Having adopted the amendments to the Tax Code of Ukraine on December 21 the Parliament of Ukraine included several unexpected surprises to the taxpayers for the year 2017. Several amendments that were made such as article 39 of the Tax code of Ukraine in relation to the transfer pricing.
While overall the amendments should be considered as positive and logical, several of them should require the explanation by experts and specialists.
Let us briefly point out some innovations that can be seen as positive while some as negative.
First of all, the standard of value to consider the operation as controlled has increased:
- the taxpayer annual income standard is increased three times and should exceed 150 million UAH (compared to the previous version stating the threshold to be 50 million UAH)
- the standard of the annual transactions volume with each non-resident-counterparty is increased two times and should exceed 10 million UAH (compared to the previous version stating the threshold to be 5 million UAH).
This liberalization takes off the pressure and then allows small business to enter international markets. As general practice of 2016 showed, to follow the requirements related to the identification of the controlled transaction and the transfer pricing reporting by the small business, it is necessary to engage the high cost specialists or to hire a special person to outsource. Those who ignored this matter suffered significant penalties for untimely submission of the reports or indicated no controlled transaction into the report.
Secondly, the deadline to submit the transfer pricing reports is shifted from May 1 to October 1, allowing the taxpayers more time for audit and identification of the controlled transactions as well as preparation of the correct transfer pricing report.
Thirdly, the amendments were made to the size of the penalties for breach of the transfer pricing legislation. In particular, they delimited the penalties for the failure to submit transfer pricing report or to include the information about all controlled transactions for the period into the report including the further failure of the taxpayer to submit the transfer pricing report within 30 days after the due date of the penalty is over. Although the payment of the penalty for the failure to submit the report or to provide the information about the controlled transaction does not relieve the taxpayer of its obligation to submit the report and in case of the further failure the taxpayer is obliged to pay the penalty of 5 minimum survival income for each day of the delay.
The amounts of the penalties were also changed. Now the penalty amount is directly connected with the minimum survival income increasing UAH equivalent compared to the last year.
We also recommend to pay attention to the extension of the list of the persons with whom the transactions will be considered as controlled. Besides the transactions with the engaged non-residents, nonresident commissionaires and non-residents included in the list of the Cabinet of Ministers of Ukraine, the transactions with non-residents paying no income taxes (corporate tax) including tax for the income received abroad or companies being not resident of the countries where they are registered in will be considered as controlled.
Therefore, these amendments can be used for different manipulations. Definitely they will result identification of the transactions with the companies such as limited partnerships, as controlled. Such structures are often used to conduct international business. Furthermore, to check if the counterparty is a tax resident, the controlling authority will probably need to request from the taxpayer to provide the apostilled Tax Residence Certificate. It will be the obligation of the taxpayer to obtain and to pay for it.
Besides, the new amendments specify the requirements for the transfer pricing documents and procedure of their self-correction.
Obviously the auditor support during the preparation and submission of the Report about the controlled transactions will ensure identification of the whole range of the existing controlled transactions, provide with the reasonable method to meet the conditions of the transfer pricing to the arm's length principle allowing to prevent the imposition of the (financial) penalty specified by the Tax Code of Ukraine.
It is necessary to stress that 2017 is the year of significant changes to be made in the field of the business legal regulation which along with the transfer pricing includes the reporting about the property and income, the activities of the private entrepreneurs, the amount of the minimum survival income, estimation of the urban lands, authorization in the field of economy and in many other spheres.
Nowadays, One-stop Consultancy is the main principle of rendering effective services to business allowing the client company to optimize taxes, secure proper audit and accounting, legal support and protection, registration and arrangement of international business.
Volodymyr Garkusha, Senior Partner at K.A.C. Group