Since the introduction of transfer pricing rules (hereinafter – TP) in Ukraine, taxpayers have been given the right to adjust their income tax liabilities independently for TP purposes. How to do it – below.
Prerequisites for self-adjustment
The precondition for self-adjustment by taxpayers of income tax liabilities is the application of conditions that do not comply with the arm’s length principle during the conduct of controlled transactions.
Thus, in the case of application by the taxpayer during the conduct of controlled transactions conditions that do not comply with the arm’s length principle, the taxpayer has the right to adjust the price of the controlled transaction and the amount of tax liabilities, provided that it does not reduce the tax payable to the budget (paragraph 39.5.4 of item 39.5 of Article 39 of the Tax Code of Ukraine, hereinafter – Tax Code).
Period for which the adjustment is made
As practice shows, most often such adjustment is made at the end of the calendar (reporting) year (especially if the payer uses transfer pricing methods, which are based on the calculation and comparison of profitability of the controlled transaction).
Thus, the taxpayer has the right to make independent adjustments and reflect the results of its implementation in Annex TD (lines 3.1.3 and 3.1.4) and Annex TP to the corporate income tax return (hereinafter – Return) for the reporting period, in which the payer has established that the prices of the controlled transactions do not comply with the arm’s length principle
How to calculate tax liabilities
Tax liabilities are calculated in accordance with:
- the maximum value of the price range (profitability), if the price/profitability of the controlled transaction were higher than the maximum value of the price range (profitability)
and/or
- the minimum value of the price range (profitability), if the price/profitability indicator of the controlled transaction were lower than the minimum value of the price range (profitability).
The amount of tax liability, calculated as a result of self-adjustment, is payable within the period specified in Art. 57 of the Tax Code.
Reporting features
The taxpayer can submit the Annex TP both as a reporting (new reporting) and as a clarifying one. The rules for filling in the Annex TP are provided by the Procedure for compiling a report on controlled transactions, approved by order of the Ministry of Revenue No. 669 of November 11, 2013.
The taxpayer, who independently reveals the fact of understatement of the tax liability of the previous tax periods, is obliged, except for the cases established by item 50.2 of Art. 50 of the Tax Code, in particular, to send a clarifying calculation and pay the amount of arrears and a fine of 3% of such amount before submitting the clarifying calculation. This penalty is not applied in case of submission of the adjusting calculation to the Return for the previous tax (reporting) year for the purpose of implementation of independent adjustment according to Art. 39 of the Tax Code no later than October 1 of the year following the reporting year (paragraphs 3–4, item 50.1 of Article 50 of the Tax Code).
That is, if the corrections of the Annex TP are made in the clarifying Return, the correct values of price adjustment during the sale/purchase of goods (works, services) are reflected in lines 15 and 17 of the Annex TP and their subsequent reflection in lines 3.1.3 TP and 3.1.4 CI Annex TD “Differences” to the clarifying Return.
Based on the comparison of the tax liability of such Return and the clarifying Return, the amounts of increase in tax liability, penalty and fine are determined, which are reflected in the part “Correction of errors” (lines 26, 29 and 30) of the Return.
In case of correction of the Annex TP in the clarifying Return for the previous tax (reporting) year no later than October 1 of the year following the reporting year, the taxpayer does not accrue and reflect the amount of fines and penalties in lines 29 and 30 of the Return.
Together with the clarifying Return, the taxpayer has the right to provide the supervisory authority with additions explaining the corrections.
It should be noted that if the conditions of controlled transactions that do not comply with the arm’s length principle, will be set by the supervisory authority (provided that the taxpayer has not exercised his right to self-adjustment in the manner prescribed by the Tax Code), the calculation of tax liabilities of the payer in controlled transactions is carried out according to the price (profitability indicator), which is equal to the median value of this range.
