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Transfer Pricing in Motion

Transfer Pricing in Motion

Ukraine
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Ukraine has made a great leap forward in the development of transfer pricing rules since the concept of “controlled transactions” was first introduced in the Tax Code in 2013. These transfer pricing rules have been amended in recent years and Ukrainian taxpayers are likely to face many new issues on the subject in 2017.

Among others, there are changes in the material thresholds for qualification of transactions as “controlled.” Starting in 2017 a company’s annual profit threshold should exceed UAH 150 million (approximately USD 5.8 million) and the annual volume of transactions with one counterparty should exceed UAH 10 million (approximately USD 385,000). The old thresholds used to be UAH 50 million and UAH 5 million, respectively. 

The deadline for filing reports on controlled transactions used to be May 1 of the year following the reporting year. The deadline has been extended to October 1. Therefore, for 2017 the deadline for filing transfer pricing reports on controlled transactions will be October 1, 2018. The change provides taxpayers with additional time for analysis and for preparation of all necessary documents. 

In 2017, Ukrainian taxpayers supplying transfer pricing documentation have to provide additional information such as information on transactions with intangibles and others. At the same time, Ukrainian transfer pricing rules still do not provide for the three-tiered documentation requirements (consisting of master file, local file, and country-by-country report) recommended by the OCED/G20 Base Erosion and Profit Shifting (BEPS) Action Plan. In particular, there is no requirement yet to provide master file and country-by-country report under Ukrainian transfer pricing rules. Only the “local file” has to be submitted to tax authorities.

The sources of information for transfer pricing documentation have undergone changes as well. In addition to information from public sources, currently taxpayers may use any other available sources which contain information on comparable transactions and companies, provided taxpayers submit this information to tax authorities. 

Grouping of transactions has been introduced starting from 2017. Now it is possible to group controlled transactions with one counterparty in order to apply an appropriate transfer pricing method. Grouping is allowed when controlled transactions are closely interconnected, are a continuation of each other, or have a continuous or regular nature.

On July 4, 2017, the Cabinet of Ministers of Ukraine adopted Resolution No. 480, which defines the list of organizational forms of non-residents, transactions with which may qualify as controlled. The list includes organizational forms of companies which usually do not pay corporate taxes and/or are not considered to be tax residents in the states of their incorporation. The list contains 95 organizational forms of companies, from 27 jurisdictions. The vast majority of companies are partnerships and other similar entities (for example, LLP in the UK, K/S in Denmark, LP in Switzerland, and so on). This new development means that transactions with such entities will now be covered by the Ukrainian transfer pricing rules and need to be reported as such going forward.

Since 2017 the list of transfer pricing sanctions has also been expanded. There are new sanctions for failure to include all controlled transactions in the reports on controlled transactions in a timely manner and for failure to file the reports on controlled transactions or transfer pricing documentation in time. 

Official data indicates that during the 2013 reporting period (i.e., the first transfer pricing reporting period in Ukraine) 40 taxpayers were fined a total of UAH 9 million, while the number of fined taxpayers fined increased to 315 in 2015, with a total of UAH 92 million in fines imposed. Moreover, it has been reported that as of August 2017 the State Fiscal Service had completed 17 transfer pricing audits, with the number expected to increase, as 29 audits are currently pending and an additional ten are scheduled to start by the end of 2017. 

Ukrainian transfer pricing rules are revised and amended almost every year. Nonetheless there are still many gaps and topics which remain unaddressed by Ukrainian transfer pricing rules. Given a massive change of international tax and transfer pricing landscape globally following the BEPS project, Ukrainian transfer pricing rules are likely to need further adjustments soon in order to align with the BEPS developments.

By Illya Sverdlov, Legal Director, Head of Tax, Dmytro Rylovnikov, Senior Associate, DLA Piper Ukraine

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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