lateral agreements will be developed by the CMU. The procedure for conclusion of unilateral agreements is currently not defined in the Law on TP.
The Law on TP prescribes transitional provisions for a five year period for foreign trade transactions with residents of low tax jurisdictions in respect of the prescribed types of commodities, such as agricultural, metal, iron ore and chemical products.
Taxpayers performing these transactions shall use at own choice the following two options for the determination of prices for tax purposes:
The Law on TP provides that it will come into force from 1 September 2013.
The Law on TP establishes a penalty of 1 Hryvnia for each violation of the new rules during the first year of their application, except for the violations outlined in Section VII of this Tax Newsletter.
As the Ukrainian tax authorities increase their focus on transfer pricing, taxpayers should address the pricing and documentation of their related party transactions with careful consideration.