New Transfer pricing rules in Ukraine: main points (updated version December 2013)

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1 New Transfer pricing rules in Ukraine: main points (updated version December 2013) I. Basics and Background II. III. IV. Operations which are subject to control Definition of related Parties Applicable Methods V. Reports, penalties and audit VI. VII. Tax adjustments Exceptions VIII. Open issues IX. News in brief I. Basics and Background New transfer pricing regulation in Ukraine came into force on September 1 st Ukrainian transfer pricing law is based on transfer pricing rules of Russia and at the same time it recognizes basic provisions of Organization for Economic Cooperation and Development. II. Operations which are subjects to transfer pricing control: With non-residents o related parties o registered under low tax residence (5% below Ukrainian CPT rate)

2 With residents of Ukraine related parties o Declaring negative CPT result of last year o Subject to special tax regimes (e.g.: agriculture) o Paying VAT and/or CPT at lower rates (e.g.: exporters) o Not payers of VAT and/or CPT at the year beginning The amount of such operations should achieve 50 million UAH without VAT per calendar year with one contractor. In other cases transfer pricing rules will not be applied. III. Definition of related parties Related parties are legal entities and/or natural persons, which may have influence on business results of their common activity: Own 20% and more of shares Assign a Director or 50% and more of Executive body or of Supervisory board members Have the same owners with 20% and more of shares Have the same Director or 50% and more of Executive body or of Supervisory board members Etc. IV. Applicable Methods Transfer pricing rules will be applied to calculation of Corporate profit tax (CPT) and Value Added Tax (VAT) from operations objects for transfer pricing control. Transfer prices may be calculated using five basic methods: 1. Comparable uncontrolled price method (CUP) 2. Resale price method 3. Cost-plus method 4. Profit-split method 5. Transactional net margin method The law allows combining two or more of the above listed methods. However, the 1st one (CUP method) is considered as a priority. Otten Consulting 2

3 V. Reports, penalties and audit The transfer pricing report of the current year must be submitted by a taxpayer till the 1 st of May of the next year, in case a taxpayer has been conducting operations - subject to transfer pricing control during current calendar year. If a transfer pricing report is not submitted, then a penalty in the amount of 5% from the total amount of transfer pricing operations will be applied. The first transfer pricing reporting in Ukraine must be submitted as a result of a period : in case a taxpayer conducts transfer pricing operations in the mentioned timeframe an amount of such transfer pricing operations achieves a limit set by law a deadline for such reporting is 1 st of May In addition the transfer pricing documentation is to be provided by a taxpayer for the tax control on a tax authority s request. Large taxpayers must provide transfer pricing documentation within 2 months, others within 1 month after obtaining the respective request. If a taxpayer doesn t provide the requested documents, a penalty in the amount of 100 minimum salaries will be applied (approximately 10k EUR). If a taxpayer doesn t provide a transfer pricing report and/or transfer pricing documentation it may become a reason for transfer pricing audit. Such audit may continue for up to 6 months, but may be additionally prolonged by another 6 months in case of having transfer pricing operations with non-residents. VI. Tax Adjustments A taxpayer has a right to adjust its CPT and/or VAT obligations to the level of taxes calculated at arm s length prices in case the contract price deviates from arm s length level. If a taxpayer doesn t make such adjustment, it will be made by tax authorities during transfer pricing audit and penalties will be applied in this case. For the period of the penalties for transfer pricing rules violation are set up at the level of 1 UAH. Afterwards usual penalties in the amount of 25%-50% from underpaid taxes will be applied. If a taxpayer has adjusted its CPT and/or VAT obligations to the level of taxes calculated at arm s length prices and has paid additional taxes, then the respective Otten Consulting 3

4 second party has the right to make a proportional adjustment of its CPT and/or VAT obligations (to reduce tax amounts), but only after the party obtains a confirmation for such adjustment from its tax authority. Proportional adjustments in transfer pricing operations with non-residents will be rather problematic, since this process requires cooperation between UA tax authority and tax authorities of foreign countries with respect to DTAs. VII. Exceptions The law sets up an exception for the period till Jan 1 st 2018 for export/import of some goods (crops, butter and oil, mineral ores, coal, petroleum, gas, electricity, chemicals, ferroalloy, steel, rolled metal, pipes) with contractors registered under low tax residence. Contract prices of such goods may deviate up to 5% from the arm s length level. For large taxpayers transfer pricing law gives a possibility to sign a Transfer pricing agreement with tax authorities. Such transfer pricing agreements will define an order of transfer pricing calculation for the operations subject to transfer pricing control (applied methods, documentation, sources of arm s length prices etc.) for a certain period. VIII. Open issues At the moment there are still some open issues which need to be additionally regulated and respective legal documents are still not in force, e.g.: o o o list of countries with low tax residents format of Transfer pricing reporting procedure of proportional tax corrections with non-residents IX. News in brief Within the period of September November 2013 some open issues of Transfer pricing regulation have been legally settled: Otten Consulting 4

5 definition of low tax residence has been clarified: wording of Transfer pricing law which defines the rate of CPT at low tax residence was changed from 5 percent and more below Ukrainian CPT rate to 5 percentage points and more below Ukrainian CPT rate (19%- 5 pct = 14%) list of special commercial editions of arm s length prices purpose has been approved, e.g.: Monthly information newsletter Overview of prices on Ukrainian and World markets (Derzhzovnishinform); Price digest of World markets (Ukrpromzovnishexpertyza) list of sources of arm s length prices has been approved, e.g.: Weekly edition Steel market: analytics, forecasts, scenarios ; official web-site of Agrarian exchange gov.ua/ procedure of market range of arm s length prices/arm s length margin calculation and applying has been established procedure of signing the voluntary Transfer pricing agreements between tax payer and tax authority has been established limit of transfer pricing operations for the period of has been clarified, namely: o UAH 50 million limit is applied to the whole year of E.g. if it consists of UAH 20 million before and UAH 30 million after , then UAH 30 million must be reported o If UAH 50 million limit is achieved before , it is not necessary to submit reporting if there are no controlled operations after Otten Consulting 5

6 Contacts Olga Geychuk Senior Accountant-Expert Thomas Otten CEO Natalia Shevchenko CFO Otten Consulting LLC Address: vul. Turgenevska 38, Kyiv, Ukraine Phone: +380 / 44 / Fax: +380 / 44 / Web: Disclaimer and copyright This newsletter is produced by Otten Consulting LLC. The material contained in this mail is provided for general information purposes only and does not contain a comprehensive analysis of each item described and does not purport to constitute legal or professional advice. The information provided relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this mail. All rights reserved. Information may be shared; however, reproduction in any medium requires our permission. Otten Consulting 6