By Order No. 841, which entered into force on March 19, 2021, the Ministry of Finance set out the following in a new version:
- Report on Controlled Transactions;
- Procedure for drawing up a Report on Controlled Transactions.
They were brought into line with Law No. 466, which made a number of changes to the TCU.
Definition of the term “related parties” (for transfer pricing purposes), which, in particular, increased the threshold of connectedness from 20% to 25% (Appendix 2, Sign code of the link of a person: for legal entities — 501 and 502, for individuals — 502 and 511) and introduced a new category of related persons — “education without the status of a legal entity” (Sign code — 524).
Related parties are legal entities and/or individuals and/or entities without the status of a legal entity, the relationship between which may affect the conditions or economic results of their activities or the activities of the persons they represent, taking into account the criteria defined by clause 14.1.159 of the TCU.
In case of business operations by entities without the status of a legal entity with a related person of any of the participants in the joint activity agreement, the amount of contributions in the common property is 25 percent or more, entities without the status of a legal entity (joint activity agreement) and such a related person of any of the participants in such agreement are recognized as related.
Education without Legal Entity Status
An entity without the status of a legal entity is an entity created on the basis of a transaction or registered according to the legislation of a foreign state (territory) without creating a legal entity, which, according to the legislation and/or documents regulating its activities (personal law), has the right to carry out activities aimed at generating income (profit) in the interests of its participants, partners, founders, principals or other beneficiaries.
Entities without the status of a legal entity may include, in particular, but not exclusively, partnerships, trusts, foundations, and other institutions and organizations established based on a transaction or the law of a foreign state (territory). Entities without the status of a legal entity are considered to be non-resident persons whose legal form is included in the list approved by the Cabinet of Ministers of Ukraine according to paragraph “d”, subclause 18.104.22.168, subclause 39.2.1, clause 39.2 of Article 39 of the TCU, which according to the personal law are not legal entities
Features of applying transfer pricing methods for controlled transactions with commodities and using a list of information sources to obtain quotation prices for such goods.
For controlled transactions with commodities, compliance of the conditions of controlled transactions with the “arm’s length” principle is established using the comparable uncontrolled price method (clause 22.214.171.124 of the TCU). For the purposes of this subparagraph, commodities are understood as goods for which unrelated persons use quotation prices as a reference point (benchmark) for setting the price of uncontrolled transactions. As of today, List No. 1221 is valid.
Quotation prices (for the purposes of Article 39 of this Code) are prices of commodities in the relevant period obtained on the international market of goods, which include the results of exchange trading, prices obtained from recognized agencies with transparent price reporting, statistical agencies or from government pricing agencies, where such indices are used as a reference (benchmark) by unrelated persons to determine prices in transactions between them. A quotation price is defined as a price (average price) and/or price range for a specific date or period (subparagraph 14.1.94-1 of the TCU).
Also, a taxpayer who performs controlled transactions with raw materials must notify the controlling body of the conclusion of the relevant agreement (contract).
If such notification is sent in a timely manner and the essential terms of the contract remain unchanged (in particular, the characteristics and price of goods, volume, terms of delivery and payment), the price of the controlled transaction will be compared with the quotation prices as of the nearest date to the pricing date agreed by the parties to the agreement.
If the terms of such an agreement (contract) are not consistent with the actual behaviour of the parties to the transaction and the actual terms of its conduct, the tax authority gets the right to compare the price of the controlled transaction with the quotation prices on the date of transfer of ownership or on the date of shipment of the goods according to the goods and transport documents.
Indication by taxpayers of the information sources used to ensure compliance with the requirements for justifying in the transfer pricing documentation the compliance of the conditions of controlled transactions with the “arm’s length” principle.
If the taxpayer applies the “arm’s-length” principle to determine whether the terms of controlled commodity transactions comply with the methods of the “arm’s-length” principle referred to in subparagraphs 126.96.36.199 to 188.8.131.52 of the TCU, the taxpayer in the transfer pricing documentation must:
- justify the impossibility of using the comparable uncontrolled price method or the fact that the comparable uncontrolled price method is not the most appropriate in relation to the facts and circumstances of the controlled transaction;
- indicate information about all persons who participated in the supply chain of such goods from the manufacturer (supplier) to the first unrelated person or a non-resident person who does not meet the criteria defined by paragraph “b”, “d”, clause 184.108.40.206 of the TCU. The information must contain data on the level of profitability indicators of these individuals, which are most appropriate, based on the facts and circumstances of their activities in the supply chain.
If the taxpayer does not provide such information, the controlling body shall have the right to independently determine the price level of the controlled transaction, which corresponds to the “arm’s length” principle, using the comparable uncontrolled price method, taking into account the requirements of clause 220.127.116.11 of the TCU.
