Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
Detailed transfer pricing rules were introduced to Ukraine’s tax laws on 1 September 2013. Since then, the rules have been frequently revised – namely, in 2015, 2017, 2018 and 2019.
In general, Ukraine’s transfer pricing rules are based on Organisation for Economic Cooperation and Development guidelines and apply only for corporate income tax purposes (in 2015, the transfer pricing rules had applied only to cross-border transactions and in 2013 and 2014, domestic transactions were also subject to these rules).
If a transaction is subject to transfer pricing (ie, a transaction qualifies as a controlled one for transfer pricing purposes), the prices in such transaction should be arm’s length.
Among other things, the Ukrainian transfer pricing rules:
- define related parties;
- provide criteria for controlled transactions;
- describe the methods and information sources for determining the arm’s length price for tax purposes in controlled transactions; and
- introduce mandatory reporting and documentation requirements.
The transfer pricing rules also provide for special transfer pricing audits and the possibility of concluding an advance pricing agreement with the tax authorities.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
In 2018 the following changes concerning transfer pricing were implemented:
- Transactions between non-residents and permanent establishments in Ukraine were made to constitute controlled transactions.
- Parties were made to calculate the volume of controlled transactions based on arm’s length prices instead of contractual prices.
- The advance pricing agreement procedure was updated.
In 2019 the substance-over-form doctrine was implemented for transfer pricing purposes. In addition, a draft law has been introduced which aims to implement the Base Erosion and Profit Shifting Action Plan into national tax legislation. The draft law envisages the implementation of a three-tier transfer pricing documentation approach, as well as the concepts of low value-adding services and constructive dividends. Such changes are expected to be finalised in late 2019.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
The primary legislation governing transfer pricing in Ukraine is the Tax Code (2755).
In addition, certain transfer pricing rules are addressed in the following acts of the Cabinet of Ministers of Ukraine:
- Act 1045 – with respect to low-tax jurisdictions;
- Act 408 – with respect to organisational types of non-resident that do not pay corporate income tax;
- Act 381 – with respect to the procedure for calculating profit level indicator ranges;
- Act 504 – with respect to the procedure for concluding advance pricing agreements; and
- Act 616 – with respect to the commodities for applying the comparable uncontrolled price (CUP) method).
As these acts undergo changes on a near-annual basis, it is important to verify which version applies to the period under review.
Are there any industry-specific transfer pricing regulations?
Ukraine has no industry-specific transfer pricing regulations. All taxpayers performing controlled transactions should ensure that prices in such transactions are arm’s length.
At the same time, the Tax Code provides for the following circumstances under which prices qualify as arm’s length if the relevant conditions are met:
- State-regulated prices and mark-ups with respect to certain goods or services may qualify as arm’s length, unless the minimum or maximum price, mark-up or indicative price is established by the state.
- Mandatory valuations of transaction objects can be used to determine arm’s length prices.
- If goods are sold through a mandatory public auction, prices determined as a result of the auction may qualify as arm’s length.
- If goods, including pledged property, are sold in an enforcement procedure in accordance with applicable legislation, terms of such sales may qualify as arm’s length.
The Tax Code also provides that taxpayers importing or exporting goods with publicly quoted prices (the list of such products and commodity exchanges is approved by the Cabinet of Ministers of Ukraine) in controlled transactions should apply the CUP method using quoted prices. Otherwise, the profitability of all counterparties involved in the chain of business transactions should be disclosed by 1 May of the year following the reporting year.
There are also specific rules to determine arm’s length prices based on forward or futures contracts.
What transactions are subject to transfer pricing rules?
The Tax Code outlines that controlled transactions are subject to transfer pricing rules.
Controlled transactions for transfer pricing purposes are business transactions that may have an impact on taxable income, specifically:
- business transactions with non-resident related parties;
- business transactions concerning sales or purchases of goods or services through non-resident commissionaires;
- business transactions with non-residents incorporated or resident in offshore jurisdictions (the Cabinet of Ministers of Ukraine determines the list of offshore jurisdictions);
- business transactions with non-residents that do not pay corporate income tax and/or are not tax residents of the country where they are registered as legal entities (the Cabinet of Ministers of Ukraine determines the list of organisation forms of such non-residents with reference to specific states);
- business transactions between non-residents and a permanent establishment in Ukraine; and
- business transactions between taxpayers and non-residents through non-related intermediaries where the intermediary:
- performs no significant function;
- uses no significant assets; and
- bears no significant risks in respect of the transaction.
