Transfer pricing rules before 2018

Transfer pricing (TP) rules were implemented into Ukrainian tax law from 2013. However, before 2018, permanent establishments (PEs) were a blind spot for TP control.

According to the Tax Code of Ukraine, non-residents that conduct business activity in Ukraine via a PE pay corporate profit tax. However, TP rules that were in force before 2018 did not provide any special rules for PEs. It was unclear whether PEs in Ukraine are subject to TP reporting requirements alongside regular corporate profit tax reporting, and what transactions of PEs in Ukraine may be recognised as being subject to TP control.

It was clear, however, that the Ukrainian TP rules lacked any legal basis to control dealings between PEs and non-residents establishing such PEs. This was due to the definition of controlled transactions for TP purposes, which did not provide grounds to extend the control to dealings between parts of the same legal entity.

This ambiguity meant that PEs of non-residents mostly ignored TP control in Ukraine, even though, under the rules existing before 2018, some PE transactions might have been recognised as being subject to TP control: for instance, if a PE had dealings with a foreign related party of the non-resident that established the PE.

Introduction of TP reporting for PEs in Ukraine

Starting from 2018, Ukrainian TP rules were supplemented with the new type of controlled transactions, namely, transactions between a non-resident and its PE in Ukraine. The Ukrainian Tax Code prescribes a special value threshold for recognising such transactions as controlled, namely UAH 10 million (roughly EUR 305,000), without applying the turnover-based threshold which is provided for enterprises.

Thus, 2018 became the first TP reporting period for PEs in Ukraine.

However, there was still some ambiguity due to the lack of proper guidance from the Ukrainian authorities on how PEs in Ukraine should conduct the analysis in practice and comply with the reporting requirements. Moreover, it was unclear how the results of such TP analysis may be applied to the corporate profit tax base calculation.

The Tax Code of Ukraine (sub-para.141.4.7) provided for the following options to calculate profits that non-residents derive through their Ukrainian PEs:

• The profit is calculated according to the general rules of the Tax Code, assuming that the PE is deemed a taxpayer separate from the non-resident and operates independently.
• If a non-resident operates both in and outside of Ukraine and does not determine profit derived from Ukraine, a separate balance sheet for its Ukraine-related activity should be prepared. This balance sheet should be approved by the tax authority at the location of the PE.
• If it is impossible to reliably calculate the profit sourced in Ukraine, then the profit is calculated as Ukraine-sourced income of the PE less costs, calculated by applying a 0.7 coefficient to such income. In other words, the profit is effectively calculated as 30% of the income received by the PE without needing to allocate and prove costs related to the PE activity.

PEs filed special reports to declare their profit tax liabilities using one of the mentioned methods. Many PEs opted for the approach calculating profit as 30% of income due to its simplicity.

After extending TP control to dealings between non-residents and their PEs in Ukraine, the above rules were supplemented with the reference that the profit under all such methods should be calculated with due regard to Ukrainian TP rules. It was not clear though how such rules should have been applied for the cases when the profit is calculated as 30% of income.

Recent changes to calculation of profit

The rules of profit calculation by PEs in Ukraine were changed once again by Law #466-IX, which came into force in May 2020. From this date onwards, the special rules of profit calculation by PEs, including the calculation method applying the 0.7 coefficient, were deleted from the Tax Code.

Instead, the new rules stipulate that the profit should be calculated following the arm’s length principle. Such profit should be in line with the profits of independent entities carrying out the same or similar activity as if such PE operated separately from the non-resident. The amount of any profit should be calculated according to Article 39 of the Tax Code setting forth Ukrainian TP rules.

Two-step analysis recommended

Yet this change has not made the situation clearer. Ukrainian TP rules are primarily designed for application by enterprises and do not contain any special rules which may be followed by PEs to determine their profits. Also, there is no official clarification from the authorities so far.

We understand that the only reliable way would be to follow the OECD-authorised approach to allocate profits to PEs. It implies that the two-step analysis should be carried out:

• firstly, hypothetical dealings between the non-resident and its PE should be identified, and
• secondly, such dealings should be priced by applying TP methodology.

Ukrainian taxpayers are required to file corporate profit tax returns quarterly (with some special exceptions). Therefore, it is likely that the forward-looking TP analysis should be implemented, otherwise, in many cases PEs in Ukraine would lack the information necessary to draft the return.

