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Changes in transfer pricing

As we have noted earlier, numerous amendments to the tax legislation have been introduced by the Law of Ukraine No. 2245-VII “On Amendments to the Tax Code of Ukraine and certain legislative acts of Ukraine regarding ensuring the balanced budget income in 2018”. In this article, we want to highlight the changes that transfer pricing has undergone, namely the changes introduced by the above-mentioned Law in article 39 of the Tax Code of Ukraine.

The first significant step has been the introduction of changes in the criteria that are applied by the Cabinet of Ministers of Ukraine in determining “low-tax” states (territories). If previously, one of such criteria has been the existence of a profit tax rate in the state (territory), which is 5 and more percentage points lower than in Ukraine (subparagraph 39.2.1.2, paragraph 39.2, article 39 of the TCU), but now, except for the low rate of income tax, those states (territories) “that provide economic entities with preferential taxation regimes or in which the features of calculating the tax base actually allow business entities not to pay corporate income tax (corporate tax) or pay it at the rate, which is 5 percentage points lower than in Ukraine”.

What does it mean for business in Ukraine, and what are the implications of expansion of this criterion? Everything is quite simple: it allows the Cabinet of Ministers of Ukraine to increase significantly the list of the states (territories) the operations with which, under certain conditions, will fall under the control of transfer pricing. The changes have become quite significant regarding the fact that from now on, economic transactions between a non-resident and his permanent representation in Ukraine will be considered as controlled transactions.

In this connection, subparagraph 39.2.1.7. paragraph 39.2. art. 39 of the Tax Code of Ukraine is supplemented with a new paragraph, according to which: “Business transactions between a non-resident and his permanent representation in Ukraine are recognized as controlled ones if the volume of such business transactions, determined by the rules of accounting, exceeds UAH 10,000,000 (after deduction of indirect taxes) for the relevant tax (accounting) year”.Thus, business transactions between non-residents and their permanent representations are transferred to the category of controlled ones, provided that the volume of economic transactions between them exceeds UAH 10,000,000. We note that it concerns the volume of economic transactions, and not the income received by the permanent representation.

At the same time, the volume of economic operations of the taxpayer for the purposes of this subparagraph is calculated at the prices corresponding to the principle of “outstretched arm”. It would be also appropriate to pay attention to the fact that the request of the supervisory authority regarding the controlled transactions might be forwarded from now on to the taxpayer not earlier than October 1 of the year, following the calendar year, in which such a controlled operation (operations) was carried out. Previously, such requests could be sent no earlier than May 1.

This means that the taxpayers have additional five months, during which they can properly draw up the documents related to the controlled transactions. This is far from the only significant changes that have been introduced by the Law of Ukraine No. 2245-VII, affecting the conduct of business in Ukraine. Other significant changes and their impact on business in Ukraine will be covered by the experts of Finance Business Service in the subsequent articles.