On July 27, the list of organizational and legal forms of foreign counterparties on the countries / territories was officially published (and therefore entered into force), operations with which can be recognized as controlled for the purpose of control of transfer pricing (TP). This list was approved by the Resolution of the Cabinet of Ministers of Ukraine No. 480 of July 4 of this year (hereinafter – the List) for the implementation of the provisions of the Tax Code of Ukraine on TP, namely the clause “d” 39.2.1.1 art.39, and it is another criterion for the recognition of the operation as controlled one. If we look more widely, this can be seen as the next step of our government within the framework of global campaign on de-offshoring, namely to fulfill the commitments to implement the BEPS plan (its minimum standard), which Ukraine assumed with the acquisition of an official BEPS membership from 1 January, 2017.
The list includes more than 90 organizational and legal forms from 26 countries and territories. The absolute majority of organizational and legal forms on the list are partnerships (about 80% of total amount). There were also some forms of investment funds and companies, limited liability companies, associations, international companies, etc. It is noteworthy that the List includes the forms of the companies not only of those jurisdictions that are traditionally used in tax planning schemes (for example, the British LLP or the UAE free zone company), but also organizational and legal forms in the jurisdictions with traditional tax load (Germany, France, Poland) and even exotic for our perception types of the companies of Asian countries (Korea, Japan, Israel).
The Government used the data of the OECD report on taxation of partnerships, as well as the information bases of the International Bureau of Fiscal Documents, to compile the List. The main criterion was the payment of profit tax.
That is, from now on, the fiscal authorities believe that if a non-resident is established in one of the organizational and legal forms of one of the states specified in the List, he does not pay the tax on the profit of the enterprise, including the income outside the state of registration, and / or he is not a tax resident of the country of registration. Accordingly, all the transactions of the Ukrainian taxpayers with such counterparties, with the volume of more than 10 million UAH for the reporting period will be recognized as controlled, and therefore the TP rules will be applied to them.
The only way to avoid control is to prove the opposite, that is, the payment of tax by a non-resident in the country of registration in the reporting year. Then business transactions with this non-resident in this reporting period will be recognized as uncontrolled, if, of course, there is compliance with other criteria defined by law. This possibility is provided for by the part 2 par. 39.2.1.1 art.39 of the Tax Code.
The bad news is that neither the procedure for confirming the tax payment nor the list of documents by which such payment can be confirmed has been established. And this means that, in practice, a taxpayer may face difficulties in proving the fact of paying a tax in the country of registration to the Ukrainian fiscal authorities.
The matter of the possibility of applying the provisions of agreements on avoidance of double taxation to the payments of such non-residents is not less important. Most likely, it will become difficult to use in practice the advantages of the international agreements in the tax sphere for non-residents, whose organizational and legal form is included in the List.
Another important issue – which reporting period will the transactions with counterparties be started to monitor, which organizational and legal form is included in the List? We assume that the disputes will inevitably arise on this issue, since the Tax Code contains two conflicting norms. Thus, the second part of par. 39.2.1.2 Article 39 establishes the moment when this criterion of the controllability of business transactions comes into force – on 1 of January of the reporting year, following the calendar year in which the countries were included in the List. This means that the deals made since 2018 will fall under the control of the TP.
At the same time, cl.41 Subsection 10 of the Transitional Provisions of the TCU states that economic transactions with non-residents, which organizational and legal form is included in the List, are recognized as being controlled from the date of introduction of the List. And this means that this norm makes report for the operations committed this year already.
We still incline to the first option, because the second one contradicts at once two basic principles of the Ukrainian tax legislation, established in art. 4 of the TCU: presumption of legitimacy of the decision of the taxpayer in the event of legal conflict and stability – a ban on the introduction of any elements of the taxes and fees in less than 6 months before the start of the new budget period.
