All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Future challenges in Ukrainian transfer pricing disputes

ukraine-flag.jpg

Svitlana Musienko and Dmytro Donets, of DLA Piper Ukraine, analyse the approach of the Ukrainian courts in transfer pricing disputes.

dla-piper-logo.jpg

Ukraine’s major transfer pricing reforms took effect on September 1 2013. Generally, the new rules are OECD-based, though some exceptions exist.

While these new and technically complicated rules represent untested waters for all stakeholders, it is uncertain whether Ukrainian taxpayers may rely on the local judiciary system to protect themselves against the excessive pressure which is likely to be applied by the tax authorities.

With that in mind, it is useful to have a look at the court practice existing to date.

Before the transfer pricing reform was launched, Ukrainian laws did not contain sophisticated transfer pricing regulations. In practice, out of a variety of methods, only the comparable uncontrolled price method was used.

While applying the comparable uncontrolled price method, the tax authorities often ignored comparability requirements for choosing comparables. Together with the attitude of the tax authorities towards cash-collection caused by the stripped state budget, this resulted in a large number of tax reassessments, especially as far as commodity transactions were concerned.

This tax authority approach is still evident. A recent example concerned taxpayers in the Ukrainian grain market applying the comparable uncontrolled price method to futures contracts. The decision in case #813/246/13 was delivered by the Lviv Region Administrative Court on July 10 2013.

The background of the case is that the Ukrainian grain exporter concluded futures contracts which fixed the grain price as at the contracts' date where actual delivery happened in months to follow. The contracts were registered through the Ukrainian agrarian stock exchange.

The tax authorities challenged the export price saying it did not meet arm's-length standards. Their argument followed that at the moment of actual shipment of grain, an average market price for grain was higher than the one used by the taxpayer. To put it simply, the authorities got it all wrong and confused spot and futures contracts concepts. The corporate profits tax reassessment which followed was appealed by the tax payer through the court procedure.

Having analysed the facts and circumstances of the case, the administrative court of the first instance delivered the decision in favour of the taxpayer. The court's decision was based on the following findings:

· Existence of the export contract concluded through the agrarian stock exchange indicated that the grain was sold at the arm's-length price as of the date of the conclusion of the contract and not as of the date of the actual grain shipment;

· Tax authorities have not analysed important comparability factors such as batch volume, shipping method, delivery basis and qualitative characteristics of the grain; and

· Tax authorities failed to indicate explicit (publicly available) sources of information to establish arm's-length prices of grain which were used for the tax reassessment.

Although this decision of the first instance court is yet to be confirmed by the administrative appeal and the higher administrative court, it serves as an extremely encouraging signal.

To conclude, some of the Ukrainian courts had a proper understanding of transfer pricing concepts and comparability requirements even before the transfer pricing reform was adopted.

Taxpayers are advised to stay vigilant and prepare themselves to defend against future challenges. Do your homework: documentation is likely to be the key tool to stand your ground in the courts.

By principal Tax Disputes correspondents for the Ukraine:

Svitlana Musienko, partner and head of tax, DLA Piper Ukraine (svitlana.musienko@dlapiper.com)

Dmytro Donets, senior associate, DLA Piper Ukraine (dmytro.donets@dlapiper.com)

more across site & bottom lb ros

More from across our site

Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
Tax directors have called on companies to better secure their data as they generate ever-increasing amounts of information due to greater government scrutiny.
Incoming amendments to the treaty could increase costs on non-resident Indian service providers.
Experts say the proposed minimum tax does not align with the OECD’s pillar two regime and risks other countries pulling out.
The Malawian government has targeted US gemstone miner Columbia Gem House, while Amgen has successfully consolidated two separate tax disputes with the Internal Revenue Service.
ITR's latest quarterly PDF is now live, leading on the rise of tax technology.
ITR is delighted to reveal all the shortlisted firms, teams, and practitioners for the 2022 Americas Tax Awards – winners to be announced on September 22
‘Care’ is the operative word as HMRC seeks to clamp down on transfer pricing breaches next year.
Tax directors tell ITR that the CRA’s clampdown on unpaid taxes on insurance premiums is causing uncertainty for businesses as they try to stay compliant.
HMRC has informed tax directors that it will impose automated assessments on online sellers with inaccurate VAT returns, in a bid to fight fraud.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree