New transfer pricing rules in Ukraine

Published 26 January 2017. Some rules have changed since; ask us for the current position.

At the end of December 2016, amendments to the Tax Code of Ukraine (Податковий кодекс України) changed the transfer pricing (TP) rules that apply to cross-border transactions for tax purposes.

A controlled transaction now affects the taxable base. The following foreign trade transactions were added to the list of controlled transactions:

• purchases and sales of services through non-resident commission agents;
• transactions with non-residents that do not pay corporate income tax (corporate tax), including on income earned outside their country of registration, and/or are not tax residents of the country where they are registered as legal entities. The list of legal forms of such non-residents by country (territory) is approved by the Cabinet of Ministers of Ukraine (CMU);
• transactions with non-residents registered in countries (territories) on the list approved by the CMU. The criteria for adding a country (territory) to this list now include full exchange of tax and financial information. Countries whose competent authorities do not exchange such information at the request of the Ukrainian tax authority will also be added to the list.

Transactions with a counterparty registered in a listed country become controlled only from the start of the reporting year following the year in which the country (territory) was added to the list. This gives taxpayers at least a year for tax "restructuring".

The annual income threshold for the taxpayer rose from UAH 50 million to UAH 150 million, and the threshold for the volume of transactions with a single non-resident rose from UAH 5 million to UAH 10 million. Transactions below these thresholds are treated as uncontrolled.

A new TP method was introduced, "comparison with legal entities". It is used to determine the profitability indicator when information on individual comparable uncontrolled transactions is missing or insufficient.

When can financial information of legal entities whose activities are comparable to the controlled transaction be used?

1. There is information that they do not carry out comparable transactions with related parties.
2. Their activities are the same as the taxpayer's within the controlled transaction, taking into account the types of economic activity.
3. According to their financial statements, they did not report losses in more than one reporting period.
4. They do not hold corporate rights in another legal entity with a stake above 20%.
5. None of their members or shareholders is a comparable legal entity holding 20% or more.

The taxpayer now submits to the tax authority the most appropriate data based on the facts and circumstances of the transaction. The updated Tax Code allows the taxpayer to conclude an advance pricing agreement; while such an agreement is in place, the tax authority may not apply the arm's length principle (TP method) to the transaction.

The new version of the Tax Code also widens the list of sources for comparing the commercial and financial terms of a transaction.

The list of information in the TP documentation submitted to the tax authority has grown as well. The taxpayer now provides:

• information on the persons who receive its local management reports (stating the countries where their head offices are located);
• a description of its management structure and an organisational chart;
• a description of its business strategy and activities, including the economic conditions of its business, an analysis of the markets for goods (works, services) where it operates, and its main competitors;
• information on its involvement in business restructuring or transfers of intangible assets in the reporting or previous year, with an explanation of these transactions;
• copies of the contracts underlying the controlled transaction (previously only a description of the transaction was required).

The legislator extended the filing deadline for the documentation from 4 to 9 months. The final filing date moved from 1 May, a public holiday, to 1 October.

Late filing or failure to file now carries tougher penalties. Penalties are no longer tied to the minimum wage; they are now based on the subsistence minimum for able-bodied persons.

What are the penalties for failing to file the report or filing it late?

1. Failure to file the controlled transactions report: a fine of 300 times the subsistence minimum*.
2. Late filing of the controlled transactions report: a fine of one subsistence minimum* for each day of delay.
3. Failure to submit TP documentation: a fine of 3% of the value of the controlled transactions for which no documentation was submitted, capped at 200 subsistence minimums* for all controlled transactions in the reporting year. If the fine is not paid within 10 days of receiving the notice, an additional penalty of five subsistence minimums* is charged for each calendar day the documentation remains outstanding.
4. Late submission of TP documentation: a fine of two subsistence minimums* for each calendar day of delay, capped at 200 subsistence minimums.
5. Failure to declare controlled transactions: a fine of 1% of the value of the transactions not declared in the report filed, capped at 300 subsistence minimums*.
6. Late declaration of controlled transactions: a penalty of one subsistence minimum* for each day of delay, capped at 300 subsistence minimums*.

* As of 1 January 2017, the subsistence minimum for able-bodied persons was UAH 1,600.