Transfer pricing requirements affect the subject to the income tax by the use of differences (sub-paras.140.5.1, 140.5.2 of the Tax Code of Ukraine, hereinafter − TCU). Besides, Art.39 of TCU relating to the controlled transactions speaks in terms of the price determined on the “arm’s length” principle. Therefore, this concept replaced the phrase “regular price” in sec. III of TCU. The Law of Ukraine “On Amendments to the Tax Code of Ukraine on improving the investment climate in Ukraine” of 21.12.2016, № 1797-VIII (hereinafter − the Law № 1797)determined another important detail for the income tax payers who have controlled transactions: differences under such transactions (sub-paras.140.5.1, 140.5.2 of TCU) should be calculated only under the results of the year. In the following there are more details on the innovations regarding the controlled transactions.
Determination of the controlled transactions
Law № 1797 made significant amendments to Art.39 of TCU. Thus, as a result of changes made to sub-para.39.2.1.1 of TCU, it was clarified the list of business transactions that under certain conditions were considered to be controlled. In particular, it includes foreign economic transactions for the sale/purchase of services via commissioners-non-residents. Also, controlled transactions are the operations with unrelated non-residents who do not pay the income tax (company income tax) including incomes received outside the state registration of such non-residents and/or are not tax residents of the state where they are registered as legal entities. The Cabinet of Ministers of Ukraine should establish the list of organizational and legal forms of non-residents during three months (para. 5 of sec. II of the Law № 1797).
The maximum amount of business transactions of a taxpayer with each contractor, defined by accounting regulations (from 01.01.2017 − UAH 10 million) should be calculated on the basis of reporting (calendar) year in 2017.
It should be reminded that controlled are the business transactions with non-residents, registered in the states, included in the relevant list by the Government (sub-para. 39.2.1.2 of TCU). Currently, the list is valid, established by the order of the Cabinet (hereinafter − CMU) of 16.09.2015, № 977-р. Before 01.01.2017, transactions with contractor registered in the country (in the territory) from this list, were recognized as controlled from the date of inclusion of state (territory) in it. The Law № 1797 recorded the next: transactions with contractors registered in the country (in the territory) included in the list CMU should be defined as controlled from January 1 of the year following the calendar year when the states (territories) were included in this list.
Cost criteria of controlled transactions
There were increased the annual income thresholds to recognise the transaction as controlled: from 50 to 150 million hryvnias. The volume of transactions with a single counterparty required to control transfer pricing exceeds now UAH 10 million per a year instead of UAH 5 million.
Stock exchange quotation
Sub-section 39.2.1.2 of TCU provides for that price range for such goods, formed on commodity exchange is used for compliance with conditions of the controlled transactions according to “arm’s length” principle. Now, in case of controlled transactions on the basis of forward or futures contract, the compliance by the method of comparable uncontrolled price should be determined with the use of forward or futures exchange quotations of the relevant product. In this case, the taxpayer should electronically inform the tax authorities within 10 working days from the day of conclusion of the relevant forward or futures contract about this event.
Range of profitability
The law № 1797 added new regulations to the Art.39 of TCU to determine the range of profitability. Thus, new para.39.3.2.8 of TCU establishes that for this, in particular, it should be used the information on comparable legal entities based on the data of accounting and financial statements for the reporting (tax) period (year), when the controlled transaction was carried out or for a few tax periods (years). In the latter case, when the procedure, established by the CMU, the weighted average rate of profitability for comparable entity should be calculated. The amendments provide for that information on comparable legal entities to calculate, in particular, gross profit margin, gross profit margin of production cost, net profitability is used for simultaneous compliance with certain conditions. Namely, if a comparable legal entity:
- carries out activity comparable to the activities of the taxpayer within the controlled transaction and perform comparable functions associated with such activity. Comparison of activity should be determined in respect of economic activities according to CBA (Classification of Business Activities) DK 009:2010, as well as international classifications;
- has no losses according to accounting (financial) reporting in more than one reporting period in periods taken for the calculation of relevant financial indicators;
- has no direct and/or indirect corporate rights of another legal entity with a share of more than 20% or has not, as a member (shareholder), the legal entity with a share of the direct (indirect) participation of more than 20%.
