Important Changes to Transfer Pricing Legislation

Tax & Legal Alert

17 July 2015

Ukraine’s Parliament on 15 July 2015 approved a Law that introduces important changes to the transfer pricing (hereinafter, “TP”) rules in Ukraine. The changes generally are positive and aimed at eliminating errors and inaccuracies in the current version of the TP legislation. Presented below is a brief overview of the most important TP amendments.

Non-application of TP regulations to VAT made clearer

A number of provisions of the Tax Code of Ukraine bore ambiguous interpretation and could have been used by the tax authorities as a ground for applying TP rules to value added tax. Amendments make it clear that TP provisions are applicable to corporate income tax only.

Threshold for controlled transactions is raised

According to the Law, the transactions will be treated as controlled transactions, provided the following two conditions are met:

  • Taxpayer’s annual income exceeds UAH 50 mln. (current rules envisage UAH 20 mln. threshold);
  • Volume of transactions with one counterparty exceeds UAH 5 mln. (currently, this threshold amounts to the lesser of UAH 1 million or 3 percent of taxable income).

Ukraine’s Parliament on 15 July 2015 approved a Law that introduces important changes to the transfer pricing rules in Ukraine

Changes to the penalty regime
Current TP rules
New TP rules
Failure to submit the report on controlled transactions
100 minimum wages
300 minimum wages
Failure to mention a controlled transaction in the report
5 percent of the transaction volume
1 percent of the amount of transactions not included in the report, capped at 300 minimum wages for all undeclared transactions
Failure to submit TP documentation
3 percent of the volume of transactions, capped at 200 minimum wages
3 percent of the volume of transactions, capped at 200 minimum wages

New provisions change penalties for failure to submit reports on controlled transactions and TP documentation. Table below contains comparison between the new and the current provisions.

Cancellation of the transfer pricing annex to the CIT Return

The Law cancels the requirement to submit an annex to corporate income tax return with information on controlled transactions performed.

The abovementioned annex was introduced on 01 January 2015. Given the fact that taxpayers should submit the reports on controlled transactions anyway, the reasons for having an additional annex was not clear. Therefore, its cancellation makes a lot of sense.

Changes to the special regulations for export/import of commodity products

The Law specifies that the price range based on exchange quotations is to be calculated according to the standard procedure for calculation of the arm’s length range. This is different from the current version, which requires the application of average prices for the preceding 10 days.

Timeframe for responding to tax authorities’ queries is extended

The term during which a taxpayer must respond to the query of the tax authorities is extended from 10 to 30 days. This is a reasonable change, since, as practice shows, 10 days are not enough for the preparation of a comprehensive response.

Changes to regulations covering the transactions that involve independent intermediaries

According to para. of the Tax Code, a transaction between related parties that involves a non-related intermediary may be treated as controlled provided that such intermediary performs no significant functions. However, the current wording of the said paragraph is vague, which raises some taxpayers’ fears that the tax authorities may use this paragraph as a ground for expanding the range of controlled transactions (for example, to apply the TP regulations to the transactions between Ukrainian residents).

New provisions are explicit and should prevent any misinterpretation.

The list of criteria for selection of low-tax jurisdictions is shortened

The Law provides for a shorter list of reasons for a country to be included in low-tax jurisdictions list approved by the CMU. According to the new rules, if a country does not disclose and make publicly accessible information on the ultimate beneficial owners of legal entities, such non-disclosure no longer constitutes a ground for including such country in the CMU’s list. The list will be made based on the following criteria:

  • Countries (territories) where the corporate income tax rate is by 5 and more percentage points lower than the one in Ukraine;
  • Countries with no international agreements on information exchange.

It is hard to predict at this stage whether the change in criteria will result in a revision of the list of countries, since the CMU does not publicly disclose the reasons for inclusion of specific countries into the list.

Applicability of the new rules

The Law applies to all controlled transactions performed throughout the year 2015.

Other amendments

The Law also introduces a number of other amendments aimed at eliminating errors and clarifying legislation provisions, including the rules for determination of business transactions, grounds for initiation of transfer pricing audits etc.

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