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Legal News: Transfer Pricing Rules: new Law in Ukraine

3 September 2013

The Law of Ukraine "On Amendments to the Tax Code of Ukraine on transfer pricing" dated July 4, 2013, comes into force on September 1, 2013. Having adopted this Law Ukraine implemented international practice of using transfer pricing rules, which are contained in Organization of economic cooperation and development’s Recommendations. 


The text of the law in Ukrainian language can be found here:  http://zakon4.rada.gov.ua/laws/show/408-vii

Transactions regulated by transfer pricing rules

The OECD’s Recommendations implemented into Ukrainian legislation,  provide the  application of the "arm's length principle" for the valuation, for tax purposes, of cross-border transactions between associated enterprises.

According to the  adopted  Law of Ukraine the arm's length price applies only to so called “controlled” operations. The operations are defined as controlled if two following requirements are met:

1)      their total amount equals or exceeds 50 million UAH (about USD 6.250.000).

2)      they are carried out by Ukrainian companies with one of the following entities:

• with non-resident associated enterprises;

• with Ukrainian associated enterprises, that meet certain criteria: it is the resident of Ukraine , which declared the negative income tax or  applies special rate of income tax etc.

• with non-residents,  registered in the state, where the corporate tax rate is  5 or more %  lower  than in Ukraine.

The last two cases are the novel just of Ukrainian legislation.

                Based on the Law the associated enterprises are the enterprises, which own more than 20 % of corporate rights of the controlled entity, the director of  the controlled entity and such an entity etc.

The novelty of Ukrainian tax legislation

The main difference between international practice of using transfer pricing rules and  Ukrainian  legislation is that the statutory control in Ukraine is carried out not only over the cross-border transactions, but also the residents of Ukraine  and non-residents,  which are not associated, but registered in the states with the low income tax rate, list of which is confirmed  by the Cabinet of Ministers of Ukraine.

The important amendment in the Tax Code of Ukraine comparing to international practice is the possibility of concluding the agreements on pricing between large taxpayers and tax authorities, the main aim of which is the preliminary confirmation of the transaction’s price and methods of price determination.

Methods of usual price determination

Determination of the transaction’s price is to be made by applying one of the following methods:

•             Comparable uncontrolled price method;

•             Resale price method;

•             “Cost plus” method;

•             Transactional net margin method;

•             Transactional profit split method.

While choosing  the price determination method in controlled transaction completeness and authenticity of output data,  relevancy of the correction of the tax obligation should be taken into consideration with the purpose to provide matching of the conditions  of controlled transaction with the comparable transactions.

Fines applicable to taxpayers

                The taxpayers, which are the parties of the controlled transaction are required to submit an electronic report to the central tax authority by May 1 of the year following the year in which such a transaction was carried. In case of not submitting such a report tax authorities are entitled to request filing the documents of the controlled transactions. Inquiry answer with documents should be submitted during 1 month from the date of receiving the request.

                The penalty for not submitting the report, the documents of the controlled transactions is 1 UAH by September  1, 2014. Obviously such a symbolic dimension of the fine is set in order to tax payers and tax authorities could practice the provisions of the Law. But since September 1, 2014 in case of failing to submit the report the taxpayers will be obliged to pay a fine of 5 % of the total sum of controlled transaction  (at least it is 312.500.00 USD) and for failure to file the documentation of controlled transaction, which is necessary to substantiate the price of the certain transaction, the penalty of  100 minimum wages should be paid by the taxpayers (it’s about 14.300 USD).

                Nowadays some companies already employ relevant specialists in transfer pricing to be prepared for  the 2014, when the financial consequences of not submitting of the report or inappropriate determination of the transaction price will be of essence.  

                To avoid negative consequences of the adopted  Law companies may also apply safer business schemes, such as using several tax haven companies, or inclusion of European companies, which are not in off-shore zone, in the scheme etc.

To avoid negative consequences of the Law companies may also apply safer business schemes, such as using several tax haven companies, or inclusion of European companies, which are not in off-shore zone, in the scheme etc.

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