Please note, reasonable economic reason (business purpose)!
Starting from January 1, 2021, the concept of “reasonable economic reason (business purpose)” will be applied to all transactions recognized as controlled in relation to transfer pricing — a reason that can only be available if the taxpayer intends to obtain an economic effect because of economic activity.
Transactions carried out with non-residents have no reasonable economic reason (business purpose) if their main purpose is not to pay taxes and/or to reduce the taxable income of the taxpayer, and in comparable circumstances, a person would not be prepared to acquire (sell) such goods, works (services), intangible assets, other items of business transactions, other than goods, in unrelated persons.
Thus, according to the new clause 140.5.15 of the TCU, when performing transactions with non-residents that do not have a business purpose, the financial result before taxation of the payer is increased by the amount of expenses incurred in this regard. The controlling body will be responsible for proving the circumstances of the absence of a business purpose.
Also, for tax purposes, such payments on transactions with non-residents pertaining to the categories specified in paragraphs “a”,” b”, “d”, clause 18.104.22.168 of the TCU:
- amounts of income in the form of payments for securities (corporate rights) paid in favour of a non-resident in controlled transactions more than the amount that corresponds to the “arm’s length” principle;
- the value of goods (works, services) (except for securities and derivatives) purchased from such a non-resident in controlled transactions more than the amount that corresponds to the “arm’s length” principle;
- the amount of underestimation of the cost of goods (works, services) sold to such a non-resident in controlled transactions, compared to the amount that corresponds to the “arm’s length” principle.
Use of the same sources of information that the taxpayer used during inspections on compliance with the “arm’s length” principle. According to Section III of Order No. 344, the taxpayer shall be obliged, at the request of the officials of the controlling body conducting the audit, to provide documents related to the subject of the audit within 10 business days from the start date of the audit.
During the audit, officials of the controlling body shall have the right to receive additional documents from the taxpayer confirming the implementation of financial and economic operations, compliance of the conditions of controlled transactions with the “arm’s length” principle, completeness of calculating and paying taxes during controlled transactions.
The taxpayer shall submit such documents within the agreed period at the oral request of the officials conducting the audit. And in case of failure to submit documents within the agreed period, the inspection bodies shall send the taxpayer a written request indicating the documents that must be provided by such a taxpayer within 15 business days from the date of receipt of the request from the controlling body.
Other Changes to the Controlled Transaction Report
Two new columns to the section “Information about controlled transactions” are added, namely:
- column 26 — which indicates the code(s) of the type of source(s) of information used by the taxpayer to establish compliance of the conditions of the controlled transaction with the “arm’s length” principle;
- column 27- — which indicates the name(s) of the source(s) of information used by the taxpayer to establish compliance of the conditions of the controlled transaction with the “arm’s length” principle. If there are several names of information sources, enter all names separated by commas and spaces (“, “).
In case of application in the previous column 26 of code “610” in column 27, put down the name(s) of the source(s) of information on quoted prices for raw materials from the recommended (non-exclusive) list of such sources published by the STS, which was used by the taxpayer according to clause 22.214.171.124 of the TCU. If there are several names of sources of information about commodity prices, specify all names separated by commas and spaces (“, “).
In addition, the link code “523” is added to the Information about related parties when disclosing information for which the sign of link is indicated according to paragraph “c”, clause 14.1.159 of the TCU at the time of performing the controlled transaction.
Please note that starting from 2021, we have a three-level transfer pricing reporting structure:
- transfer pricing documentation submitted to local tax authorities and a report on controlled transactions;
- global transfer pricing documentation (master file), which is submitted by a taxpayer who is part of an international group of companies whose annual income is equal to or exceeds the equivalent of EUR 50 million, at the request of the STS body. The request may be sent no earlier than 12 months and no later than 36 months from the end date of the financial year established by the international group of companies to which such taxpayer belongs, and in the absence of information about the financial year established by the international group of companies — no earlier than 12 months and no later than 36 months after the end of the reporting year. Global transfer pricing documentation (master file) must be provided by the taxpayer to the STS within 90 calendar days from the date of receipt of the request;
- a country-by-country report of an international group of companies, which is submitted if the total consolidated annual income of the international group of companies, which includes the taxpayer, exceeds the equivalent of EUR 750 million, submitted by the parent company or an authorized member of an international group.
However, as the tax authorities explain in the Public Reference Resource (category 131.03), the submission of this report will begin no earlier than the competent authorities conclude a Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. Please note that the form of the Country-by-Country Report of the International Group of Companies and the procedure for its drawing up was approved by Order of the Ministry of Finance No. 764 dated December 14, 2020.
When Must We Report using the Updated Form?
