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The Tax Code stipulates that controlled transactions are subject to transfer pricing rules.
For transfer pricing purposes, 'controlled transactions' are defined as business transactions that may have an effect on taxable income, including:
- business transactions with non-resident-related parties
- business transactions concerning the sale or purchase of goods or services through non-resident commissionaires
- business transactions with non-residents incorporated or a resident in offshore jurisdictions (the Cabinet of Ministers determines the list of offshore jurisdictions)
- business transactions with non-residents that do not pay corporate income tax or are not tax residents of the country in which they are registered as legal entities (the Cabinet of Ministers determines the list of organisation forms of such non-residents with reference to specific states)
- business transactions between taxpayers and non-residents through non-related intermediaries where the intermediary:
- performs no significant function
- uses no significant assets
- bears no significant risks in respect of the transaction.
These transactions qualify as controlled if they simultaneously meet the following criteria:
- The annual amount of the transactions with one counterparty (calculated according to accounting rules) exceeds UAH10 million (approximately €312,000).
- The total annual revenue (calculated according to accounting rules) of the Ukrainian taxpayer from any type of activity exceeds UAH150 million (approximately €4.7 million).
From 2018 transactions between non-residents and permanent establishments in Ukraine are considered controlled if their value exceeds UAH10 million (approximately €312,000). For this type of controlled transaction, no annual revenue criterion applies (ie the permanent establishment need not earn more than a specific amount).
In all of the above cases, the criteria for qualifying a transaction as controlled should be determined using arm's-length prices.
In addition, there are certain cases in which taxpayers should justify the arm's-length price of transactions below UAH10 million (approximately €312,000).
- Ukraine is not a member of the OECD.
- The OECD transfer pricing guidelines are not legally binding in Ukraine.
However, local transfer pricing rules are primarily consistent with the guidelines and include the same key principles. Further, the OECD guidelines are used as an additional source of guidance and the tax authorities consider them during transfer pricing audits and litigation.
- The Ukrainian tax authorities refer to the OECD guidelines as well as other reference guides in their consultations and public opinions.
- Ukrainian law incorporates the main standards of the OECD guidelines. A taxpayer taking part in a controlled transaction shall determine the amount of its taxable income pursuant to the arm’s-length principle. The array of methods and documentation requirements closely follows the OECD guidelines.
- Transfer pricing methods described in Chapter II of the OECD guidelines are recognised and used in Ukraine. However, a specific hierarchy of these methods applies:
- CUP method
- Resale Price or Cost Plus method
- TNMM or Profit Split method.
If a taxpayer engages in a transaction with a counterparty (whether related or not) registered in a so-called 'low-tax' jurisdictions, and subject(s) of the transaction are listed commodities, CUP method must be applied. In other cases, the taxpayer must submit copies of contracts used in the entire supply chain of such commodities, up to the first unrelated party, to the tax authorities.
- Ukrainian legislation allows taxpayers to make transfer pricing adjustments.
- If the prices of the controlled transaction do not correspond with the arm's-length principle, the taxpayer may perform the respective self-adjustment and pay additional tax. Such self-adjustment can be made to maximum or minimum values of the range of prices (profitability). Taxpayers have the right to make a self-adjustment without incurring any penalties and fines until 1 October of the year following the reporting year.
- Taxpayers are prohibited from making self-adjustments during transfer pricing audits.
- Ukrainian legislation also provides for pro rata transfer pricing self-adjustments after the respective approval has been received from the tax authorities. Proportional adjustments are also allowed in case of transfer pricing assessments by the tax authorities and based on the provisions of double tax treaties.
- To date, there is no established practice; however, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure.
- Ukrainian legislation requires only local transfer pricing documentation (on the request of the tax authorities) and reporting on controlled transactions (transfer pricing notification) to be filed (by 1 October of the following year). Neither the master file nor the country-by-country report are currently required.
- The Tax Code sets out the requirements for local transfer pricing documentation.
- Transfer pricing documentation should be prepared in Ukrainian only.
- Proper and comprehensively prepared transfer pricing documentation is a major factor in reducing transfer pricing audit risks. However, it does not confer penalty protection if transactions are not at arm's length.
- Taxpayers are required to send notifications of their participation in multinational groups of companies. The first such notification should be provided for 2020.
- Taxpayers participating in multinational groups of companies with the total consolidated income which is equivalent to or exceeds EUR 750 million for the year preceding the reporting year, and under certain additional circumstances in place, are required to file a Country-by-Country Report. The first Country-by-Country Report should be submitted for the financial year ending in the 2021 calendar year.
Three-tiered TP reporting are introduced, which consist of a Master File, TP Documentation (Local File) and a Country-by-Country Report.
Taxpayers participating in multinational groups of companies with the total consolidated income which is equivalent to or exceeds EUR 50 million for the year preceding the reporting year, are required to make the global TP documentation (Master File) in a national official language. The first global TP documentation may be requested in 2022 for the financial year ending in 2021 calendar year.
