You're reading: Transfer pricing in 2017, or Ukrainian-style investment climate improvement
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Oksana Kochmarska, Executive Director Accountor Kyiv LLC

State transfer pricing (TP) control system is operating in Ukraine starting from 2013 and still is not significantly differ from other tax legislation in terms of ease of interpretation. Till now business community faced several difficulties while preparing and submitting TP reports and documentation. The reasons for that are constant changes of TP rules and “local flavor” in applying the rules. These facts caused the need for further methodological changes in legislation, especially in the direction of bringing them closer to OECD requirements and global practice.
Studying the TP rules changes implemented by the Law of Ukraine of December 21, 2016 #1797-VIII “On Amendments to the Tax Code of Ukraine Improving the Investment Climate in Ukraine” enacted starting from January 1, 2017 it is not easy to detect any changes which are actually able to improve the investment climate in short-term prospective. However, there are still some positive points. One of them is a change of TP report submission deadline from May 1 to October 1 (the year following the reporting year), which gives a taxpayer more time for understanding of ambiguous Ukrainian tax litigation provisions and preparation of the form itself. Another positive change is a possibility to adjust TP reports in case of errors via submission of a new form to the Tax Authorities (prior to deadline) or clarifying form (after the deadline).
Certainly, another positive legislative change is an increase in controlled transactions thresholds: total taxpayer revenues criteria tripled (from 50 mln UAH to 150 mln UAH) and transaction turnover with one counterparty doubled (from 5 mln UAH to 10 mln UAH). These improvements fairly shift the focus of control from medium-sized companies to larger taxpayers, making compliance burden more adequate.
TP-related fines and penalties were also changed, not only from value prospective, but also in terms of general approach. Due to significant increase of minimum wage starting from January 1, 2017, TP penalties now will be linked to “living wage”, which is also set on January 1 of tax reporting year. However, living wage is approximately twice lower than minimum wage, which mean that TP penalties will be more or less reasonable.
Also, “penalties” section of TP legislation was supplemented with a new provision: non-submission of TP report and/or TP documentation file in 30 calendar days following the deadline of penalty payment result in additional fine of 5 living wages for each day of delay. Taking into account that there is no upper limit stipulated, this penalty can be treated as a one of the most severe fine in Ukrainian legislation. According to the Tax Authorities opinion, this penalty should motivate taxpayers to timely submit TP reports and TP documentation files.
At the same time, extenuating changes were made for taxpayers who independently identified non-submission of TP report and submitted it prior to TP tax audit. In such a case, penalty for violation of TP report submission deadline will sum to 1 living wage for each day of delay with upper bound of 300 living wages. Almost similar fines apply in case of delays with disclosure of separate transactions in already submitted report and failure to submit TP documentation on time.
Another innovation is a provision 39.3.8 of the Tax Code, allowing grouping of controlled transactions with similar counterparty for TP analysis purposes. New approach allows to group transactions to apply margin-based methods for the whole group of such transactions in case if such transactions are closely related, supplement each other, or performed on continuous basis. TP practitioners were often applying this approach in previous years as well (basically because it is hardly possible to apply e.g. TNMM to each separate transaction), however, now the grouping of transactions is officially stipulated by the law. From available information about existing TP audits it can be concluded that Tax Authorities do not oppose the grouping itself, even though it was not included in previous TP rules, they oppose the way taxpayers are actually applying it.
Controlled transactions list was also amended. Comparing to previous version of TP legislation, now transactions performed through (using) commission agentsare deemed controlled not only in case of sale of goods, but also in case of goods/services purchases. Also, starting from January 1, 2017 transactions with foreign entities which are not payers of corporate income tax (or pay corporate income tax in jurisdiction different from registration jurisdiction) will be controlled. Primarily, this new criterion is aimed at targeting transactions with Limited Liability Partnerships, or LLPs, registered in UK.
Summarizing express analysis of new TP legislation developments, it can be concluded that several steps to expand tax control over transfer pricing were made. The only thing worth adding is that transfer pricing is not only about changing the rules, but actually about applying them. However, during last four years of enacted TP legislation we could hardly observe any significant attention of tax authorities to controlled transactions of oligarchs’ business (in contrast to multinationals presented in Ukraine). Lawmakers have provided Tax Authorities with a modern instrument to control profit shifting and fill the budget, and constantly upgrade this instrument. Maybe it is time to apply it according to instruction?

 

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