On July 18, the Large Taxpayers Office of the State Fiscal Service of Ukraine hosted a seminar for business representatives where the key aspects of transfer pricing reporting were discussed.
Partner at Kreston GCG Andrey Popov attended this venue and emphasized its top-notch organization, its practical orientation, and the readiness of controllers to have meaningful talks with the business.
Following up on the results of this event, Andrey Popov prepared a list of best recommendations from the State Fiscal Service:
1. Quality of documentation. The availability of duly prepared documentation alone can save a taxpayer from transfer pricing risks. The SFS Audit Department has already initiated around 60 inspections. In many cases, the examination can cover documents for several years, and around 50% of the questions and complaints pertaining to controlled transactions can be resolved after fiscal authorities examine taxpayer’s reports.
2. Quarterly adjustments. The Ministry of Finance and State Fiscal Service have a different outlook on whether one should or should not make quarterly adjustments to the income tax in pursuance of Article 140.5 of the Tax Code of Ukraine (when importing from low-tax jurisdictions or certain incorporation forms). The State Fiscal Service believes it would be more appropriate to make an advance of the budget funds and 30% adjustments on a quarterly basis. From there, a reverse adjustment may be made according to results at the year-end.
We advise preparing the documents on controlled transactions quarterly. Another option is to find an agreement with the consultant that there may be interim transfer pricing documents prepared (quarterly, semi-annual) if required.
3. Relevance. The documents requested by controllers in response to transfer pricing regulations must comply with requirements pertaining to the structure and contents relevant at the time of request rather than at the controlled transaction. In other words, if in 2016 you prepared documents covering the controlled transactions for 2015, and the request came in 2019, then these documents should be updated to meet the newest requirements.
Our clients can rest assured of our transfer pricing deliverables since our support covers the entire period of potential examination on controlled transactions specified in Article 102.1 of the Tax Code (up to 7 years), including the updates to documents when requested.
4. An Advance Pricing Arrangement (APA) can become a very effective tool to minimize tax risks when it comes to controlled transactions. However, the State Fiscal Service currently reviews only one APA application, which has not been agreed yet.
5. Controllability of dividend payments is rather an ambiguous issue. On one hand, dividends do not constitute expenses in the accounting. On the other hand, they still have a certain effect on the financial result. Since contentious issues are unlikely to be always interpreted in favor of the taxpayer, it is recommended to include dividend payments in the report on controlled transactions but prepare no documentation on such dividends.
6. BEPS in Ukraine. Companies should prepare for the BEPS plan (Base Erosion and Profit Shifting) in Ukrainian transfer pricing. More specifically, the changes will pertain to controls over the prices for services obtained by Ukrainian taxpayers from parent companies abroad. To confirm the expenses on such services, a new concept of ‘business purpose’ emerged. To that note, the new revision of Article 39 of the Tax Code of Ukraine is expected to outline a loyal approach to substantiation of the services with low added value. Their margin must not exceed 5%.
7. Control of transactions with entities from low-tax jurisdictions as specified in the Resolution of the Cabinet of Ministers No. 480 as of 4 July 2017. First and foremost, this Resolution touches upon transactions with partnerships in commendam that are very common in Germany (KG), Poland (Sp.K), and other countries. It is important that a confirmation of taxes paid by the founders of partnerships in commendam (whether legal entities or natural persons) will not constitute sufficient basis for recognizing transactions with these partnerships as uncontrolled since the partnerships themselves do not pay the corporate tax in most countries.
It is also possible that the list of incorporation forms specified in Resolution No. 480 will be subject to amendments same as it was with the list of low-tax countries and territories.
In any event, Kreston GCG recommends Ukrainian taxpayers to pay attention to the counterparties they do business with and see if those are mentioned in the Resolution No. 480. The perfect option will be preparing a report and documents on transactions with these counterparties in accordance with Article 39 or seek personal advice from the State Fiscal Service to confirm if the incorporation forms fall under the controlled transaction criteria.