A commission agreement is quite a popular agency agreement, which is often used by taxpayers in their foreign economic activity. Given the fact that for the purposes of income tax assessment foreign economic transactions on selling products through non-residents agents are deemed controlled transactions, many questions arise as to various aspects of transfer price formation within such business transactions. For example, what would be subject to fiscal authorities’ control, would a transaction be controlled if a non-resident country is not listed in jurisdictions approved by the Cabinet of Ministers of Ukraine? In April 2016 the SFSU stated its position in its letter as to control of transactions with non-residents under agency agreements and explained what exactly shall be an object of regard and in which case.
In accordance with the provisions of the Civil Code of Ukraine, under an agency agreement one party (the agent) undertakes for a charge on behalf of the other side (the principal) to make one or several transactions in its own name, but at the expense of the principal. The essential terms of an agency agreement under which the agent agrees to sell or to buy property are conditions as of such property and its price. The principal should pay the agent fee in an amount and under procedure set up in the agency agreement. If the sum of remuneration is not defined, then it is paid on the basis of the usual price for such services. After making the transaction on behalf of the principal the agent should provide a report to the principal and transfer to the latter everything received under agency agreement.
In accordance with the Commercial Code of Ukraine foreign business activity of entities is economic activity which in the process of its conduct requires crossing the customs border of Ukraine by property (valuables). In accordance with the On Foreign Economic Activity Act of Ukraine it is activity of economic entities of Ukraine and of foreign economic entities based on relationships between them, which take place both in Ukraine and abroad.
Given all of the above transactions can be deemed controlled in terms of transfer price formation in case when on behalf of the principal-taxpayer the non-resident agent carried out foreign business transactions for sale of goods. That is, in the interests of the principal a transaction was carried out with a third party that is a foreign business entity, during which goods crossed the customs border of Ukraine.
Transactions are deemed to be controlled ones only in case of fulfillment (compliance) of cost criteria:
— Annual income of the taxpayer from any activity, defined by accounting rules, is more than UAH 50 million (excluding indirect taxes) for the respective tax (reporting) year;
— The volume of business transactions of the taxpayer with each counterparty, defined by accounting rules, is more than UAH 5 million (excluding indirect taxes) for the respective tax (reporting) year.
“A controlled transaction will be sale of goods to a third party by the principal through the agent, and in this case it does not matter in what state the non-resident agent is registered and whether such state is included in the list of jurisdictions approved by the Cabinet of Ministers of Ukraine. The party of a controlled transaction, information of which should be disclosed in the statement of controlled transactions, is a person who buys goods to which the principal sold its goods with the help of the agent. The subject of a controlled transaction is the buying and selling of goods”, explainsYaroslav Romanchuk, managing partner of International Legal Center EUCON. He adds that if non-resident, acting as the agent, is an associated person of the taxpayer, or the state, of which it is the resident, is included in the list approved by the Cabinet of Ministers of Ukraine, it will be necessary to verify compliance with the cost criteria for the sum of services provided under an agency agreement. And if remuneration exceeds UAH 5 million, excluding indirect taxes for the reporting year, the agent’s services will also be subject to control. “In this case remuneration amount should be included in the statement of controlled transactions and its level should be correspondingly confirmed in documentation on transfer price formation”, Mr. Romanchuk notes.