With the support ofTransfer pricing: significant changes in 2015

On 28 December 2014, the Ukrainian Parliament passed On Changes to the Tax Code of Ukraine regarding Improvement of Tax Control of Transfer Pricing Act No.72-VIII, which came into effect on 1 January 2015. Reporting for the year 2014 will be prepared pursuant to Article 39 of the Tax Code that was in force prior to that date. Speaking about the changes in general, starting from now business transactions of a larger range of persons will be subject to transfer pricing legislation. “Before, taxpayers, whose annual volume of transactions with a single counterparty was under UAH 50 million, were happy that they did not need to apply transfer pricing, Yaroslav Romanchuk, the managing partner of the ILC EUCON said. — Now, as the value criterion has been significantly reduced, many of them would need to learn that complicated legislation. I can confirm an increased interest in transfer pricing as our company holds many training sessions these days both for its clients and for various industry associations of businesses”.

The main legislative changes can be summarized by the following areas:

1.Recognition of controlled transactions

— Controlled transactions do not include business transactions between related residents of Ukraine;

— It has been established that for the purposes of income tax, controlled transactions are the business transactions that affect the object of taxation;

— For purposes of the income tax, controlled transactions are the business transactions involving sale of goods through non-resident commissioners;

— While drawing up the list of countries (territories) that is approved by the Cabinet of Ministers of Ukraine, the following criteria are taken into consideration:

a) countries (territories) where the rate of corporate income tax (corporate tax) is 5 or more percentage points lower than in Ukraine;

b) the countries that do not openly disclose the information on the ownership structure of legal entities;

c) countries that do not have international agreements with Ukraine with provisions on the exchange of information.

— Controlled business transactions include transactions between related persons involving non-related persons, provided that such non-related persons do not perform significant functions in such transactions and do not use significant assets and/or assume significant risks.

2. Value criterion in recognition of controlled transactions

Business transactions are deemed controlled if the following conditions concur:

— The total income of a taxpayer and/or its related persons from all activities that is taken into account when determining the object of income taxation exceeds UAH 20 million in  a given calendar year;

— The value of a group of such business transactions of a taxpayer and/or its related persons with one counterparty exceeds UAH 1 million (excluding VAT) or 3% of the income that is taken into account when determining the object of income taxation of the  taxpayer in a given year.

3. Regarding the sources of information on comparable transactions

— The priority of the official sources of information has been canceled;

— It is provided that taxpayers and the authorities can use the following sources of information:

a) the information on comparable transactions of a taxpayer and the information on comparable transactions of its contrac- tor — a party of transactions with non- related persons;

b) any information sources that are publicly available and provide information on comparable transactions and persons.

4. Filing reports on controlled transactions

— Taxpayers, whose volume of controlled transactions with a single counterparty does not exceed UAH 5 million (excluding VAT), provide to a controlling authority the information on performed controlled transactions along with the corporate income tax declaration (attached to the declaration);

— Other taxpayers are required to file a report on controlled transactions prior to 1 May of the year following the reported year;

— On penalties for violation of legislation on transfer pricing. The following fines have been established:

a) 100 minimum wages as of 1 January of the reported year — in the event of  failure to file (untimely filing) the report on controlled transactions;

b) 5% of the controlled transactions that are not declared in the report;

c) 3% of the controlled transactions where documentation is not filed, but no more than 200 minimum wages for all undeclared controlled transactions.

Liability for violations of legislation on transfer pricing has been substantially increased, and the application rules have not been simplified. Therefore, Yaroslav Romanchuk recommends that companies with foreign economic activity need to anticipate the tax risks and to take care and prepare the company to effectively control prices in controlled transactions. “In the course of two years of the new legislation, we assist clients in developing and implementing internal rules to control transfer pricing that make life easier for their accounting departments. The lack of experience of transfer pricing is not a reason to panic or to become confused, as we are ready to assist with justification of prices and to prepare the documentation on controlled transactions”, he said.