According to clause 46.6 of the TCU, the updated tax reporting forms must be used for reporting for the period following the period of their official publication. That is, according to the rules of the TCU, for the first time in the updated form, you will have to report on TP for 2021 until October 1, 2022.
Liability for the failure of a taxpayer to submit a report is provided for in clause 120.3 of the TCU and for late submission of a report — in clause 120.6 of the TCU.
Checking Compliance with the “Arm’s Length” Principle
Article 39 of the TCU stipulates that tax control over establishing compliance of the conditions of controlled transactions with the “arm’s length” principle shall be carried out by monitoring controlled transactions and conducting inspections on the taxpayer’s compliance with the “arm’s length” principle.
According to clause 39.1.1 of the TCU, a taxpayer participating in a controlled transaction must determine the amount of their taxable profit according to the “arm’s length” principle.
The amount of taxable profit received by a taxpayer participating in one or more controlled transactions shall be considered to correspond to the “arm’s length” principle if the conditions of these transactions do not differ from the conditions applied between unrelated persons in comparable uncontrolled transactions (clause 39.1.2 of the TCU).
If the conditions in one or more controlled transactions do not comply with the “arm’s length” principle, the profit that would have been accrued to the taxpayer in terms of the controlled transaction that meets this principle is included in the taxpayer’s taxable profit (clause 39.1.3 of the TCU).
Inspections on the taxpayer’s compliance with the “arm’s length” principle are radically different from other documentary inspections, primarily in terms of the purpose, procedures, and terms of their implementation.
The TCU notes that the taxpayer’s compliance with the “arm’s length” principle is checked according to the general provisions of Chapter 8, Section II of the TCU, but considering the specifics defined in Article 39 of the TCU.
Grounds for Verification
Verification of the taxpayer’s compliance with the “arm’s length” principle shall be carried out if there are grounds defined by the following criteria: subparagraphs 126.96.36.199 and 78.1.14-78.1.16 of the TCU.
That is, according to clause 188.8.131.52 of the TCU, verification may be carried out by the controlling body in the following cases:
- provision by the taxpayer of transfer pricing documentation according to clause 39.4.4 of the TCU;
- failure to submit or submission in violation of the Report on Controlled Transactions, transfer pricing documentation, global transfer pricing documentation (master file), country-by-country report of the international group of companies;
- submission by the taxpayer of an application for intention to make a proportional adjustment.
Under subclauses 78.1.14-78.1.16 of the TCU, verification shall be carried out:
- in case of obtaining documented information and data indicating non-compliance of the conditions of the controlled transaction with the “arm’s length” principle and/or establishing non-compliance of the conditions of the controlled transaction with the “arm’s length” principle, according to the procedure provided for in clause 184.108.40.206 of the TCU;
- failure by the taxpayer to submit or submission in violation of the Report on Controlled Transactions and/or transfer pricing documentation, or in case of violations during monitoring of such report or documentation according to the requirements of clauses 39.4 and 39.5 of the TCU;
- failure of the taxpayer to submit a clarifying calculation within 20 business days to correct errors identified based on the results of an electronic audit conducted at the taxpayer’s request.
Therefore, verification can be ordered for any of the above reasons.
Who Conducts the Verification
According to Section II of Order No. 344, the head (their deputy or authorized person) of the controlling body shall issue an order to conduct an audit after the SFS approves the information notice provided by him/her with the justification of the grounds for conducting the audit.
According to clause 220.127.116.11 of the TCU, the controlling body shall not have the right to conduct more than one audit of compliance with the “arm’s length” principle of one taxpayer during a calendar year. The controlling body shall not have the right to re-conduct an audit on compliance with the taxpayer’s “arm’s length” principle, which has already been verified, except in the following cases:
- appeal against the results of the audit (clause 78.1.5 of the TCU);
- conducting an internal investigation (disciplinary proceedings have been initiated or suspicion of committing a criminal offence has been reported) against officials who conducted the inspection (clause 78.1.12 of the TCU).
Terms of Verification
According to clause 18.104.22.168 of the TCU and clause 5, Section 1 of Order No. 344, the duration of the audit on the taxpayer’s compliance with the “arm’s length” principle must not exceed 18 months.
If it is necessary to obtain information from foreign state bodies, conduct an expert examination and/or translate into Ukrainian documents necessary for the study of compliance of the conditions of the controlled transaction with the “arm’s length” principle, the period for conducting an audit by decision of the head (deputy head) of the central executive authority implementing the state tax policy may be extended for a period not exceeding 12 months (clause 22.214.171.124 of the TCU).
That is, according to the TCU, the duration of verification on compliance with the “arm’s length” principle must not exceed 30 months (18 months with the possibility of extending it for 12 months).