22 January 2019, 12:58

Novelties of the Tax Code of Ukraine in terms of transfer pricing

Kateryna Gupalo
Kateryna Gupalo «Arzinger» partner
Nikita Larionov
Nikita Larionov «Arzinger» associate

On 01 January 2019 the Law of Ukraine dated 23.11.2018 No. 2628-VIII “On amendments to the Tax Code of Ukraine and certain other legislative acts of Ukraine to improve the administration and revision of rates of certain taxes and duties” came into effect. The Law introduces some changes in terms of transfer pricing regulation in Ukraine, in particular:

Criteria for controlled transactions have been specified

  • Unless other criteria are available, transactions with a non-resident that paid corporate tax in the reporting year, though with the form of incorporation included in the list approved by Resolution of the Cabinet of Ministers of Ukraine dated 04.07.2017 No. 480, shall be deemed non-controlled.
  • Intra-business settlements between a non-resident and its permanent establishment in Ukraine are recorded as controlled transactions.

Characteristics of assets that are taken into account in determining the comparability of commercial and/or financial terms of comparable transactions with the conditions of a controlled transaction have been defined

When determining the comparability of terms of transactions, the following characteristics of assets should be taken into account:

  • Type of asset (intangible/financial, production equipment, etc.);
  • Nature of the asset (age, market value, location, protection rights available, etc.).

Additionally, the effects of intangible assets on the terms of controlled and comparable transactions shall be determined and analyzed with due regard to the following characteristics, including but not limited to:

  • Legal ownership type of intangible assets and contractual terms of their use;
  • Categories and characteristics of intangible assets (exclusivity, degree and duration of legal protection, the geographical scope of application, useful life, stage of development, etc.);
  • Contractual and actual activities of the parties to the transaction related to the development, improvement, support, protection and exploitation of such assets.

The substance over form approach to a control transaction

The parties’ actual actions and the actual terms of the transaction shall be taken into account, even if the actual terms of the transaction and the parties’ actual actions are not in accordance with the contractual terms or the transaction has actually been carried out but not documented (confirmed).

Possible interruption of the term for conducting an audit of compliance with the arm’s-length principle has been provided for

The term for conducting an audit shall be interrupted if the court is considering a claim related to the appointment, conduct or subject of such audit until the judicial proceedings are completed.

The list of a supervisory authority’s rights within audits of compliance with the arm’s-length principle has been extended

Starting from 01 January 2019, in the course of audits supervisory authorities may:

  • Send inquiries to the competent authorities of foreign countries regarding the subject and circumstances of a controlled transaction or the business activity and financial reporting of the non-resident that is a party to a controlled transaction;
  • Have meetings with taxpayers (their authorized representatives) to discuss the methodology applied by the supervisory authority in the course of an audit for determining whether controlled transactions are compliant with the arm’s-length principle.

Procedure for penalty accrual following an independent adjustment has been changed

Penalty accruals shall be started upon the expiration of 270 calendar days following the last day before the due date of tax liability.

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