Changes in transfer pricing: new requirements of the adopted Draft Law No. 1210
On January 16, 2020, the Verkhovna Rada adopted in the second reading the Draft Law that introduces a three-level structure of transfer pricing (TP) documentation for international groups of companies, which includes Local file (TP documentation), Master file (global TP documentation), and Country-by-country reporting (CbCR).
We will consider in the following article the main new requirements of the adopted Draft Law No. 1210.
In addition to the already existing criteria for recognition of parties as related, a new one was added: “when conducting transactions by entities without the status of a legal entity with a related party of any of the parties to the joint venture agreement, whose contributions to the common property are 25 percent or more, entities without the status of a legal entity (of joint venture agreement) and such a related party of any of the parties to such an agreement are deemed related”.
In addition, the dramatic change is the increase in the percentage of corporate rights ownership from 20% to 25%, for which persons are recognized as related. This change can also be tracked in Article 39 of the Tax Code of Ukraine in the context of the use of information on comparable legal entities for the purpose of substantiation of the conditions of the controlled transactions under the arm’s-length principle.
The definition of the notion of quoted prices has been added to Article 14 of the Tax Code of Ukraine. According to it, the quoted prices are the prices of the commodity in the corresponding period, which were received in the international commodity market. A quoted price is defined as the price (average price) and/or the range of prices on a certain date or period.
This innovation is aimed at transforming so-called exchange commodities into commodities as well as at establishing a more transparent and clear process for justifying controlled transactions, where commodities will be featured. In this case, such justification will be carried out using the comparative uncontrolled price (CUP) method as a priority.
The taxpayer conducting controlled commodity transactions shall inform the supervisory authorities about the conclusion of the respective agreement (contract). This notification will serve as documentary evidence that the parties to the controlled transaction had agreed to the material terms of the agreement (contract) at the time of entering into such an agreement.
Thus, the taxpayer is entitled to compare the price of the controlled transaction with the quoted prices as of the nearest date to the price formation date agreed upon by the parties to the controlled transaction.
Otherwise, the supervisory authority will compare the price of the controlled transaction with the quoted prices on the date of transfer of ownership rights of the object of the controlled transaction or on the date of shipment of goods under the commodity transportation document.
Please note that the Cabinet of Ministers of Ukraine determines the list of commodities. In addition, the Central Executive Body that implements the state tax policy publishes the recommended list of sources of information for obtaining quoted prices.
Verification of economic (business) purpose of transaction
The next requirement is the establishment of criteria for the absence of a reasonable economic (business) purpose for the taxpayer in transactions with non-residents, namely:
- the main purpose or one of the main purposes of the transaction and/or its result is the non-payment (partial payment) of taxes and/or reduction of the taxable profit of the taxpayer;
- in comparable conditions a counterparty would not be able to buy (sell) such works (services), intangible assets, other objects of business transactions other than goods from non-related parties.
From now on, the taxpayer is required to provide a justification of the economic feasibility (economic benefit) of the completed transactions and the availability of a business purpose (for transactions other than commodity ones) in the TP documentation. If the supervising authority proves that completed transactions have no economic (business) purpose, the financial result from the taxpayer’s operating activities is increased by the amount of expenses incurred by the taxpayer in such transactions with non-residents.
Adjustment of financial result
According to the adopted amendments, the financial result of the taxpayer is increased by 30% of the cost of goods, works and services sold to residents of low-tax states (territories), and counterparties, whose legal status is included in the list approved by the Cabinet of Ministers of Ukraine.
Similar to the Paragraph 140.5.4 of the Tax Code of Ukraine, the requirement for the taxpayer to apply the above adjustment can be avoided if the operation is not controlled and the taxpayer confirms the amount of such income at arm’s-length prices without submitting a report.