Yet these are just preliminary thoughts on the matter. Hopefully, taxpayers will receive proper clarification from the authorities very soon.

Clarification still required

Such clarification is desperately required due to the lack of appropriate transition rules in Law #466-IX. This change occurred in the middle of the year and a lot of PEs have already reported their profits for the first quarter applying the previous mechanisms. So, the question arises of how to file the reports after the changes. Thus far, the tax authorities have just recommended filing the ordinary profit tax return instead of the report on profit of the PE. However, the tax authorities have not shared their vision on how the data from previously filed reports should be transferred to such regular profit tax returns. This is especially important in the cases when the profit was calculated as 30% of income.

Hopefully, the authorities will very soon produce clear guidance that can be followed. Otherwise, the only option for PEs in Ukraine would be to use the results of the TP analysis for previous years and adapt these for the current profit tax reporting. If a PE has not conducted any such analysis, it is highly recommended to do so urgently.

If you would like to know more about the latest TP-rules for PEs in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

A Development of TP control over PEs in Ukraine bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Over the course of two days, in-house transfer pricing professionals, leading advisers and senior policymakers will be brought together to debate the most significant topics and trends currently impacting the industry.

The Forum aims to facilitate free and transparent debate on salient issues such as the OECD’s taxation of the digital economy, developments in risk and compliance management and the rise in TP disputes. As such, taxpayers are invited to openly share experiences of how to deal with a rapidly evolving global transfer pricing environment.

Please find further information on the Forum on the website of International Tax Review.

A Global Transfer Pricing Forum Europe 2019 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

It is worth mentioning that Ukraine is yet to see the signature of the first APA. The absence of “agiotage” in respect of this instrument was caused largely by the extremely cumbersome procedure, which could barely be offset by corresponding benefits for the taxpayers. This may change due to the new APA procedure.

Legal certainty for large taxpayers

The essence behind an APA is to ensure legal certainty for Ukrainian taxpayers, who fall into the category of “large” with respect to the application of Ukrainian TP rules.

According to the Ukrainian Tax Code, a taxpayer (legal entity or permanent establishment) shall be recognised as “large” if its overall revenue from all types of activity in the 4 most recent tax (reporting) quarters exceeds the equivalent of EUR 50 million; or if the total amount of taxes, fees and payments to Ukraine’s state budget for the same period exceeds the equivalent of EUR 1 million determined based on the average official exchange rate of the National Bank of Ukraine for the same period, provided that the sum of such taxes, fees and charges less customs payments exceeds the equivalent of EUR 500,000.

An APA is concluded for a limited period between the taxpayer and the State Fiscal Service of Ukraine (with the possible participation of fiscal authorities from other states), setting forth special pricing criteria and selecting the most appropriate tools in transfer pricing methodology that will be used to determine if future controlled transactions of the taxpayer are at arm’s length. Such arrangements may be either unilateral (between the taxpayer and the State Fiscal Service of Ukraine), bilateral (between the taxpayer, the State Fiscal Service of Ukraine and the fiscal authority of the country of the non-resident party in the controlled transaction) or multilateral (with the participation of several fiscal authorities in the countries of the non-resident parties of controlled transactions). It is important to note that an effective double taxation treaty with the countries of residence of the parties to the transaction is a prerequisite for engaging the fiscal authorities of the respective countries in an APA procedure.

Steps of new APA procedure in Ukraine

Entering into an APA is a multi-step process and it is usually difficult to predict how long such steps will last, and if an agreement will ultimately be reached. To test the ground the new APA procedure establishes a special preliminary procedure. Namely, before filing a fully-fledged APA request the companies may make a preliminary request, which is a sort of light option designed to check whether it is worth making a fully-fledged application for an APA and preparing the whole set of documents.

The new wording of the procedure also establishes time limits by when the State Fiscal Service of Ukraine has to take action in response to the taxpayer’s application.

The following procedure must be followed in the case of preliminary procedures:

The second option for the taxpayer is to file a fully-fledged APA application without preliminary consultations. In such a case the procedure is as follows:

The new APA procedure at least ensures predictability regarding the timing for the start of the procedure. It would obviously not be excessive to set some general deadlines for the overall procedure too, which is likely to take time.

