Transfer Pricing in 2017 — Improvement Under the Slogan of Liberalization

From 1 January 2017 Ukrain­ian tax legislation regulating transfer pricing has undergone changes, which generally can be evaluated as liberal and which were introduced in the interests of taxpayers. Here is the short list of changes.

Increase of Cost Criterion to Recognize Transactions as Controlled

This is definitely the most expected busi­ness standard. Preparation of reports on controlled transactions and documentations for many small businesses, whose sum of ac­tivities fell within the criterion to recognize transactions as controlled, was quite bur­densome. From now on transfer pricing is a prerogative right of taxpayers with more sub­stantial amounts of income.

The annual income criterion was in­creased to UAH 150 million (earlier it was UAH 50 million).

The volume of transactions with one counterparty was increased to UAH 10 mil­lion (earlier it was UAH 5 million).

Comment: yet the non-availability of controlled transactions does not mean a lack of attention on the part of controllers to a range of non-controlled transactions. Thus, for example, income tax payers with an annual income of at least UAH 20 million are obliged to increase their financial result before tax by adjusting by 30% the cost of goods, works (services) acquired from non-residents registered in countries included in the list approved by the Cabinet of Minis­ters of Ukraine. The increase in the taxable financial result is carried out also in case of costs accrual in the form of royalties for the benefit of non-residents. And it seems that it is possible to avoid adjustments only if a company prepares substantiation of price level under transfer pricing rules. In other words, you should either increase the tax base or substantiate level of costs in docu­mentation.

On Extension of Controlled Transactions List

From now on foreign economic transac­tions can be recognized as controlled not only on sales, but also on the acquisition of goods and/or services carried out via a non-resident commission agent.

Economic transactions carried out with non-residents who do not pay income tax (corporate tax), including tax on income re­ceived outside country of registration of such non-residents, and who may not be tax resi­dents of a country where they are registered as legal entities can also be recognized as controlled. The list of business legal struc­tures of such non-residents by countries (ter­ritories) shall primarily include British LLP companies.

The current list of countries (territories) of low-tax jurisdictions and countries, with which Ukraine has not concluded any agree­ments including provisions on information exchange should be supplemented with a list of countries, with which such agreements were concluded, but competent authorities do not provide timely and full tax informa­tion exchange upon requests from the tax of­ficials. While this year any country (territory) is included in the said list of the Cabinet of Ministers of Ukraine, transactions with coun­terparties registered in such a country (terri­tory) shall be recognized as controlled from 1 January of the following calendar year.

On Controlled Transactions that are Carried out on the Basis of a Forward or Futures Contract

In case of carrying out controlled transac­tions under a forward or futures contract, price comparisons shall be performed on the basis of information on forward or futures prices as of the date closest to the date of the respective forward or futures contract’s conclusion.

If a controlled transaction is related to export and/or import of exchange goods, car­ried out on the basis of forward or futures contracts, then to substantiate compliance of such transactions conditions with the “arm’s length” principle, price range shall be calculat­ed on the basis of exchange quotations of cor­responding goods for the decade preceding the date of the respective contract’s conclusion.

Source: Ukrainian Law Firms 2017