Draft law No. 1210: the audit report becomes mandatory
I would like to comment on how the recently adopted draft law No. 1210 supplements the Tax code of Ukraine in terms of mandatory audit of financial statements and what this means for Ukrainian companies.
- The audit report becomes part of the TP documentation
Draft law No. 1210 expands the scope of transfer pricing documentation (Article 39.4.6 of the Tax Code of Ukraine) by adding a copy of the audit report (if the audit is mandatory for the taxpayer).
“add sub-paragraph 39.4.6 with paragraphs “i”, “j” and “k” as follows:
- j) a copy of the audit report on the taxpayer’s accounting (financial) statements for the reporting period (reporting periods) for which transfer pricing documentation is submitted (if its availability is mandatory for the taxpayer)”
Thus, if a Ukrainian company simultaneously falls under the category of medium-sized or large enterprises, or companies of public interest, and at the same time falls under the TP, it is critically important for this company to pass a mandatory audit for the year 2019.
Failure to perform a mandatory audit for such a company may not only face sanctions under Article 163-16 of the Code on Administrative Offences of Ukraine, which I previously wrote about in another article, but also sanctions in the field of TP for submitting incomplete documentation (without a copy of the audit report).
Recall that for failing to submit transfer pricing documentation (in accordance with Article 120.3 and 120.4 of the Tax Code of Ukraine), the taxpayer will have to pay a penalty of 3% of the amount of controlled transactions that are not submitted documentation, , but shall not exceed 200 minimum living wages for an able-bodied person established by law as of January 1, tax (reporting) year for all controlled transactions made in the relevant reporting year. For the reporting year 2019, the fine will be 384 200 UAH.
Companies must submit a report on the TP for 2019 no later than October 1, 2020. Thus, October 1 can be considered as the second deadline for passing the mandatory audit (in addition to April 30 and June 1 under the Law “On accounting and financial reporting”).
- The audit report becomes part of the tax report
After being finalized by the Verkhovna Rada, the voted version of the draft law No. 1210 introduced amendments to Article 46.2 of the Tax Code concerning the filing of a tax return.
In fact, the fiscal value of mandatory audit is legalized: the audit report officially becomes part of the tax reporting.
Before the changes to Article 46.2, there was some uncertainty: the deadline for filing a tax return was not changed (60 calendar days after the reporting year), while the deadline for conducting mandatory audits for different types of companies is April 30 or June 1.
Formally, after the end of the audit, the company was not obliged to report to the State Fiscal Service of Ukraine on the results of the audit, including the clarifications in the reports. The issue of publishing reports together with the audit report (control and sanctions mechanism) also remained unresolved.
Draft law No. 1210 regulates uncertainty by introducing an obligation for enterprises to submit financial statements to the Supervisory authority together with an audit report no later than June 10 of the year following the reporting year:
Income tax payers who, in accordance with the law of Ukraine “On accounting and financial reporting in Ukraine” are required to publish annual financial statements and annual consolidated financial statements together with the audit report, submit annual financial statements to the Supervisory authority, which are subject to disclosure together with the audit report no later than June 10 of the year following the reporting year.
It should be noted that the penalties for failure to submit (late submission) of reports together with the audit report are regulated by Article 120.1 of the Tax Code of Ukraine (as well as tax returns), and they are very moderate: a fine of 170 UAH or 1 020 UAH for repeated violations within a year. At the same time, the moderation of the amount of fines does not negate the fact of their existence.