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UKRAINE Updates Transfer Pricing Rules for 2018

31/ 01/ 2018
  On 1 January 2018, the Law of Ukraine No. 2245-VIII as of 7 December 2017 “On Introduction of Changes to the Tax Code of Ukraine and Some Legislative Acts of Ukraine on Ensuring the Balance of Budget Revenues in 2018” (the Law) came into effect. The most important changes to transfer pricing (TP) regulations which come into force in 2018 are outlined below. Permanent establishment and threshold for TP purposes Business transactions between a non-resident and its Ukrainian permanent establishment will qualify as controlled transactions (CTs) when the annual volume of such transactions exceed UAH 10 million. For this type of CTs, there is no annual income criterion (i.e. the permanent establishment does not need to earn income beyond a specific level). In contrast, for other CTs to be subject to transfer pricing rules in Ukraine, the resident would need to have earned an annual income of UAH 150 million or above and the annual volume of transactions between the resident and non-resident entity would have to be UAH 10 million or above. For the purpose of calculating the volume of transactions, the amount must be calculated based on the arm’s length prices. In the past this threshold can be calculated based on contractual prices. Non-residents: “low-tax” jurisdictions and legal forms For TP purposes in Ukraine, transactions of Ukrainian entities with entities located in “low-tax” jurisdictions as well as with entities of special legal forms may be subject to TP control even if the parties are not related. The list of “low-tax” jurisdictions is approved by the Cabinet of Ministers and includes the following states and territories: with corporate tax rate by 5 or more percent lower than in Ukraine; which do not have double tax treaties with Ukraine; which do not provide tax information upon request of Ukrainian tax authorities in full and timely. The Law provides that the list shall also include states and territories that offer preferential taxation regimes, or where specifics of the tax base calculation allow not to pay the corporate profit tax or pay it at the rate lower by 5 or more percent than in Ukraine. The list of legal forms of non-residents was introduced in 2017 and include tax transparent entities such as LLP in UK or K/S in Denmark and many others (around 90 legal forms from 27 jurisdictions). The Law clarified that any changes to the list of the legal forms (such as inclusion or exclusion of legal forms) come into force on 1 January of the year following the year when those changes were introduced. TP documentation  The Ukrainian government has not introduced the three-tiered documentation requirements that have been brought on by the OECD BEPS Action Plan. Instead, the requirements to the contents of local Ukrainian TP documentation have been modified as follows: Information on the parties to CTs and the taxpayer’s related persons should be indicated for the period when the transaction was performed and as of the date of documentation submission. Description of the taxpayer’s management structure and organizational chart have to contain information on the total number of employees (with a breakdown by individual units) as of the date of the transaction or at the end of the reporting period. Advance Pricing Agreements Most importantly, the revised rules in 2018 allowed for the possibility to apply for Advance Pricing Agreements (APAs) retroactively and potentially to cover reporting periods before 2018 when the APA rules came into force. In order to qualify to apply for an APA, a taxpayer needs to be a large taxpayer. The APA can be done on a bilateral basis involving tax authorities of another country. For taxpayers that have concluded an APA, it is guaranteed that the provisions of the APA will remain stable and unchanged in case of any legislative changes to the procedure in respect of the conclusion, amendment or termination of APAs or if the taxpayer loses the status of a large taxpayer. If changes are made to the criteria of CTs that need to comply with the arm’s length principle or if legislative changes affect the activities of a large taxpayer, the tax authorities and the taxpayer are entitled to propose an amendment to the APA. If either party rejects the proposed changes, the APA shall be terminated. In case of non-compliance with the terms and conditions of the APA by the taxpayer, such APA becomes void from the day of its entry into force. In this case, the tax authorities may charge additional tax liabilities and apply financial sanctions with regard to CTs that do not meet the arm’s length principle. Key Takeaways Although the Ukrainian TP rules have not been updated to reflect the international standards based on OECD BEPS Action Plan so far, some significant changes have been implemented in the Ukrainian TP rules from 1 January 2018. Among these changes are the inclusion of certain dealings between a non-residents head office with its Ukrainian permanent establishments in the TP rules. Such dealings will now be subject to the arms length principle in Ukraine. Importantly volume of transactions must be now calculated based on arm’s length prices instead of contractual prices. In addition, the local TP documentation requirement in Ukraine have been amended so that more information would need to be provided. The update of an APA regime in Ukraine is a welcome development as it allows taxpayers to secure their transfer pricing positions in Ukraine, thereby providing better certainty.