The abovementioned transactions qualify as controlled if they meet the following criteria (which must be met simultaneously):
- the annual amount of the transactions with one counterparty (calculated according to accounting rules) exceeds UAH10 million (approximately €312,000); and
- the total annual income (calculated according to accounting rules) of the Ukrainian taxpayer from any type of activity exceeds UAH150 million (approximately €4.7 million).
From 2018, transactions between non-residents and permanent establishments in Ukraine are considered controlled if their value exceeds UAH10 million (approximately €312,000). For this type of controlled transaction, no annual income criterion applies (ie, the permanent establishment need not earn more than a specific amount).
In all of the above cases, the criteria for qualifying a transaction as controlled should be determined using arm’s length prices.
In addition, there are certain cases where transfer pricing rules might apply, including purchasing goods or services from offshore or zero-tax non-residents and royalty payments. Deductible expenses on goods sold and royalty payments in such cases will be partially limited, unless the Ukrainian purchaser confirms that the transaction with the non-resident was performed at arm’s length.
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
The Tax Code defines ‘related parties’ as legal entities or individuals that can affect the conditions or economic effects of business activities. The Tax Code provides the following criteria for determining related parties:
- For legal entities:
- if an entity directly or indirectly (via related parties) owns 20% or more in another entity;
- if a person (individual or legal entity) directly or indirectly (via related parties) owns 20% or more in another entity;
- if 50% or more of the members of an entity’s collegial executive bodies or supervisory boards of the legal entities are the same;
- if single executive bodies are appointed (elected) upon the decision of the same person (owner or authorised body); or
- if the ultimate beneficial owner (controller) of the legal entity is the same physical individual.
- For individuals:
- spouses, parents (including foster parents), children (including adult, non-adult and adopted children), siblings (including half-siblings), guardians and children under guardianship.
- For legal entities and individuals:
- if an individual directly or indirectly (via related parties) has ownership in 20% or more of another legal entity;
- if an individual is the ultimate beneficial owner (controller) of a legal entity;
- if this individual acts as the single executive body of such entity; or
- if the sum of all credits (loans), refundable financial aid granted and guaranteed by the same individual or legal entity is more than three-and-a-half times the equity of the borrowing entity (or more than 10 times this amount for financial and exclusively leasing companies). The sum of such credits (loans), refundable financial aid and equity is calculated as an average of opening and closing values in the reporting period.
While non-exhaustive, this list illustrates a number of common scenarios in which parties qualify as related for transfer pricing purposes.
If the draft law on amendments to the Tax Code comes into force, the abovementioned criteria would be supplemented with the following criteria:
- More than 75% of a taxpayer’s income derived from business activities during a calendar year must be from transactions for supplying goods, performing work or providing services to another legal entity.
- More than 75% of the taxpayer’s expenses for a calendar year must be from transactions on purchasing goods, receiving work or services from another legal entity. The
amount of contributions to common property made by parties to a joint-cooperation venture agreement must be 25% or more.
Are any safe harbours available?
There are no formal safe harbours in Ukraine.
However, taxpayers with an annual income below UAH150 million are not subject to transfer pricing control.
Some transactions are considered to be at arm’s length (ie, those in which prices are subject to state regulation or mandatory valuation, or determined by mandatory auction and those for forced sales of collateral) if the transaction’s conditions meet the respective legislative requirements.
In addition, the burden of proof lies on the tax authorities. Therefore, during a tax audit, the tax authorities should use the same transfer pricing method (combination of methods) used by the taxpayer, unless it is proven that the taxpayer used an incorrect method.
Which government bodies regulate transfer pricing and what is the extent of their powers?
The State Fiscal Service of Ukraine is the primary regulator authorised to:
- monitor compliance with the transfer pricing rules;
- perform transfer pricing audits;
- clarify tax issues;
- issue private tax rulings; and
- sign advance pricing agreements.
