Broadly, transfer pricing laws exist to prevent companies with International dealings shifting taxable profits offshore through the pricing of goods and services that they buy or sell from related companies overseas.
Historically, transfer pricing rules in Ukraine have been vague and were seldom applied by the Ukrainian tax authorities. The original rules dated to a 2002 amendment to the 1994 Law of Ukraine “On Taxation of Profits of Enterprises” No. 334 (28th December 1994) and subsequently the 2010 Tax Code of Ukraine.
However, these brief rules lacked methodology and guidance for practically implementing the regulation of transfer pricing. Tax advisors generally agreed that the application of transfer pricing rules, particularly between related parties and those relating to primary documentation were poorly regulated under the 2010 tax code.
In practice, Ukrainian tax authorities usually challenge transactions in which sale prices are below the cost of goods or services. In these cases, tax authorities often do not question the contract price but, instead dispute the business nature of the transactions.
- Removal of the “safe harbour” rule
- Controlled Transactions
- Named Low-tax jurisdictions
- UAH 50 million threshold
- “Arm’s length” Price determination
- Reporting Requirements
- Penalties – 5% of true value
On this page
- Introduction to the New Rules
- Controlled Transactions
- Low-tax jurisdictions
- Price Determination
- Reporting & Audit
New Transfer Pricing Rules in Ukraine
Article 39 of the Tax Code of Ukraine stipulated new transfer pricing rules to become effective from 1 January 2013. Although it was not until the 4th July 2013 when the Parliament of Ukraine passed the Law No. 408 “On Amendments to the Tax Code of Ukraine in respect of transfer pricing rules” that proper regulation of transfer pricing was put into legislation. These new rules represented a significant transformation for Transfer Pricing in Ukraine. The new legislation was entered into force on 1 September 2013 and introduced a number of key changes for both taxpayers and tax authorities.
The Ministry of Revenue and Duties of Ukraine also see the new legislation as an opportunity to reduce “uncertainties” that might hinder foreign direct investment and the development of foreign trade.
The new rules broadly follow OECD guidelines on transfer pricing matters and it is thought that these will provide a greater degree of stability and certainty to how transfer pricing rules will be applied in Ukraine. The new rules provide a mechanism for the determination of prices in related transactions and may be an effective tool for the collection of taxes and for the establishment of fair market prices on an “arm’s length” basis.
Some analysts believe that the wording of the new transfer pricing rules contain uncertainties and do not provide enough detail on how the mechanisms will work. Such practical clarity is important in Ukraine. There are many examples when provisions for tax rules have been used in arbitrary ways and against the interests of taxpayers.
In addition, certain regulations required for the functioning of the new transfer pricing rules have only been recently introduced. Guidelines to the general application of the new rules were only published on 22nd December; and the list of low-tax jurisdictions was confirmed on 25th December 2013.
The new transfer pricing rules will only apply to “controlled transactions”. These are transactions by a Ukrainian resident company between related companies or companies that are resident in low tax jurisdictions.
The list of controlled transactions includes the following:
- Transactions by a Ukrainian resident company (taxpayer) with related parties that are non-residents of Ukraine.
- Transactions by a Ukrainian resident company (taxpayer) with residents of low tax jurisdictions.
- Transactions by a Ukrainian resident company with related parties that are resident in Ukraine that:
- declared tax losses for the previous tax year;
- apply special tax regimes as of the beginning of the tax year;
- apply Corporate Income Tax and/or VAT rates other than the standard rates at the beginning of the tax year; or
- are non-Corporate Income Tax and/or non-VAT payers at the beginning of the tax year.
A related party is one where ownership of at least 20 percent of shares (based on voting power or share capital) are under common control.
Related parties are defined in Ukrainian tax law as legal entities and/or individuals, whose relationship may affect the terms and economic results of their activities or activities of persons represented by them. An entity qualifies as a related party if ownership of at least 20 per cent of shares; based on voting power; share capital; are under common control.
Low-tax jurisdictions are those in which Corporate Income Tax rates are five or more percentage points below the Ukrainian Corporate Income Tax rate. The list of the low tax-jurisdictions is set by Cabinet of Ministers of Ukraine Resolution no. 1042-p of 25th December 2013.
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If the total value of all transactions with that party in any calendar year is equal to, or more than, UAH 50 million (approximately equivalent to USD $5.8 million or EUR €4.2 million) then they will be deemed to be controlled transactions and therefore subject to the new transfer pricing rules.
The threshold is net of VAT and applies cumulatively for all transactions with one counterparty per year.
For the purposes of calculating the total amount of transactions with the counterparty and applying the threshold of UAH 50 million, the taxpayer should account for the body of loans received from or provided to the counterparty, including any interest-free loans. The general approach to the calculation of the threshold is to sum up all transactions based on the definition of the commercial transaction according to the law on accounting, which is any change in the assets and liabilities of the company. The return of goods is accounted for as a separate transaction.
Reporting & Audit
The new transfer pricing rules in Ukraine introduce requirements on taxpayers to prepare and file reports concerning controlled transactions along with any additional supporting documentation. This information will be used by the tax authorities to confirm that pricing in controlled transactions is at “arm’s length’.
The new transfer pricing rules have introduced a framework of transfer pricing audit standards and rules.
All taxpayers must file an annual return of their controlled transactions before the 1st May in the year following the tax year subject to reporting.
“Large taxpayers” are required to submit their transfer pricing documentation within two months of a request from the lax authorities. All other taxpayers must submit transfer pricing documentation within one month of a request.
If the Ukrainian tax authorities undertake an audit of a controlled transaction, they are required to use the same price determination methods which the taxpayer has used to determine the price payable in relation to the transaction.
If the tax authorities are able to prove that the method of calculation used by the taxpayer did not allow the taxpayer to correctly determine the price payable in relationship to the controlled transaction; then the tax authorities are able to challenge the method that the tax payer has chosen and are able to use an alternative method to calculate the “arm’s length” price.
For transfer pricing control purposes, the authorities shall use the “official sources of information” set by the CMU (Order No. 865-r of the Cabinet of Ministers of Ukraine dated 23 October 2013).
In cases where there is an absence or lack of information in the official sources, the sources of information defined in Article 39 of the Tax Code can be used. The sources of information defined in Article 39 include the following:
- prices of public auctions, tenders and exchange quotations;
statistical data from state authorities;
- prices published in specialised commercial mass media (including Internet media), including electronic and other databases, informational programs and other public sources of information;
- information about prices, inter-quartile range of prices / profitability and quotations published in mass media;
- information from accounting and statistical reporting of taxpayers published in mass media;
results of independent evaluation of property and property rights; and
- information about other controlled transactions conducted by the taxpayer.
The duration of a transfer pricing audit cannot exceed 12 months.
Taxpayers that breach the new rules for transfer pricing will be liable for penalties imposed by the Ukrainian tax authorities.
As part of the new legislation, a new penalty regime has been implemented for taxpayer’s failure to comply with Ukraine’s new transfer pricing rules.
In particular, penalties will be awarded for a taxpayer’s failure to submit the notification of controlled transactions and the supporting documentation.
Failure to submit notice of a controlled transaction and the required supporting documentation can incur a penalty of up to 5 percent of the total value of the controlled transaction.
If “large taxpayers” fail to submit appropriate transfer pricing documentation, then they will be subject to penalties of 5% of the total value of the controlled transaction or a sum equal to 100 times the minimum wage (approximately equivalent to USD $14,000).
If the tax authorities are able to prove that the method used by the taxpayer did not allow the taxpayer to correctly determine the price payable in relationship to the controlled transaction, then penalties will be based upon the tax authorities valuation of the controlled transaction.
List of Low-tax jurisdictions specified in Ukraine Transfer Pricing rules
- The Republic of Albania
- Principality of Andorra
- Antigua and Barbuda
- Commonwealth of
- the Kingdom of Bahrain
- Bosnia and Herzegovina
- British Virgin Islands
- Brunei Darussalam
- Virgin Islands of the United States of America
- The Republic of Vanuatu
- Autonomous Community of the Canary Islands Kingdom of Spain
- Cape Verde
- Cayman Islands
- Republic of Kyrgyzstan
- Republic of Cyprus
- Autonomous Province of Kosovo and Metohija Republic of Serbia
- Kingdom of
- Liberia, Republic of
- Lebanon Republic
- Principality of Liechtenstein
- Grand Duchy of Luxembourg
- Special Administrative Region of China Macau
- The former Yugoslav Republic of Macedonia
- Federal Territory of Labuan Malaysia
- Malta Republic
- Kingdom of Morocco
- Republic of the Marshall Islands
- Nauru Republic
- United Arab Emirates
- Sultanate of Oman
- Isle of Man
- Cook Islands
- Turks and Caicos Islands
- Republic of Palau
- Republic of Panama
- Republic of Paraguay
- Northern Mariana Islands
- Madeira Autonomous Region of Portugal
- The Republic of San Marino
- Democratic Republic of Sao Tome and Principe
- Republic of Seychelles
- Saint Vincent and the Grenadines
- Saint Kitts and Nevis
- Saint Lucia
- Republic of Singapore
- Sint Maarten (Dutch part) of
- the Republic of Sudan
- Democratic Republic of Timor-Leste
- The Republic of Uzbekistan
- French Guiana
The Ukraine Cabinet of Ministers in late December 2013 approved a resolution No. 1042-p identifying jurisdictions where the corporate income tax rate is five or more percentage points less than the rate applied in Ukraine – a list of countries to be used in identifying which “controlled transactions” between Ukrainian taxpayers and foreign entities are subject to the transfer pricing rules.