Documents required

The documents required for filing, alongside the APA, are as follows:

The procedure stipulates that any information, documents or materials received by the State Fiscal Service of Ukaine from the taxpayer during an APA (including any preliminary request discussion) may not be disclosed without the prior consent of the taxpayer and/or such information may not be used as the grounds for a tax or transfer pricing audit. All this information is confidential. It is hard to predict whether the provisions regarding the ban for launching a tax / TP audit will actually work in practice.

Upon agreement with the State Fiscal Service, an APA may be extended to previous tax periods. This is an advantage of the new APA procedure because if the APA is successfully concluded, the large taxpayer could theoretically also mitigate TP risks for previous periods, on condition of compliance with the APA of course.

A taxpayer signing an APA is required to report annually on its implementation, in the form and by the deadlines to be agreed in the APA. One clear advantage of the new APA procedure is that the taxpayer will not be required to prepare separate TP documentation. Previously, even if an APA was concluded, the taxpayer not only had to fill out the report on controlled transactions but also prepare TP documentation like other taxpayers. Now we understand that all the required TP analysis information will be presented in an annual report on APA implementation.

Protection against additional tax liabilities

If a taxpayer complies with the APA, it protects the taxpayer against additional tax liabilities, fines and penalties for breaching Ukrainian TP legislation.

Yet this protection is limited by the possibility of the State Fiscal Service of Ukraine terminating the APA early, with effect from the date the APA entered into force. Such early termination is possible in the following cases:

• the fiscal authority finds that the taxpayer has provided misleading information (if such information was mentioned in documents and materials, filed together with the APA application and/or was in the annual report on APA implementation);

• the taxpayer violates the APA.

To conclude, the new Ukrainian APA procedure seems to be more operational in comparison with previous procedures. Although it is not ideal, it may be considered an option for establishing legal certainty in relation to Ukrainian TP rules.

If you would like to know more about the new APA procedure or other issues in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

A New APA procedure in Ukraine bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

On 4 December 2017, the Austrian Finance Ministry published information on the Transfer Pricing Documentation Act, including specifications of the Master and Local File in Austria.

The additional information of the Austrian Finance Ministry (BMF) clarifies the interpretation of doubtful questions of the Documentation Act (VPDG) and the ordinance issued thereto (VPDG-DV). The report on BEPS Action 13, the EU Mutual Assistance Directive and the OECD Guidelines for the Implementation of CbC-Reporting should be used as a supplement.

No obligation for a Master and Local File in Austria if threshold is not exceeded

The BMF information mainly deals with questions regarding the CbCR. However, we have limited ourselves below to clarifications regarding the Master and Local File in Austria:

• Sales revenue: The Master and Local File in Austria are to be prepared if the sales revenue of the Austrian group of companies has exceeded the amount of EUR 50 million in the two previous financial years. The term “sales revenue” is based on the definition of the Austrian Commercial Code (UGB) or comparable accounting principles.
• Other documentation requirements: For business units that do not exceed the thresholds, there is no obligation to adhere to the prescribed structure under VPDG and VPDG-DV.
• Relationship with the EU Code of Conduct: The implementation of the Master and Local File in Austria complies with OECD and EU guidelines and should be understood as a national “minimum standard”.
• Transmission of copies: In the case of a request for the transmission of the Master and Local File in Austria, the required copies are to be attached (unsolicited).
• Materiality: The characteristic of materiality can only be determined on a case-by-case basis from the overall picture of the circumstances.
• Level of detail of the information: The benchmark is the diligence of a proper and conscientious manager.

The whole Master File must be available in each state 

The BMF information contains following specifications regarding the Master File:

• Description of business: In the case of a presentation according to business lines, the entire Master File with all business lines must be available in each state. It is not permissible to include only those business units that have an international connection.
• Presentation of the supply and service chain: The five largest products or services offered are measured by turnover. Group turnover is decisive, which is why a consolidated result is to be assumed.

Intra-group transactions in the Local File

The clarifications regarding the Local File are as follows:

• National transactions: Purely national intra-group transactions are usually not documented in the Local File.
• Business transactions to be documented: Only material intra-group business transactions are to be documented.
• Amount of payments: The information can be delivered not only on a payment basis but also on a transaction/business transaction basis. In the case of bookkeeping according to the principle of realisation, the concept of “payments” should be understood in the same way as for the principle of realisation.
• Financial information – financial statements: With regard to the financial data used for the application of transfer pricing methods (OM data, gross profit, cost plus), it must be documented to what extent these financial data are based on the annual financial statements. When presenting the breakdown for the profit split, it must be clear at which point in the annual financial statements the financial data used for the application of the transfer pricing method can be found.