The State Fiscal Service of Ukraine will be reorganised into separate tax (the State Tax Service) and customs (the State Custom Service) services. The State Tax Service is expected to be a successor of the State Fiscal Service in relation to transfer pricing regulations.
The Ministry of Finance is authorised to issue generalised tax rulings on any issues, including transfer pricing matters.
In addition, the Cabinet of Ministers of Ukraine issues specific acts in respect of transfer pricing issues.
Which international transfer pricing agreements has your jurisdiction signed?
Ukraine has not signed any specific international transfer pricing agreements. However, it has entered into more than 70 double tax treaties with developed countries. The list of such double tax treaties is available on the State Fiscal Service’s website.
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
The Organisation for Economic Cooperation and Development (OECD) guidelines are not legally binding on Ukrainian tax law. However, local transfer pricing rules are primarily consistent with the OECD Transfer Pricing Guidelines through the inclusion of their key principles. Further, the OECD guidelines are used as an additional source of information and the tax authorities also consider them during transfer pricing audits and litigation.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
Ukrainian tax legislation prescribes the possibility of using all methods described in Chapter II of the Organisation for Economic Cooperation and Development Guidelines – in particular:
- the comparable uncontrolled price method (CUP);
- the resale price method (RPM);
- the cost plus method (CPM);
- the transactional net margin method (TNMM); and
- the profit split method (PSM).
The CUP method is based on a comparison of prices used in controlled transactions with the price and/or range of prices in comparable non-controlled transactions. The information about the prices in the comparable non-controlled transactions, which were actually performed by the taxpayer or other parties, are used.
The CUP method may be used:
- when exchange quotations are available;
- in transactions involving intellectual property (eg, royalties);
- in financial transactions (eg, loans and bonds); and
- in comparable transactions with non-related parties, if reliable information on the comparable transactions is available.
RPM may be used, for example, during resales of goods if the following functions are performed:
- the goods are prepared for resale and transportation (eg, division of goods among the parties, forming deliveries, sorting and repacking); and
- the goods are mixed, if the characteristics of the final (prefabricated) product is not significantly different to the mixed goods.
CPM may be used, for example, in the following cases:
- providing work or services in favour of related parties; and
- sales of goods, raw materials or semi-finished products under contracts in favour of related parties.
TNNM applies if the information that allows taxpayers to reasonably apply the previous transfer pricing methods are absent. It is often used in:
- resales of goods;
- the provision of work or services; and
- the production of goods (in case of capital-intensive activity).
PSM is often used when other methods cannot be applied, particularly where:
- a significant relationship exists between controlled transactions and other transactions undertaken by the parties of controlled transactions with related parties; and
- parties of the controlled transaction hold the rights on intangible assets that have a significant impact on profitability.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
According to the Ukrainian legislation, the CUP method takes priority over the other methods. If the CUP method is inapplicable, taxpayers can apply other methods specified in Article 39 of the Tax Code. However, where RPM, CPM, NPM or PSM are available, the first two methods are preferred. The application of methods that are not prescribed by the Tax Code is prohibited.
The transfer pricing method selected should be the most appropriate based on the facts and circumstances of the controlled transaction.
The main criteria for selecting the most appropriate transfer pricing method are:
- the nature of the controlled transaction, which is often determined by a functional analysis of the controlled transaction (including the functions performed, assets employed and risks assumed);
- the availability of complete and accurate information, which is necessary for the application of the selected transfer pricing method(s); and
- the level of comparability between the controlled and non-controlled transactions, including the reliability of any comparability adjustments that can be used to eliminate differences between such transactions.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
According to Ukrainian legislation, controlled and non-controlled transactions are recognised as comparable if:
- there are no substantial differences between them that may significantly affect the financial results; or
- if such differences exist, they can be eliminated by adjusting the conditions and financial results of uncontrolled transactions to avoid the impact of these differences on the results of the analysis.
During the comparability analysis of the conditions of controlled and non-controlled transactions, the following elements must be taken into account:
- the description of the goods, works or services which are the subject of the transaction;
- the functions performed by the transacting parties, including the assets that they employ and the allocation of risks, rewards and responsibilities between them;
- the common practice of relationships and terms of agreements concluded between the transacting parties which substantially affect the price of the goods, works or services;
- the economic conditions of the transacting parties’ activities, including an analysis of the relevant markets that significantly affect the price of the goods, works or services; and
- the transacting parties’ business strategies (if any) that significantly affect the price of the goods works or services in the controlled transaction.
