Measures for de-offshorization in Ukraine

The fight against offshores intensified around the world after the 2008 financial crisis. The main focus was on combating tax evasion, exchange of tax and financial information, transparency and the disclosure of beneficiaries.

According to Yaroslav Romanchuk, managing partner of International Legal CenterEUCON, the major initiatives on de-offshorization at international community level are measures for information exchange — Convention on Mutual Administrative Assistance in Tax Matters and BEPS (Base Erosion and Profit Shifting), which many experts called the most fundamental changes in international tax rules. This plan was approved by G20 in the autumn of 2015, with 4 points of the plan (out of a total of 15) dedicated to transfer pricing. To date 103 states, including Ukraine, have joined the Convention. However, exchange mechanisms provide for the existence of bilateral or multilateral agreements. At the moment, a multilateral agreement on automatic exchange between competent authorities has been developed and according to the latest information it has been signed by 83 jurisdictions. Ukraine is only planning to sign it.

It’s difficult not to mention showy tax proceedings — including those involving large corporations (Apple in Ireland) and the Panama securities scandal, which are intended to force multinational companies to pay taxes.

Ukraine is not member of OECD and is not part of the G20 group. However, our country simply will not be allowed to stay away from these processes, which are gathering speed.

Measures for de-offshorization currently in place:

#1. Tax legislation in the field of TP has been in force since 1 September 2013.

— Transactions considered as controlled are those with non-resident related parties, non-residents from the list of low-tax jurisdictions, approved by the Cabinet of Ministers, sale of goods through non-resident commission agents.

#2. Restrictions on transactions with offshore companies came into force (Clause140.5.4 of the Tax Code of Ukraine, according to which financial result of the reporting period is to be increased by 30% of the value of such goods, works, services purchased from non-residents); in other words only 70% of the cost is allocated to expenses.

There are precedents for additional charges under this article. According to the last paragraph of this article, such adjustment may be waived if the taxpayer justified the transaction price by rules of transfer pricing, i.e. in documentation.

#3. Clause 140.2 of the Tax Code of Ukraine came into force (rule of “thin capitalization”).

At the moment this rule usually implies that the payer, whose sum of debt liabilities to non-resident related parties exceeds the amount of its own capital by more than 3.5 times (for financial institutions and companies engaged exclusively in leasing activities — more than 10 times), increases its financial result subject to the tax on accrued percentage in accounting records in excess of more than 50% of sum of financial result before taxation, of financial expenses and depreciation allocations.

#4. Regulations on procedure of analysis and verification of documents (information) on financial transactions and their participants by banks, approved by Decree No. 369 passed by the NBU Board of 15 August 2016, has come into force.

According to this document, a participant of a financial transaction, which is registered in the country, entered by the Cabinet of Ministers of Ukraine in the list of offshore zones/low-tax jurisdictions, shall undergo additional verification by the bank.

The bank may check the documents on the ownership structure, ultimate beneficial owners, content of activities of participants of a transaction, origin of funds, etc.

#5. Introduction to the Unified State Register of information about final beneficiary legal entities and final beneficiaries of their founders (the Act of Ukraine No.1701-VII of 14 October 2014)

Focus on de-offshorization is currently being declared by Ukrainian President Petro Poroshenko and the government. The goal to be attained is that of improving the investment climate and combating tax evasion. Through the following:

— Preparation of bills on de-offshorization of the Ukrainian economy;

— Joining multilateral agreement on the exchange of financial and tax information by Ukraine;

— Gradual revision of bilateral agreements of Ukraine on avoidance of double taxation in accordance with the ОECD’s principles;

— Improvement of legislation in the field of transfer pricing.

“Our current activities show that business is beginning to realize that changes are inevitable and that various tax optimization schemes will soon sink into oblivion. Today, there is great demand for removal of risks related to non-transparent structures and ILC EUCON experts have already helped many companies to introduce changes to their business model. I think that adjustments carried out in due time will help many to maintain a competitive advantage on the market in strict regulatory conditions,” said Mr. Romanchuk.

Source: The Ukrainian Journal of Business Law, October 2016

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