The Tax Code sets out the requirements for local transfer pricing documentation. In particular, it should include:
- information regarding related parties, including information on parties which directly or indirectly own at least 20% of the taxpayer and parties of which the taxpayer owns at least 20% (directly or indirectly)
- information regarding the group, including its legal structure, a description of its activities, and its transfer pricing policy – this should be provided with the information about the entities, which the taxpayer provides with local management reports (eg names of entities and countries in which such entities have head offices)
- a description of the taxpayer's management structure (ie its organisational structure)
- a description of the taxpayer's activities and business strategy (including information regarding economic conditions, an analysis of the markets in which the taxpayer operates and its main competitors)
- information regarding the taxpayer's participation in business restructurings or transfers of intangible assets during the reporting or preceding year, along with an explanation of the aspects of those transactions that had or still have an impact on its activity
- a description and the conditions of the transaction, as well as copies of the relevant agreements (ie contracts)
- a description of the goods, works or services
- information regarding the payments that were made in the controlled transaction (ie the amounts, currencies and dates of payments and payment documents)
- factors that influenced the price determination, including the business strategies of the parties to the controlled transaction (if any) that significantly affected the prices of the goods, works, or services
- functional analysis of the controlled transaction (ie information regarding the functions performed, assets used and economic risks assumed by the parties to the controlled transaction);
- an economic analysis, including:
- a benchmarking study
- substantiation of the transfer pricing methods
- the profitability indicators and sources of information used
- the allocation of the supplier's income or expenses relating to the controlled transaction that were considered when calculating the profit-level indicator
- a calculation of the arm's-length range of prices or profitability
- a description and calculation of comparability adjustments performed in respect of controlled and non-controlled transactions
- substantiation of the use of several tax periods (years) for determining the profitability range and the calculation of the weighted average profitability indicator.
- information regarding the proportional transfer pricing adjustment performed by the taxpayer
- information regarding the individuals and entities that are party to the controlled transaction and parties relating to the taxpayer (in the reporting period in which the controlled transaction was performed and at the time of submission of the transfer pricing documentation)
- information regarding the taxpayer's total number of employees, with a breakdown based on its specific divisions as of the date of the transaction or the end of the reporting period.
- The company is unprofitable during several reporting (tax) periods.
- Inconsistency of financial results (profitability indicators) with the average indicators in the industry in Ukraine and the CIS countries.
- A significant amount of transactions for the provision/receipt of intragroup services, paid royalties and/or interest on financial borrowings.
- Conducting business transactions that are not typical for the current activities of the enterprise.
Ukrainian legislation contains a number of specific transfer pricing penalties. The penalties are calculated using the value of the subsistence minimum (SM) established for 1 January of the reporting year (1 January 2019, UAH1,853 (approximately €58)).
For non-submission or non-reporting of certain controlled transactions the following penalties may be accrued:
- 300 costs of living (UAH 576 thousand ~ EUR 18.6 thousand) – for non-submission of report on controlled transactions
- 1% of the value of the controlled transactions (but not more than 300 costs of living – UAH 576 thousand ~ EUR 18.6 thousand) – for not reported controlled transactions in the submitted report on controlled transactions
- 3% of the value of the controlled transactions (but not more than 200 costs of living – UAH 384 thousand ~ EUR 12.4 thousand) – for the lack of transfer pricing documentation
- 5 costs of living (UAH 10 thousand ~ EUR 310) for each day of non-submission of report on controlled transactions and/or TP documentation after the expiry of 30 days following the last day of the deadline for paying the fines, described above.
For untimely submission of report and documentation the following penalties may be accrued:
- 1 cost of living (UAH 2 thousand ~ EUR 62) for each day of delay (but not more than 300 costs of living – UAH 576 thousand ~ EUR 18.1 thousand) – for late submission of report on controlled transactions;
- 1 cost of living (UAH 2 thousand ~ EUR 62) for each day of delay (but not more than 300 costs of living – UAH 576 thousand ~ EUR 18.1 thousand) – in case of late declaring of controlled transactions in report on controlled transactions;
- 2 costs of living (UAH 4 thousand ~ EUR 124) for each day of delay (but not more than 200 costs of living – UAH 384 thousand ~ EUR 12.4 thousand) – for late submission of transfer pricing documentation.
If the price or profitability of controlled transactions is out of the range determined by transfer pricing documentation, additional corporate profit tax should be calculated to the minimum or maximum of the arm’s length range (for self-identified adjustments) or to the median of the arm’s length range (for adjustments calculated by the tax authorities). The corporate profit tax rate is 18%.
The taxpayer may be charged with penalties for understating tax liabilities in amount of 25% of such liability and 50% in case of recurrent violation during 1,095 days.
The CUP method may be used:
- when exchange quotations are available
- in transactions involving intellectual property (eg royalties)
- in financial transactions (eg loans and bonds)
- in comparable transactions with non-related parties, if reliable information on the comparable transactions is available.