In addition, there are several criteria for the selection of comparable legal entities, which must be met simultaneously:
- The activity must be comparable with the activity of the tested party within the controlled transaction. ‘Comparability’ is determined by the national (ie, Ukrainian only) or international classifiers of economic activities.
- Comparable companies must not have operating losses in more than one reporting period within the analysed period.
- comparable companies must not directly or indirectly own more than 20% of the corporate rights in another company. Further, the shareholders of the comparable company must not be legal entities with more than 20% direct of indirect ownership per shareholder.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
The CUP method should be used to verify whether prices for commodities listed on commodities exchanges are arm’s length. The list of such commodities and exchanges is determined by the Cabinet of Ministers of Ukraine. The range of prices is determined based on the exchange quotations for the decade preceding the performance of the controlled transaction.
If the controlled transaction is performed based on a futures or forward contract, the range of prices is determined based on futures or forward quotations for the decade preceding the effective date of the relevant futures or forward contract, provided that the taxpayer notifies the tax authority of entering into such a contract within 10 business days from the effective date thereof.
If a taxpayer uses a method other than CUP to determine the level of prices in the abovementioned transactions, it must provide information on all related parties that participated in the controlled transaction (up to the first non-related party), including information on profit level indicators of related parties. Otherwise, the tax authority is authorised to determine the level of prices based on the CUP method.
Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
According to Ukrainian legislation, all taxpayers performing controlled transactions must prepare, maintain and implement place local transfer pricing documentation for each reporting period (ie, calendar year). Local transfer pricing documentation, substantiating the arm’s-length nature of prices and profitability, should be submitted only on request of the tax authorities and within 30 calendar days. Such requests can be sent to the taxpayer no earlier than 1 October of the year following the calendar year in which the controlled transaction was performed.
In addition, all taxpayers performing controlled transactions should file a report on controlled transactions (transfer pricing notification) by 1 October of the year following the reporting year.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
The Ukrainian legislation requires only local transfer pricing documentation and report on controlled transactions (transfer pricing notification) to be filed. Neither master file nor country-by-country report are currently required.
The Tax Code sets out requirements for local transfer pricing documentation. In particular, it should include:
- information regarding related parties, including information on parties which directly or indirectly own at least 20% of the taxpayer and parties of which the taxpayer owns at least 20% (directly or indirectly);
- information regarding the group, including its legal structure, a description of its activities and its transfer pricing policy. This should be provided with the information about the entities, whom the taxpayer provides with local management reports (eg, names of entities and countries where such entities have head offices);
- a description of the taxpayer’s management structure (ie, its organisational structure);
- a description of the taxpayer’s activities and business strategy (including information regarding economic conditions, an analysis of the markets where the taxpayer operates and its main competitors);
- information regarding the taxpayer’s participation in business restructurings or transfers of intangible assets during the reporting or preceding year, along with an explanation of the aspects of those transactions that had or still have an impact on its activity;
- a description and the conditions of the transaction and copies of the relevant agreements (ie, contracts);
- a description of the goods, works or services;
- information regarding the payments that were actually made in the controlled transaction (ie, the amounts, currencies and dates of payments, and payment documents);
- factors that influenced the price determination, including business strategies of the parties to the controlled transaction (if any) that significantly affected the prices of the goods, works or services;
- a functional analysis of the controlled transaction (ie, information regarding the functions performed, assets used and economic risks assumed by the parties to the controlled transaction);
- an economic analysis, including:
- a benchmarking study;
- substantiation of the transfer pricing method(s);
- the profitability indicators and sources of information used;
- the allocation of the supplier’s income (profit) or expenses relating to the controlled transaction that were considered when calculating the profit level indicator;
- a calculation of the arm’s length range of prices/profitability; and
- a description and calculation of comparability adjustments performed in respect of controlled and non-controlled transactions; and
- substantiation of the use several tax periods (years) for determining the profitability range and the calculation of the weighted average profitability indicator;
- information regarding the proportional transfer pricing adjustment performed by the taxpayer (if any);
- information regarding the individuals and entities that are party to the controlled transaction and parties relating to the taxpayer (in the reporting period in which the controlled transaction was performed and at the time of submission of the transfer pricing documentation); and
- information regarding the taxpayer’s total number of employees, with a breakdown based on its specific divisions as of the date of the transaction or the end of the reporting period.
