The new regime aims to improve control over transfer pricing with additional documentation and disclosure requirements which seek to ensure that transactions between related parties – newly defined in the legislation – are conducted at arm’s-length.
The most significant amendments to Ukraine’s transfer pricing regime include:
· Legal introduction of arm’s-length principle for TP purposes;
· Scope of related parties expanded;
· Transactions with non-residents (even non-related) may be considered controlled if non-residents are registered in jurisdictions which do not publicly disclose information on shareholding structure, do not have information exchange agreements with Ukraine or have a corporate income tax rate 5% lower than Ukraine’s (i.e. lower than 13%);
· Amount of transactions with one counterparty should exceed 3% of the taxpayer’s annual income to qualify as controlled transaction;
· New hierarchy of TP methods (CUP, resale price/cost plus, TNMM/profit split);
· CUP mandatory for export and import of commodities transactions with certain non-residents; and
· Proof of burden shifted from tax authorities to taxpayers.
Penalties
Failing to report a controlled transaction will result in a fine which amounts to 5% of that transaction.
Any company that fails to submit transfer pricing documentation will receive a penalty of up to 200 times the minimum wage.
Compliance burdens
The new provisions extend the scope of controlled transactions and are likely to increase the administration burden and cost for companies operating in Ukraine.
While some controlled transactions between related Ukrainian residents have been excluded, the scope for controlled transactions between non-residents has been substantially broadened.
The maximum period for a transfer pricing audit has also been extended to up to 30 months and the “look back” period has been set to 2555 days (seven years). These timeframes could lead to drawn-out disputes and burdensome audits.
Uncertainty and inexperience
Previous legislation, which only allowed specialised transfer pricing teams to conduct transfer pricing audits, has been abolished. This has created uncertainty and suggests there is a possibility that local tax authorities will soon conduct audits. With a lack of expertise, risks and disputes would surge.
“The local tax authorities are absolutely not aware of transfer pricing concepts and best practices that will most likely result in the biased and subjective interpretation and application of transfer pricing rules,” said Dmytro Donets of DLA Piper.
Advice for taxpayers
While it is clear the scope of transactions falling under transfer pricing control will increase dramatically, “the new provisions should apply for the period starting from January 1 2015. Thus, there is at least time to be prepared for new challenges,” said Donets.
Taxpayers should:
· Get themselves up to date with the new guidelines;
· Review their transfer pricing approach;
· Closely monitor developments; and
· Prepare themselves for more legislative changes in the near future.
“After analysis of the new legislation there is a strong feeling that the [government’s] transfer pricing control will increase in the near future. Thus, it appears that major comments and remarks from business were not taken into account by the legislator,” said Donets.
