Transfer pricing: Amendments-2019

What is transfer pricing means?

In simple terms the transfer pricing is a method for management of the financial result, optimizing the income tax and transferring capital from one company to another one, and the conditions of such transactions should not differ from those used in similar transactions by the unrelated persons.

It is no secret that companies often resort to the various kinds of mechanisms for the withdrawal and capital allocation, in particular, transferring to “their” companies in countries, where tax conditions are much more profitable than in Ukraine. To combat this phenomenon, there is a consolidation and regulatory adjustment of the transfer pricing at the state level.

The controlled transactions are subjects to the tax reporting and verification in order to determine the amount of taxable income received by the taxpayer participating in the controlled transaction (one or more), the arm’s length principle. The determination of the compliance of the conditions of such controlled transaction with the arm’s length principle is carried out according to the methods specified in subparagraph 39.3 of Article No. 39 of the Tax Code of Ukraine, in order to verify the correctness, completeness of the charging and payment of the corporate income tax.

Please note that the transactions only with non-residents can be controlled. Therefore, if you do not have the transactions with non-residents, do not worry - you do not need to submit the Report on controlled transactions to the fiscal authorities. But if you carry out the transactions with the non-residents, check to see if they are controlled.

According to the analysis of the current Tax Code of Ukraine, it can be seen that it is conditionally possible to single out the following criteria for classifying the transaction as the controlled one. However, we emphasize that it is mandatory that all of the following criteria be respected at the same time:

1) The transaction is carried out with the non-resident;

2) The transaction refers to at least one of the types foreseen by the subparagraph 39.2.1.1 of Article No. 39 of the Tax Code of Ukraine;

3) The transaction reaches the established value indicator.

If everything is clear with the first criterion, the second and third require more detailed consideration.

For convenience, we give the Table no. 1 with detailed analysis of the second criterion.

It should also be noted that the amendments to the Tax Code of Ukraine, which entered into force on January 01, 2019, updated the rules for attributing transactions to controlled, if the ownership of the item (result) of such transaction between the resident and non-resident first transfers to one or more persons, what is provided by the subparagraph 39.2.1.5 of the Tax Code of Ukraine.

If earlier these rules were applied only to the non-residents, who were related to the taxpayer, then from January 01, 2019 they apply to all business transactions between the taxpayer and non-resident, provided for by subparagraph 39.2.1.1 of Article No. 39 of the Tax Code of Ukraine. In particular, if in the chain of such transactions, the ownership of the item (result) of the transaction before moving from the taxpayer to such non-resident (in the case of export transactions) or before switching from such non-resident to the taxpayer (in the case of import transactions) goes to one or more persons and the transaction between the resident and these persons was not recognized as the controlled transaction by the tax payer, such transaction is considered the controlled transaction between the taxpayer and such non-resident, if the persons, who transferred the right of ownership:

 

• In such transactions do not perform the essential functions related to the purchase (sale) of goods (works, services);

 

• Do not use the significant assets and / or do not assume the significant risks for organizing the purchase (sale) of goods (works, services).

 

At the same time, the essential functions are the functions that the parties to the controlled transaction could not perform independently in their normal activities without involving other persons and using the assets of such persons.

The significant assets are the assets, whose usage is necessary in carrying out such transactions and which are not available to the parties to the controlled transaction.

By the significant risks are meant the risks that must be accepted for the business practice of such transactions.

As for the third criterion, its detailed analysis is given in the Table no. 2 below.

Please note that in determining the value indicator there is an exception, in particular, business transactions carried out between the non-resident and its permanent representative office in Ukraine are considered to be controlled, if the volume of such business transactions, determined according to the accounting rules, exceeds 10 million UAH (excluding the indirect taxes) for the relevant tax (reporting) year. So, in this case the taxpayer’s annual income is not taken into account.

The comparison of controlled transactions and uncontrolled transactions

 When specifying the correspondence of the implementation of the arm’s length principle to the controlled transactions, it is necessary to compare such transactions with uncontrolled transactions. In particular, for the purposes stipulated by the Tax Code of Ukraine, the controlled transactions are considered comparable to uncontrolled, if:

- There are no significant differences between them, which can significantly affect the financial result in the course of applying the appropriate transfer pricing method;

- Such differences can be eliminated by the adjusting the conditions and financial results of the controlled or uncontrolled transaction in order to avoid the effect of such differences on comparability.

In determining the comparability of transactions, the following elements of the controlled and comparable transactions are analyzed:

• · The characteristics of the goods (works, services) that are the subject of the transaction;
• · The functions performed by the parties to the transaction, the assets they used, the distribution conditions of risks and benefits between the parties to the transaction, the liability distribution between the parties to the transaction and other conditions of the transaction (hereinafter referred as “ the functional analysis”);
• · The constant practice of relations, the terms and conditions of agreements concluded between the parties to the transaction that significantly affect the prices of goods (works, services);
• · The economic conditions of activity of the parties to the transaction, including the analysis of the relevant goods market (works, services) that significantly affect the prices of goods (works, services);
• · The business strategies of the parties to the transaction (if any) that significantly affect the prices of goods (works, services).

If the information necessary to determine the profitability ratio is not available or there is incomplete information on individual uncontrolled transactions, the financial information of the legal entities carrying out the activities comparable to the controlled transaction can be used, provided that there is information that these legal entities do not carry out the transactions with the related persons.

