Tax Regulation (#09 September 2014)

With the support ofTax Regulation

Amendments to the Tax Code of Ukraine pursuant to Act No.1260-VII of 13 May 2014 required appropriate amendments to the summarized tax explanation on transfer pricing from the previous year. In July 2014, order No.368 of the Ministry of Revenue and Taxes approved a new explanation, which contains answers to forty questions by taxpayers. As Yaroslav Romanchuk, managing partner of the International legal center EUCON says, half of the questions were answered in the previous explanation. Moreover, responses to some questions completely contradict the previous opinion of the Ministry.

“During the seminars that are held at our Transfer Pricing School for chief accountants and financial directors, most questions concerned calculation of the value criteria of controlled transactions and the search of comparable transactions. Now, the situation with the value criterion has become more or less clear”, he admitted. The most significant amendments in the explanation relate to calculation of the value criterion of UAH 50 million. According to the new explanation, the calculation does not take into account loans, deposits, credits, repayable financial assistance, dividends, or the cost of investment. (Before, the Ministry of Revenue and Taxes was of the opinion that all of the above was to be taken into account.) In case of financial services, it concerns only the principal amount, and not the interests accrued under contracts. Charging interest is a payment for the service and the interest is taken into account during the calculation. As to the position of the Ministry about not including dividends and investments, it confirms the approach that only purchases and sales of goods, works and services are included in the calculation, Mr. Romanchuk notes. And it does not include all business transactions in total. In addition, there are no restrictions for payments made to low tax jurisdictions. “Speaking about the 50 million criterion for imported raw materials for tolling schemes and the exported finished products, the answer is clear that there is no need to include that in the calculations, if the supplier is a non-resident related person. But, of course, the cost of processing such raw materials should be included in the calculations”, he adds.

The explanation regulates issues of engaging intermediaries/agents for the sale of goods, for example, non-resident related parties. If the sum of a transaction falls within the value criterion, such a sale has signs of being a controlled transaction. The main argument is that ownership of the goods passes directly to the buyer — a related person.

Thus, taxpayer-consignors should check the status of persons who are buyers of goods.

Overall, this response by the Ministry confirmed that a transaction between a consignor and a buyer is a controlled one, Yaroslav Romanchuk explains. This means that if a consignor is a related party or a non-resident from a low tax jurisdiction, transactions with such person do not come under the description of controlled transactions. But again, this does not include the value of agency fees.

In case of one sale of goods through an agent, the price should be accordingly controlled only in one transaction. In our case, it is a transaction for selling goods to a buyer. Thus, in agency transactions through related persons or non-residents, we control the amount of compensation.

Barter transactions are included in the calculation of the value criterion. But there are certain features. Since under barter contracts each party acts both as a seller of goods (works, services) and a buyer of the bartered goods, works and services, such transactions are treated as two separate transactions, and the total amount of the sale and purchase is taken into account for the calculation. “The position of our experts about barter transactions is now confirmed by the conclusion of the Ministry”, Mr. Romanchuk stressed.

If a taxpayer enters into transactions with branches of a company and the parent company — a legal entity, the total value of all transactions is taken into account for the calculation of the value criterion. “We completely support this conclusion, because there is only one legal entity that is a party to the contract”, he added, noting that issues are being resolved over time: “However, such explanations should have been released much earlier. And we will continue to work on improving legislation on transfer pricing in the best interests of taxpayers”.

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