On 1 January 2018, the Law of Ukraine No. 2245-VIII as of 7 December 2017 “On Introduction of Changes to the Tax Code of Ukraine and Some Legislative Acts of Ukraine on Ensuring the Balance of Budget Revenues in 2018” (the Law) came into effect. The most important changes to transfer pricing (TP) regulations which come into force in 2018 are outlined below.

Permanent establishment and threshold for TP purposes

Business transactions between a non-resident and its Ukrainian permanent establishment will qualify as controlled transactions (CTs) when the annual volume of such transactions exceed UAH 10 million. For this type of CTs, there is no annual income criterion (i.e. the permanent establishment does not need to earn income beyond a specific level). In contrast, for other CTs to be subject to transfer pricing rules in Ukraine, the resident would need to have earned an annual income of UAH 150 million or above and the annual volume of transactions between the resident and non-resident entity would have to be UAH 10 million or above.

For the purpose of calculating the volume of transactions, the amount must be calculated based on the arm’s length prices. In the past this threshold can be calculated based on contractual prices.

Non-residents: “low-tax” jurisdictions and legal forms

For TP purposes in Ukraine, transactions of Ukrainian entities with entities located in “low-tax” jurisdictions as well as with entities of special legal forms may be subject to TP control even if the parties are not related.

The list of “low-tax” jurisdictions is approved by the Cabinet of Ministers and includes the following states and territories: with corporate tax rate by 5 or more percent lower than in Ukraine; which do not have double tax treaties with Ukraine; which do not provide tax information upon request of Ukrainian tax authorities in full and timely. The Law provides that the list shall also include states and territories that offer preferential taxation regimes, or where specifics of the tax base calculation allow not to pay the corporate profit tax or pay it at the rate lower by 5 or more percent than in Ukraine.

The list of legal forms of non-residents was introduced in 2017 and include tax transparent entities such as LLP in UK or K/S in Denmark and many others (around 90 legal forms from 27 jurisdictions). The Law clarified that any changes to the list of the legal forms (such as inclusion or exclusion of legal forms) come into force on 1 January of the year following the year when those changes were introduced.

TP documentation 

The Ukrainian government has not introduced the three-tiered documentation requirements that have been brought on by the OECD BEPS Action Plan. Instead, the requirements to the contents of local Ukrainian TP documentation have been modified as follows:

  • Information on the parties to CTs and the taxpayer’s related persons should be indicated for the period when the transaction was performed and as of the date of documentation submission.
  • Description of the taxpayer’s management structure and organizational chart have to contain information on the total number of employees (with a breakdown by individual units) as of the date of the transaction or at the end of the reporting period.

Advance Pricing Agreements

Most importantly, the revised rules in 2018 allowed for the possibility to apply for Advance Pricing Agreements (APAs) retroactively and potentially to cover reporting periods before 2018 when the APA rules came into force. In order to qualify to apply for an APA, a taxpayer needs to be a large taxpayer. The APA can be done on a bilateral basis involving tax authorities of another country.

For taxpayers that have concluded an APA, it is guaranteed that the provisions of the APA will remain stable and unchanged in case of any legislative changes to the procedure in respect of the conclusion, amendment or termination of APAs or if the taxpayer loses the status of a large taxpayer. If changes are made to the criteria of CTs that need to comply with the arm’s length principle or if legislative changes affect the activities of a large taxpayer, the tax authorities and the taxpayer are entitled to propose an amendment to the APA. If either party rejects the proposed changes, the APA shall be terminated.

In case of non-compliance with the terms and conditions of the APA by the taxpayer, such APA becomes void from the day of its entry into force. In this case, the tax authorities may charge additional tax liabilities and apply financial sanctions with regard to CTs that do not meet the arm’s length principle.

Key Takeaways

Although the Ukrainian TP rules have not been updated to reflect the international standards based on OECD BEPS Action Plan so far, some significant changes have been implemented in the Ukrainian TP rules from 1 January 2018. Among these changes are the inclusion of certain dealings between a non-resident’s head office with its Ukrainian permanent establishments in the TP rules. Such dealings will now be subject to the arm’s length principle in Ukraine. Importantly volume of transactions must be now calculated based on arm’s length prices instead of contractual prices. In addition, the local TP documentation requirement in Ukraine have been amended so that more information would need to be provided.

The update of an APA regime in Ukraine is a welcome development as it allows taxpayers to secure their transfer pricing positions in Ukraine, thereby providing better certainty.

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