We would like to note the characteristics that (except for those that were specified in the Tax Code of Ukraine earlier) are taken into account from January 01, 2019 with the comparability of the indicated transactions:

1. In accordance with the subparagraph 39.2.2.9 of Article No. 39 of the Tax Code of Ukraine, when determining the comparability of the commercial and / or financial conditions of comparable transactions with the conditions of the controlled transaction, the characteristics of the assets used by the parties in the controlled transaction can also be taken into account, in particular, but not exclusively: the type of asset (production equipment, intangible assets, financial assets, etc.); the nature of the asset (age, market value, location, protective rights, etc.). At the same time, the determination and analysis of the impact of intangible assets on the conditions of controlled and comparable transactions are carried out taking into account, in particular, but not exclusively: the legal possession of the intangible assets and contractual terms of their use; the categories and characteristics of such intangible assets (exclusivity, degree and duration of legal protection, geographical scope, useful life, development stage, etc.); the contractual and actual activities of the parties related to the development, improvement, support, protection and operation of such assets.
2.  If the actual conditions of controlled transaction do not correspond to the conditions of the concluded (written) agreement and / or the practical steps of the parties to the controlled transaction, the actual circumstances of its implementation differ from the terms of such agreement, the commercial and / or financial characteristics of the controlled transaction for transfer pricing purposes determined according to the practical steps of the parties to the transaction and the actual conditions for its implementation.
3. If the controlled transaction was actually carried out but was not documented (not confirmed), for the transfer pricing purposes it should be considered according to the actual behavior of the parties to the transaction and the actual conditions for its implementation, in particular the following aspects are taken into account: the functions that were actually performed by the parties to the transaction, the assets, which were actually used, and the risks that each of the parties actually assumed and controlled.

 Advance pricing in controlled transactions

The current tax legislation allows the large taxpayers to apply to the central executive body, which implements the state tax and customs policy with the statement on prior approval and pricing in controlled transactions.

The advance pricing in controlled transactions is a procedure between large taxpayer and the central executive body implementing state tax and customs policy, during which the following aspects are agreeing: the criteria for determining the compliance of the conditions of the controlled transactions that are carried out or will be carried out by such large taxpayer to the arm’s length principle on the basis of the fixed-term agreement.

The agreement concluded as a result of the advance pricing in controlled transactions between the large taxpayer and central executive body that implements state tax and customs policy is one-sided.

If the procedure of advance pricing in controlled transactions involved the foreign state body authorized to administer taxes and fees in state, whose resident is the party to the controlled transaction (if there is the international treaty (convention) on the avoidance of double taxation between Ukraine and such state), the agreement concluded as a result of such advance pricing between the large taxpayer and the central executive body authority implementing the state tax and customs policy, is bilateral.

If the procedure of advance pricing in controlled transactions involved two or more foreign state bodies authorized to administer taxes and fees in state, whose resident is the party to the controlled transaction (if there is the international treaty (convention) on the avoidance of double taxation between Ukraine and such state), the agreement concluded as a result of such advance pricing between the large taxpayer and the central executive body authority implementing the state tax and customs policy, has the multilateral nature.

The procedure for advance pricing in controlled transactions and agreements concluded, which are one-sided, bilateral and have the multilateral nature, was approved by the Resolution of Cabinet of Ministers of Ukraine No. 504 dated July 17, 2015 (as amended by the Resolution of Cabinet of Ministers of Ukraine No. 518 dated July 04, 2018).

If the terms and conditions of the advance pricing agreement in controlled transactions have been met, the controlling authorities are not entitled to decide on the additional charge of tax obligations, fines, and penalties for controlled transactions, which are the subjects of such agreement.

Drawing up of accounts and reporting to the fiscal authorities

 The reporting period for the transfer pricing is the calendar year. The taxpayers, who carried out the controlled transactions in the reporting year, are required to submit a report on controlled transactions to the central executive body, which implementing state tax and customs policy, before October 01 of the year following the reporting using electronic means of electronic communication in compliance with the legislation on electronic document exchange and digital signature. The form and procedure for filling the Report on Controlled transactions are approved by the Rule of the Ministry of Finance of Ukraine dated January 18, 2016 under No. 8.

The Report on controlled transactions shall contain information on all controlled transactions carried out by the taxpayer in the reporting period. If the taxpayer has revealed that the information on the controlled transactions previously submitted is not fully provided, contains some errors or flaws, such taxpayer has the right to submit a new report before the deadline for submitting such reports on controlled transactions for the same reporting period, or a clarifying report in case of its submission after the deadline for the relevant reporting period.

However, it should be noted that the submission by the taxpayer of a clarifying report on controlled transactions does not exempt from the responsibility provided for by the subparagraph 120.3 and subparagraph 120.4 of Article No. 120 of the Tax Code of Ukraine.

In addition, during the documentary audit, the taxpayer is not entitled to submit a clarifying report on controlled transactions.

In accordance with the requirements of the subparagraph 39.4.3 of Article No. 39 of the Tax Code of Ukraine, the taxpayers conducting controlled transactions must prepare and keep transfer pricing documentation for each reporting period. At the request of the central executive body that implements the state tax and customs policy, the taxpayers provide, within 30 calendar days from the date of receipt of the request, the documentation on the transfer pricing on controlled transactions specified in the request. Such transfer pricing documentation is provided by the taxpayer to the controlling authority specified in the request.

At the same time, we call your attention to the fact that the request can be sent by the central executive body that implements the state tax and customs policy no earlier than October 01 of the year following the calendar year, in which such controlled transaction (transactions) was carried out.

Based on: Lawyer & Law. The analytical edition