If you would like to know more about the Transfer Pricing Documentation Act and exact regulations of Master and Local File in Austria, please visit the homepage of ICON Austria!

WTS Klient Hungary is a member of the WTS Global transfer pricing consulting team. As a member of this team we endeavour to find solutions to seemingly impossible problems with the help of personal contacts, regular training and consultations, and relying on the WTS Global central TP team. Should you have questions we are happy to assist you:

 

András Szadai
senior manager
Tel: +3618810624
andras.szadai@wtsklient.hu

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A Clarification of the Master and Local File in Austria bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

On 27 November 2017 the country’s parliament adopted a new law on transfer pricing issues in Russia in connection with the implementation of international exchange of information and documentation on international groups of companies. It took effect on the day of its publication and applies to fiscal years starting in 2017.

Russian transfer pricing legislation is essentially based on OECD principles, with certain important deviations. The key deviations are as follows:

• Ownership criterion regarding the definition of subsidiaries: more than 25% (direct or indirect) in Russia and more than 50% according to OECD common requirements.
• Benchmarking studies: rules for the benchmarking analysis are similar to the OECD recommendations but have some differences (for example, loss-making companies and companies with negative net assets are not admissible for comparability purposes).
• Information Sources: in Russia two-tier hierarchy is provided. Official information sources of authorized state authorities – price agencies and Official publications.
• Intra-group services: there is no simplified approach such as, for example, a 5% mark-up for low value-added intra-group services. It is necessary to conduct a full analysis on these types of transactions.
• Transactions with intangible assets: there is no special guidance on these types of transactions.
• Safe harbours: according to Article 269 of the Russian Tax Code there is a price range for interest expenses for different currencies.
• Advance Pricing Agreements (APAs): available only to high taxpayers. Not available for permanent establishments.
• Downward adjustments: only valid if you increase the tax base.

Three-tier documentation: a new element of transfer pricing in Russia

On 27 November 2017, the Russian State Duma adopted a new law (Federal Law No. 340-FZ) that requires the provision of three-tier transfer pricing documentation and also introduces provisions on the automatic exchange of CbCRs. The law came in force on the day of its publication on the official website of legal information. The periods starting from 1 January 2017 are subject to the new law, but the previous tax law rules for preparation of reports on controlled transactions and transfer pricing documentation remain in force.

According to this law, organisations that are members of MNEs with a consolidated revenue of over 50 billion roubles (approx. EUR 700 million) should provide for three-tier reporting to tax authorities (Country-by-Country Reports (CbCR), global and national documentation). Tax authorities automatically exchange the CbC Reports of such MNEs.

In accordance with such requirements, the three-tier documentation is in line with the OECD approach. But the submission of such documentation does not exclude the obligation of the taxpayer to prepare national transfer pricing documentation in accordance with local requirements. In addition, taxpayers who are members of the MNE are required to submit the notification of participation in the MNE to the tax authority.

Automatic exchange of CbCRs

Also, the new law provides for the rules of participation of a foreign tax authority, if it is stipulated by an international Treaty of the Russian Federation, in exercising tax control in the Russian Federation (tax audit, tax monitoring), which can be carried out with the participation of such body upon its request in accordance with Russian tax code and the provisions of international treaties of the Russian Federation.

At the same time, the new law provides for the order of automatic exchange of financial information with foreign countries (territories) for tax purposes, specifically the automatic exchange of CbCRs. Terms such as “financial information”, “financial services”, “financial assets” are defined.

The new law on CbC Reporting in Russia also describes the limitations of the use of the information contained in the CbCRs.

If you would like to know more about the transfer pricing and CbC Reporting in Russia, please visit the homepage of Althaus Group, the exclusive representative of WTS Global in Russia.

WTS Klient Hungary is a member of the WTS Global transfer pricing consulting team. As a member of this team we endeavour to find solutions to seemingly impossible problems with the help of personal contacts, regular training and consultations, and relying on the WTS Global central TP team. Should you have questions we are happy to assist you:

 

András Szadai
senior manager
Tel: +3618810624
andras.szadai@wtsklient.hu

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A New law on CbC Reporting in Russia bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.