With the support ofTax Regulation
The previous version of Article 39 of the Tax Code of Ukraine (hereinafter — TCU) contained a concise definition of transactions that are considered controlled for the purpose of transfer pricing control. Those included business purchases (sales) of goods (works, services). All explanations on certain situations explained transactions in more or less detail and were provided in the Summarized tax advice of 1 July 2014 No.368.
Following the approval of systemic changes to the Tax Code, which came into force on 1 January 2015, the following are deemed to be controlled transactions:
— Business transactions that affect the object of taxation of the parties (party) of such transactions that are carried out by taxpayers with related persons — non-residents;
— Business transactions on the sale of goods through commissioners — non-residents;
— Business transactions that affect the object of taxation of a taxpayer, where one of the parties is a non-resident, registered in the country that is included in the list of countries (territories), approved by the Cabinet of Ministers of Ukraine.
The list is compiled based on the following criteria:
— countries (territories) where the rate of corporate income tax (corporate tax) is 5 or more percentage points lower than in Ukraine;
— countries that do not openly disclose the information on the ownership structure of legal entities;
— countries that do not have international agreements with Ukraine with provisions on the exchange of information.
“As long as this list is not approved, taxpayers can be guided by the list that is approved by the Cabinet of Ministers on 25 December 2013 No.1042-p”, — says Yaroslav Romanchuk, managing partner of the International Legal Center EUCON, — “I should admit that the current version of the TCU does not provide for a possibility to avoid the status of controlled transactions for the transactions with non-residents, who actually pay the tax at a rate that is not lower than in Ukraine. The possibility is not provided based on a certificate issued by the competent authority of the non-resident’s country. Perhaps, the fact that no Ukrainian taxpayer was able to obtain such a certificate from a counter-party did play an important role.”
It should be borne in mind that the set of economic transactions between related parties involving (intermediaries) unrelated persons is also recognized as controlled transactions, provided that such unrelated persons:
— do not perform essential functions for the given set of transactions;
— do not use significant assets neither/nor assume significant risks in such transactions.
Essential functions and assets are deemed functions that the related persons would not be able to perform in the usual course of their business without involving other persons and without using assets of such persons. Significant risks are the assumed risks that are necessary for business practices in such transactions.
One novelty of Article 39 of the TCU is the definition of the term “business transaction” for the purposes of transfer pricing. These transactions include all types of transactions, agreements or arrangements that are documented or not confirmed, which may affect the taxable income of a taxpayer, including but not limited to:
— Transactions with raw materials, finished goods;
— Transactions pertaining to provision of services;
— Transactions with intangible assets, including royalties, licenses, fees for patents, trademarks, know-how, etc., as well as any other intellectual property objects;
— Financial transactions, including leasing, participation in investments, loans, warranty fees, etc.;
— Equity transactions, including the purchase or sale of shares or other investments, purchase or sale of long-term tangible and intangible assets.
And one should mention that all business transactions are deemed controlled if they reach a value criterion, which implies the following conditions:
— 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 for a given tax (reported) 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 tax (reported) year.
“In my opinion, calculation of the value criterion collectively for a group of related persons is a rather complicated norm to be implemented in practice, of which our experts informed the legislators before they made changes to the final version of the TCU”, — said Mr. Romanchuk. — “And at EUCON’s weekly seminars on tax reform in 2015 we warn taxpayers of the full awareness of their related parties. But our numerous appeals to our lawmakers will hopefully be a success, since a draft law was registered recently that can amend the TCU on this issue”.