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Offshore for Trading Activities: Is It Necessary

Until recently, offshore companies have been actively used by the Ukrainian entrepreneurs in international trade to reduce the tax burden and keep business confidentiality. We will consider in this blog whether the situation has changed in the conditions of global deoffshorization, and in particular, tightening of the Ukrainian legislation.

The field of trade has always been the simplest and most popular for offshore applications. One of the main goals of using offshore schemes in export-import transactions was to regulate the customs value of the goods, and, accordingly, the company’s trading profits. Offshore companies in such schemes were used as intermediaries between the seller and the buyer for the understatement of the value of goods during the export and overstatement – upon import.

However, the process of deoffshorization has reached our country. The provisions for the control of transfer pricing started working in the Ukrainian legislation. The Cabinet of Ministers has approved and periodically reviews the list of the countries with preferential taxation (it includes both classic offshores and jurisdictions, the income tax rate for the companies which have 5 or more points lower than Ukraine). When the Ukrainian companies trade with the countries from this list, the tax authorities apply additional control methods, namely, control over the price of operations for compliance with the principle of “outstretched hand”. This means that the conditions should not differ from those conditions that exist on the market, that is, between unrelated counterparties in comparable operations.

The control of transfer pricing only for the operations of a tax bearer (the Ukrainian company) which volume with each of contractors does not exceed 10 million UAH is not applied, and also if the annual income of this tax bearer from any activity does not exceed 150 million UAH. In order to avoid control of the TP, it is possible to split the activity by using more companies, however, in the conditions of increasing cost of offshore content, the economic feasibility of their use is dubious.

Many entrepreneurs continue to use offshore trading schemes in international trade, hoping for a lack of qualified personnel and well-tried techniques from the tax authorities. However, the fact that the control system of TP in our country has not started working yet fully is just a matter of time. After all, Ukraine joined the BEPS plan in 2017, undertaking to fulfill the so-called “minimum standard” to combat harmful tax practices, one of the items of which is the improvement of transfer pricing documentation. Now, the international community monitor carefully the fulfillment of Ukraine’s commitments.

In addition, the National Bank’s course on easing foreign exchange control has been outlined in our country. So, one of the provisions of the draft law “On Currency”, published in late 2017, is the abolition of the deadline for the closing of contracts, which make up 180 days at the moment. The availability of such a borderline was one of the main reasons for using offshore intermediaries in trading operations, because its non-compliance threatened to charge a fine of 0.3% of the value of the goods for each day of delay in the delivery of goods or payment of goods under a foreign economic contract. However, after the adoption of this law, entrepreneurs will no longer have to worry about the need to meet the deadline within 180 days, therefore one of the main reasons for accomplishment of export-import transactions through offshore intermediaries will disappear.

You should not forget about the reputational issue. Sometimes a counterparty, on learning the place of registration of a company on the islands, refuses to cooperate with it immediately. Instead, the company from a prestigious jurisdiction, for example, the Czech Republic or Estonia will inspire more confidence. Using such companies in international trade, Ukrainian companies can enjoy a number of advantages. But that is another story, which is the subject of an individual blog.