Although Ukraine updated transfer pricing rules for 2018 in January, these changes were rather technical character. Hence, the draft law on BEPS implementation from September last year is still on the agenda in Ukraine without any changes.
Due to the Ukrainian law “on the amendment of the Tax Code and some other legislative acts to balance budget revenues for the year 2018” transfer pricing control applies to permanent establishments in Ukraine from 1 January 2018. Other issues about transfer pricing, such as TP documentation were however unchanged.
In September 2017, the working group, led by the Ministry of Finance of Ukraine and the State Fiscal Services, prepared a draft law aimed at the implementation of transfer pricing-related actions of BEPS into Ukrainian tax law. In this article we highlight the most important changes of the draft law.
Three-tier approach to TP documentation
The draft law on BEPS implementation adopts a three-tier approach to transfer pricing (TP) documentation according to Action 13 of BEPS. Namely, TP documentation shall consist of
- master file,
- local file and
- Country-by-Country (CbC) report.
Suggested amendments are generally in line with basic BEPS recommendations. Yet, there are also some differences. For instance, although it envisages, in general, the BEPS compliant threshold of EUR 750 million for submitting of CbC Report, there are also specific rules designed for multinational corporations (MNCs) of Ukrainian origin.
Namely, MNCs with the annual consolidated group revenue equal or exceeding EUR 50 million would be obliged to file a CbC Report in Ukraine if one of the following conditions is met:
- the beneficial owner of the parent company of the international group of companies is a resident or citizen of Ukraine;
- at least 50% of shares in international group of companies belong to residents or citizens of Ukraine;
- at least 50% of the total number of employees of all companies of the group at the end of the reporting period are employed in Ukraine;
- at least 50% of the total balance sheet value of fixed assets of all group companies at the end of the reporting period are actually located in Ukraine;
- at least 50% of consolidated income of the international group of companies is income from sales of goods (works, services), the country of origin of which is Ukraine;
- if the parent company of international group of companies is registered in an offshore zone, included in the list, which is approved by the Cabinet of Ministers of Ukraine, and such company did not submit a CbC Report, or this report was submitted in the country which has not concluded an agreement on the exchange of information with Ukraine.
Special provisions in the draft law on BEPS implementation
The draft law on BEPS implementation also provides special provisions on the possibility to submit simplified TP documentation for low value-added intra-group services. This is the new provision not currently established in the Tax Code of Ukraine. Action 10 of the BEPS is the basis for provisions of the draft law regarding such services.
An important novelty is the introduction of the principle of the business purpose of transactions. Namely, taxpayers will be obliged to prove in TP documentation that controlled transactions have a clear business purpose, which is actually the benefit-test.
According to the draft law on BEPS implementation, controlled transactions are deemed to have a reasonable business purpose if, under comparable circumstances, an independent person is ready to buy the same services or goods from another independent person in order to obtain the same benefits, or is ready to pay the same value of the services or goods. Otherwise (i.e. in the absence of a business purpose of a controlled transaction), the value of such controlled transaction shall be considered to be zero.
The abovementioned changes are going to make taxpayers feel themselves to be in a vulnerable position. Thus, the draft law on BEPS implementation does not provide for the definite list of possible evidence of a business purpose of transactions. At the same time, the controlling authority is entitled to disregard, for tax purposes, the results of controlled transactions, which they believe not to have a “business purpose”.
If you would like to know more about the draft law on BEPS implementation and other issues in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.
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