With the support ofTax Regulation
Legislation on transfer pricing came into effect on 1 September, one year ago. In general, the legislation was accepted by the community with understanding, especially as the outflow of capital to low tax jurisdictions has continued in recent years. However, there was much discussion and bitter criticism in respect of some provisions on high penalties and control over transactions of related persons — residents of Ukraine. “The legislation was approved within a very short period of time. There was almost no time to get used to it. And understanding of the practical application of the legislation by both taxpayers and the tax agency was gained as it was applied throughout the first year”, Yaroslav
Romanchuk, managing partner of the
International legal center EUCON, says.
In the space of a year the legislation was amended twice. First, they settled the situation with 5% points for the tax rate of low tax jurisdictions.
On 30 May 2014 more extensive changes to the Tax Code came into effect. The reporting deadlines have been shifted till 1 October 2014.
Changes significantly reduced penalties. The failure to file the report implies a fine of 100 minimum wages (earlier, the penalty came to 5% of total controlled transactions), and the failure to file documentation — 10 minimum wages (before, it was 100 minimum wages). Besides, the penalty for mistakes will be UAH 1 till the end of 2014.
Mr. Romanchuk said that many issues of practical application in the legislation have been addressed in the summarized tax advice for last year, which has been supplemented and it currently contains answers to over 40 questions.
In general, enforcement of transfer pricing legislation faces many difficulties. The practices of the International legal center EUCON enable us to outline the key problems of application:
1. Lack of information in the sources. Information is very insufficient. It does not exist for many groups of goods, services, works. First of all, the official sources include orders of the Cabinet of Ministers of Ukraine to obtain information about market prices for the first method — a method of comparable uncontrolled prices. In case of special rules being set for the export and import of certain commodity groups till 2018, few exchanges can provide information on transactions commodities, and there are no quotes. There is no approved list of exchange of specific goods, so that taxpayers could clearly discern which products are traded and which are not. There is not enough information to recognize comparable transactions according to established criteria (it is necessary to compare commercial and financial terms). According to Mr. Romanchuk, taxpayers are unable to conduct a full analysis of the comparability of terms.
2. Confirmation of a chosen rate by non-resident. According to tax advice, in order to confirm the tax rate, a non-resident should provide a certificate issued by the competent authority of his country (tax agency, Ministry of Finance, etc.) with proper legalization and translation. “Practically, it is impossible to obtain such certificate from a non-resident”, Yaroslav Romanchuk says, adding that sometimes there are situations when the country of a non-resident is placed in the list of low-tax jurisdictions, but a given person pays tax at a rate higher than 13%. In such case, the supervisory agency believes that transactions are not considered controlled if the relevant certificate is presented. “Certainly, it works in favor of taxpayers, but it is still a serious problem of obtaining a certificate from a non-resident”, the expert said.
3. Recognition of a transaction as a controlled one with related resident persons if they pay taxes at a basic rate for the controlled transaction, but in case of export transactions, taxes on repatriation, and transactions with securities.
“In this regard, the supervisory agency did not change its position during this year, — says he. — I think it would be logical if a contractor wouldn’t apply the basic rate for the same controlled transaction or for the subsequent sale. Then, of course, the transaction could be considered a controlled one”.
4. Recognition of a transaction as a controlled one with related resident persons in the event of further independent specification of the taxable object by the income tax (negative value). According to Mr. Romanchuk, it is also a very serious problem — taxpayers need to monitor each other’s statements. “We always recommend that our clients include a special provision to an agreement if such person is a related resident person —
an obligation to send a written notice on subsequent clarification of the annual declaration”, he says.
5. A problem of relation for state-owned enterprises: now, virtually all state-owned enterprises are related on the basis of ownership of corporate rights.
These make up just a part of the problems in respect of the legislation on transfer pricing. All these problems need to be solved soon and EUCON experts are working on draft changes to legislation in a working group at the Ukrainian Ministry of Finance.