Principle of controlled transactions grouping
Henceforth the taxpayer has the right to determine compliance with the conditions of controlled transactions under “arm’s length” principle with a set of several controlled transactions with one person united under the principle of grouping (new sub-para. 39.3.8 of TCU). These transactions can include:
- purchase (sale) of goods (works, services) under long-term contracts, transactions according to which are carried out during the entire reporting (tax) period;
- transfer (receipt) of rights to use the various intangible assets related to one product (service);
- purchase (sale) of a series of closely related products (product group) and/or services;
- purchase (sale) of various goods (works, services), provided that one commodity (work, services) or one group of goods (works, services) creates the demand for other goods (works, services) or group of goods (works, services).
In order to calculate index of profitability as on a grouped set of controlled transactions as on individual controlled transactions, it should be known the following. In order to determine the costs and revenues associated with such transactions, it should be used the most reasonable algorithm that reflects the economic substance and nature of the costs incurred or incomes received.
Reporting on the controlled transactions
The date of the report on controlled transactions changed: the deadline postponed from May 1st to October 1st of the year following the reporting one. It is specified, if the taxpayer found incomplete information, errors or omissions in previously submitted report on controlled transactions, he/she is entitled to submit:
- a new report to the deadline of submission of the controlled transactions for the same reporting period;
- clarifying report in case of its submission after the deadline for the reporting period. However, the presentation of clarifying report does not exempt the taxpayer from liability under para.120.3 of TCU. In addition, the taxpayer has the right to submit a report on clarifying controlled transactions during the documentary inspections.
Penalty sanctions
In view of the significant increase of the minimum wage on 01.01.2017, it was softened the responsibility for violation of transfer pricing provided for be para. 120.3 of TCU in wording to 01.01.2017 and there were added new fines (sub-para.2 of para.60 of sec. I of the Law № 1797).
The Law № 1797 increased the responsibility of taxpayers having added new penalties for violation of transfer pricing. They are recorded in para. 120.4 of TCU:
- 1 living wage of able bodied person (hereinafter − LWABP) for each calendar day of delayed submission of a report on controlled transactions, but not more than 300 LWABP.
- 1 LWABP for each calendar day of delayed declaration of controlled transactions in submitted report on controlled transactions in case of submission of clarifying report, but not more than 300 LWABP.
- 1 LWABP for each calendar day of delayed submission of documentation on transfer pricing, but no more than 200 LWABP.
Controlled transactions documentation
The Law № 1797 expanded the amount of information that should be included in documentation of transfer pricing, prepared by the taxpayer. This information includes, in particular (updated sub-para. 39.4.6 of TCU):
- information about persons, which corporate rights in amount of 20 percent or more directly or indirectly owned by the taxpayer;
- information about persons whom the taxpayer provides local management reports;
- description of the management structure and format of the organizational structure of the taxpayer;
- description of the strategy and business activity that carries out the taxpayer, including economic conditions of activity, analysis of the relevant markets for goods (works, services), where the taxpayer, main competitors carry out their activities;
- information about payments actually made in a controlled transaction (amount and currency of payment, date, payment documents);
- business strategies of the parties of transaction (if any) that have a significant impact on prices.
Tax control over the controlled transactions
Monitoring of conditions of controlled transactions should be carried out by analyzing the reports of controlled transactions, transfer pricing documentation received, in particular, on the basis of requests, any other information sources, and by obtaining tax information according to Art.73 of TCU. Previously, the tax authorities also monitored over the prices used by the parties of the controlled transactions.
All the considered information is only the tip of iceberg of the transfer-pricing.