Summarizing, we want to note that Ukraine is moving towards a worldwide policy to fight with tax evasion and approving the concept of paying taxes at the place of business and earning income. It is also obvious that in the future such a struggle will only intensify. The approval of the List has become, even though expected, but still a challenge for the businesses using the tax optimization schemes with the help of the foreign partners and counterparties. We see this as another signal to the need of revision of such structures. List of organizational and legal forms of non-residents is approved, with which operations will be controlled according to rules of tp
On July 27, the list of organizational and legal forms of foreign counterparties on the countries / territories was officially published (and therefore entered into force), operations with which can be recognized as controlled for the purpose of control of transfer pricing (TP). This list was approved by the Resolution of the Cabinet of Ministers of Ukraine No. 480 of July 4 of this year (hereinafter – the List) for the implementation of the provisions of the Tax Code of Ukraine on TP, namely the clause “d” 39.2.1.1 art.39, and it is another criterion for the recognition of the operation as controlled one. If we look more widely, this can be seen as the next step of our government within the framework of global campaign on de-offshoring, namely to fulfill the commitments to implement the BEPS plan (its minimum standard), which Ukraine assumed with the acquisition of an official BEPS membership from 1 January, 2017.
The list includes more than 90 organizational and legal forms from 26 countries and territories. The absolute majority of organizational and legal forms on the list are partnerships (about 80% of total amount). There were also some forms of investment funds and companies, limited liability companies, associations, international companies, etc. It is noteworthy that the List includes the forms of the companies not only of those jurisdictions that are traditionally used in tax planning schemes (for example, the British LLP or the UAE free zone company), but also organizational and legal forms in the jurisdictions with traditional tax load (Germany, France, Poland) and even exotic for our perception types of the companies of Asian countries (Korea, Japan, Israel).
The Government used the data of the OECD report on taxation of partnerships, as well as the information bases of the International Bureau of Fiscal Documents, to compile the List. The main criterion was the payment of profit tax.
That is, from now on, the fiscal authorities believe that if a non-resident is established in one of the organizational and legal forms of one of the states specified in the List, he does not pay the tax on the profit of the enterprise, including the income outside the state of registration, and / or he is not a tax resident of the country of registration. Accordingly, all the transactions of the Ukrainian taxpayers with such counterparties, with the volume of more than 10 million UAH for the reporting period will be recognized as controlled, and therefore the TP rules will be applied to them.
The only way to avoid control is to prove the opposite, that is, the payment of tax by a non-resident in the country of registration in the reporting year. Then business transactions with this non-resident in this reporting period will be recognized as uncontrolled, if, of course, there is compliance with other criteria defined by law. This possibility is provided for by the part 2 par. 39.2.1.1 art.39 of the Tax Code.
The bad news is that neither the procedure for confirming the tax payment nor the list of documents by which such payment can be confirmed has been established. And this means that, in practice, a taxpayer may face difficulties in proving the fact of paying a tax in the country of registration to the Ukrainian fiscal authorities.
The matter of the possibility of applying the provisions of agreements on avoidance of double taxation to the payments of such non-residents is not less important. Most likely, it will become difficult to use in practice the advantages of the international agreements in the tax sphere for non-residents, whose organizational and legal form is included in the List.
Another important issue – which reporting period will the transactions with counterparties be started to monitor, which organizational and legal form is included in the List? We assume that the disputes will inevitably arise on this issue, since the Tax Code contains two conflicting norms. Thus, the second part of par. 39.2.1.2 Article 39 establishes the moment when this criterion of the controllability of business transactions comes into force – on 1 of January of the reporting year, following the calendar year in which the countries were included in the List. This means that the deals made since 2018 will fall under the control of the TP.
At the same time, cl.41 Subsection 10 of the Transitional Provisions of the TCU states that economic transactions with non-residents, which organizational and legal form is included in the List, are recognized as being controlled from the date of introduction of the List. And this means that this norm makes report for the operations committed this year already.
We still incline to the first option, because the second one contradicts at once two basic principles of the Ukrainian tax legislation, established in art. 4 of the TCU: presumption of legitimacy of the decision of the taxpayer in the event of legal conflict and stability – a ban on the introduction of any elements of the taxes and fees in less than 6 months before the start of the new budget period.
Summarizing, we want to note that Ukraine is moving towards a worldwide policy to fight with tax evasion and approving the concept of paying taxes at the place of business and earning income. It is also obvious that in the future such a struggle will only intensify. The approval of the List has become, even though expected, but still a challenge for the businesses using the tax optimization schemes with the help of the foreign partners and counterparties. We see this as another signal to the need of revision of such structures.