Inspections of controlled transactions pick up speed

According to the rules of the Tax Code of Ukraine,tax control in the sphere of transfer pricing is undertaken by monitoring and inspecting the calculation of completeness and of payment of income tax in controlled transactions.

Such information, obtained during monitoring of economic activities, is the basis for decision adoption as of inspections conduct. According to Yaroslav Romanchuk, managing partner of International Legal Center EUCON, individual taxpayers have already evaluated the effectiveness of monitoring measures, because those who carried out controlled transactions, but did not report them, have already received letters from the SFSU with a request to provide the appropriate explanations. Having analyzed information received from a taxpayer the inspection is usually carried out and in case of confirmation of the conduct of controlled transactions, the company shall have to pay a fine. “Payment of the fine does not relieve from obligation of submitting a report itself,” says Mr. Romanchuk. “We were addressed by quite a few economic entities that did not even know that they carried out controlled transactions and were shocked by the amount of fine,” he added.

In fact, the fine is quite significant — 300 minimum wages established as of 1 January of the tax year. For non-submission of statements for 2015 such a fine shall come to UAH 365,400. According to Mr. Romanchuk, if a taxpayer unassisted identifies the fact of non-submission of statements and decides to change the situation not waiting for controllers, he will still have to pay this fine, as Article 120.3 of the Tax Code of Ukrainestipulates the imposing of a fine both in case of non-submission of statements and in case of late submission. Moreover, an inspection could establish the fact of incomplete declaration of controlled transactions. In this case the company will be fined at a rate of 1% of the amount of such transactions, but not more than 300 minimum wages.

The main topic of attention during monitoring are the foreign transactions of taxpayers, comprehensive information about which is available from the customs authorities. Therefore, taxpayers need to pay attention to one more aspect of monitoring. Of course, not all transactions of economic entities shall be recognized as controlled ones, as this depends on reaching their assigned cost criterion. To date, in accordance with Article 39 of the Tax Code of Ukraine, concurrent compliance with the following conditions is necessary when:

— The annual income of a taxpayer from any activity defined by accounting rules exceeds UAH 50 million (net of indirect taxes) for the financial year in question;

— The volume of business transactions of a taxpayer with each counterparty, defined by accounting rules, exceeds UAH 5 million (net of indirect taxes) for the respective tax (reporting) year.

On carrying out transactions with non-residents, whose countries of registration are included in the list of states defined by the CMU, and which are not controlled ones, existence of cl.140.5.4 of the Tax Code of Ukraine should be kept in mind”, says Larysa Vrublevska, partner of ILC EUCON. According to the rules set by it, the financial result of a reporting period is increased by 30% of the cost of goods, including fixed assets, works and services. “The only case in which these requirements could be omitted — if the price level is reasonable and the sum of such costs is confirmed by the documentation drawn up under the rules of Article 39 of the Tax Code of Ukraine. So when purchasing goods and services from non-residents from the list, the price should be substantiated in any case”, she claimed.

The activity of state tax controllers related to reporting control does not prevent the rising number of unscheduled inspections intended to monitor price levels. So, in 2015 more than 10 of those were conducted, with three of them being completed in the same year. All transactions analyzed were export ones and controllers tried to prove that in those cases there was understatement of tax liabilities. In 2016 new inspections began and their remit is much broader. Apart from exports, these are purchase of corporate rights and transactions with intangible assets. The criteria, which increase risks to be included to the list of companies inspected, are systematic losses, atypical transactions, and the low level of profitability if compared with the industry average.

Source: The Ukrainian Journal of Business Law

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