RPM may be used during the resale of goods if the following functions are performed:
- the goods are prepared for resale and transportation (eg division of goods among the parties, forming deliveries, sorting and repacking)
- the goods are mixed, if the characteristics of the final (prefabricated) product are not significantly different from the mixed goods.
CPM may be used, for example, in regard to:
- the performance of works or services to related parties
- the sale of goods, raw materials or semi-finished products to related parties.
TNNM applies if the information that allows taxpayers to reasonably apply the previous transfer pricing methods is not available. It is often used in:
- the resale of goods
- the performance of works or services
- the production of goods (in case of capital-intensive activity).
PSM is not often used and there are also no published TP 'safe harbours'.
- Decree of the Cabinet of Ministers of Ukraine No. 504 (17 July 2015) defines the procedures and requirements for APAs between the tax authorities and the taxpayer.
- Large taxpayers (legal entities with total income exceeding EUR 50 million or amount of taxes paid exceeding EUR 1 million for the last 4 consecutive quarters) have the opportunity to conclude APA with the State Fiscal Service of Ukraine.
- Applications can be made for future transactions on a unilateral, bilateral or multilateral basis for a period of up to five years (with a possible extension). APA may be also applied retrospectively for periods preceding the date of its conclusion.
- Ukrainian legislation does not specify any fee for APA. Taxpayers may apply to the tax authorities for preliminary consideration of APA. The decision on whether such application is would be taken into consideration is expected within 60 days.
- Currently, there is limited practice of signing APA in Ukraine.
- There are no formal 'safe harbours' in Ukraine. However, taxpayers with an annual revenue below UAH150 million are not subject to transfer pricing control.
- Even if the taxpayer reaches an annual income of more than UAH150 million but the volume of transactions with non-residents is below UA10 million, such transactions are not subject to transfer pricing control.
- However, there are certain cases in which transactions below UA10 million should meet the arm's-length principle.
- In addition, the Tax Code provides for the following circumstances under which prices qualify as arm's length if the relevant conditions are met:
- State-regulated prices and mark-ups with respect to certain goods or services may qualify as arm's length, unless the minimum or maximum price, mark-up or indicative price is established by the state.
- Mandatory valuations of transaction objects can be used to determine arm's-length prices.
- If goods are sold through a mandatory public auction, prices determined as a result of the auction may qualify as arm's length.
- If goods, including pledged property, are sold in an enforcement procedure in accordance with applicable legislation, the terms of such sales may qualify as arm's length.
- The tax authorities monitor transfer pricing risks in several stages. After the deadline for submitting a report on controlled transactions has passed, the tax authorities review such reports and identify taxpayers which did not submit the report or indicated abnormal profit level indicators or non-typical information. Subsequently, the tax authorities send a request for transfer pricing documentation to the respective taxpayers. At this stage, the tax authorities consider the documents provided to determine whether the taxpayer's justifications regarding the arm's-length nature of its controlled transactions are feasible. If the transfer pricing documentation is not submitted, the taxpayer submits incomplete documentation or its conclusions are insufficient, the tax authorities may initiate a transfer pricing audit.
- The burden of proof lies with the tax authorities. During the tax audit, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the taxpayer selected an unsubstantiated method.
- Daily cash flow planning and cash management has quickly become the most critical management issue for companies impacted by Covid-19.
- As changes in the economic environment occur, parties are seeking to amend the terms and conditions of existing trade agreements, both third-party and intercompany. In order to create much-needed cash resources, they are looking to take various measures such as: deferring cash outflows in respect to taxes and payables, obtaining lower interest rates on loans, and obtaining access to cash through government subsidies. While amendments to third-party agreements are constrained by existing contracts and the relative market positions of each party, changes to intercompany arrangements are, or course, subject to the (almost) global arm’s length standard and the transfer pricing regimes of each country involved.
- Given that group companies are expected to enter into intra-group transactions in a manner consistent with the way they deal with third parties (arm’s-length principle), it may be possible to renegotiate intra-group arrangements as a result of Covid-19 disruptions. Companies may consider a number of alternatives including: reducing management fees due to reduced cross-border services being provided (or increasing them due to extraordinary crisis management costs); prepaying, postponing or cancelling royalty payments or support service fees; or renegotiating interest rates on loans and/or prepaying or deferring interest payments. Intra-group factoring might be affected. Consideration should be given to whether certain banking arrangements or covenants may be impacted by a change in the debt to equity ratio.
- However, while amending intra-group transactions and policies may seem like a rather quick fix to free up cash and improve liquidity, it is imperative to fall within the framework of the arm’s-length principle.
- Nonetheless, existing intra-company funding arrangements may no longer be effective, and now may be the time to re-examine them. Revisions may involve, for example: changes in payment terms (prepayments or deferrals); changes in interest rates; amendments to maturity or repayment clauses; or changing other relevant terms and conditions. Analyze intra-group agreements to consider whether they provide for a change in payment terms, what the financial implications of any changes are, and whether Intercompany agreements can and / or need to be amended. And, when revising funding arrangements, any changes must be consistent with the functional and risk profiles of the various companies in the Group.