Ukraine: overview of new transfer pricing rules
Ukraine: overview of new transfer pricing rules
On 16 January 2013 the Ukrainian government approved the draft law “On amendments to the Tax Code of Ukraine with regard to transfer pricing”.
It is expected that the draft law will be considered by the Parliament in the nearest future, since the Head of the Tax Service of Ukraine, the Head of the Government and the President of Ukraine have all declared the need for adoption of this draft law. Currently, the draft law is published on the website of the Tax Service of Ukraine.
The most important changes that affect the transfer pricing rules of Ukraine include the following:
The list of controlled transactions:
• Business transactions between taxpayers who are qualified as related parties
• Transactions with non-residents who are registered in the state (territory) with a corporate income tax rate of at least 5% less than in Ukraine (i.e. less than 14% starting from 1 January 2013), or who pay corporate income tax at the rate of at least 5% less than in Ukraine
• The abovementioned transactions are qualified as controlled if the overall volume of taxpayers’ operations with each party equals or exceeds UAH 50M per calendar year
• As of now it is not fully clear whether the financial transactions and transactions with intellectual property rights will be treated as controlled.
Transfer pricing methods:
• Comparable uncontrolled prices (CUP) method
• Resale price method
• “Cost plus” method
• Net profit method
• Profit-split method
It is acceptable to use a combination of two and more methods to substantiate the price in a controlled transaction
Until 1 January 2018, the arm`s length price applied in transactions with related parties on export and import of the following group of commodities, is defined in accordance with the exchange quotation or list prices, published in specialized commercial bulletins: grain crops, animal and vegetable oils, ore, mineral fuels, in-organic and organic chemical products, metals and ferrous metal goods.
Should the above commodities be exported, the arm`s length price could be decreased by not more than 5%, and should the commodities be imported, then the arm`s length price could be increased by not more than 5%.
Determination of the arm`s length range:
• The procedure of calculation and application of the arm`s length range will be adopted by the Cabinet of Ministers of Ukraine at some future date
• If the price in the controlled transaction meets the arm`s length range, such price is deemed to be at an arm`s length level.
• All taxpayers are required to notify the tax authorities on the controlled transactions prior to 1 May of the year following the year in which transactions occurred
• Large taxpayers are required to submit documentation to the tax authorities on the controlled transactions prior to 1 May of the year following the year in which transactions occurred
• Regular taxpayers are required to submit documentation on the controlled transactions only upon the request of the tax authorities, within two months after receipt of such request
• Documentation should be supported by copies of primary documents which substantiate the occurrence of the controlled transaction.
Special tax audits:
• Special transfer pricing audits have been introduced
• The tax authorities are required to notify taxpayers of the planned transfer pricing audit within 10 days from the date of the decision on such audit
• The tax audit cannot last for more than 6 months, but can be prolonged (in certain circumstances) for a term of another 6 months
• The taxpayers may appeal against the transfer pricing assessments disclosed in the audit act within 20 days from the moment of obtaining of such act.
• The taxpayers may self-adjust the amount of tax liabilities in case the prices applied in the controlled transaction do not meet the arm`s length level
• Should the taxpayer adjust the amount of its tax liabilities, the other party to the controlled transaction – related party – may perform a correlative adjustment of its tax liabilities based on the arm`s length level. Correlative adjustments are to be agreed with the tax authorities within the specific procedure.
Reciprocal pricing arrangements:
• Large taxpayers may agree the transfer pricing method and the procedure of estimation of the transfer price with the tax authorities for a certain period.
• 5% оf the total amount of the controlled transaction – for failure to notify the tax authorities of the controlled transaction by the taxpayer
• 5% of the total amount of the controlled transaction – for failure to file the primary documents supporting the controlled transaction
• 100 minimum wages – for failure to file the transfer pricing documentation.
To minimize the impact of transitional problems, the penalty for any breach of the transfer pricing regulations, except for the penalties defined above, is UAH1 per breach for the period starting 1 January 2013 until 31 December 2013.
If you wish to evaluate or understand the potential impact of the new changes to the Tax Code on your business or
contemplated transactions in Ukraine, please feel free to contact your KPMG team – Craig Richardson, Oleg Chayka (KPMG in Ukraine) or Natalia Valkovskaya (KPMG in Russia).
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