Local transfer pricing documentation should be prepared in Ukrainian only. No mandatory form for transfer pricing documentation has been prescribed and the information may be contained in a single document or series of documents.
The Ukrainian tax authorities may require taxpayers to provide additional information and documentation.
What are the penalties for non-compliance with documentation and reporting requirements?
Ukrainian legislation contains a significant number of specific transfer pricing penalties. The penalties are calculated using the value of the subsistence minimum (SM) established for 1 January of the reporting year. The SM in January 2018 was UAH1,700 (approximately €53); in January 2019 it was increased to UAH1,853 (approximately €58).
The penalties for non-compliance with the transfer pricing reporting requirements are as follows:
- 3% of the controlled transaction value for failure to file transfer pricing documentation (limited to 200 SMs) for all controlled transactions in the respective tax year;
- 1% of the controlled transaction value for failure to declare the controlled transaction in the report on controlled transactions (limited to 300 SMs for all unreported controlled transactions);
- 300 SMs for failure to file (or the late filing of) the report on controlled transactions;
- 5 SMs for each calendar day for non-submission of the controlled transactions report or transfer pricing documentation within 30 calendar days following the last day of the deadline for settlement of the fine;
- 2 SMs for each calendar day (up to a maximum of 200 SMs) for late submission of transfer pricing documentation; and
- 1 SM for each calendar day, but no more than 300 SMs, for late submission of the controlled operations report or late declaration of the controlled transaction in such report when submitting an adjusting report.
Paying penalties does not exempt the taxpayer from its obligation to file a report on a controlled transaction or prepare transfer pricing documentation.
In addition, the taxpayer’s management could be subject to criminal liability if the total amount of additional tax liabilities assessed by the tax authorities during the tax audit exceeds 1,000 times the amount that is equal to 50% of the statutory subsistence minimum for able-bodied individuals (ie, UAH960,500 of additional tax liabilities for 2019).
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Since the introduction of transfer pricing documentation requirements, the burden of proof has been transferred to the tax authorities.
As Ukrainian legislation prescribes clear content requirements in transfer pricing documentation, taxpayers can prepare proper transfer pricing documentation justifying the arm’s length nature of the controlled transactions. If detailed documentation is in place, the tax authorities must demonstrate that the selected method, search criteria and identified uncontrolled comparables are not applicable. This assumes that if the functional and economic analysis were determined correctly, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the selected method is incorrect.
That is why the best practice is to prepare the transfer pricing documentation in advance (without the tax authorities’ request), preferably prior to the submission of the transfer pricing report (transfer pricing notification). Proper and comprehensively prepared transfer pricing documentation is a major factor in reducing transfer pricing audit risks.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Advance pricing agreements (APAs) are available for large taxpayers only. Taxpayers are considered ‘large’ if:
- their overall revenue, from all types of activity in the four most recent tax (reporting) quarters, exceeds the equivalent of €50 million; or
- if the total amount of taxes, fees and payments to Ukraine’s state budget for the same period exceeds the equivalent of €1 million based on the average official exchange rate of the National Bank of Ukraine for the same period and provided that the sum of such taxes, fees and charges less customs payments exceeds the equivalent of €500,000.
APAs are concluded for a limited period (up to five years) between the large taxpayer and the State Fiscal Service (SFS), with the possible participation of fiscal authorities from other states. An APA can set out special pricing criteria and select the most appropriate transfer pricing methodology tools for determining whether future controlled transactions of the taxpayer are at arm’s length. Such arrangements may be either:
- unilateral (ie, between the taxpayer and the SFS);
- bilateral (ie, between the taxpayer, the SFS and the fiscal authority of the country of the non-resident party in the controlled transaction); or
- multilateral (ie, with the participation of several fiscal authorities of the countries of the non-resident parties to the controlled transaction).
An effective double taxation treaty with the countries of residence of the parties to the transaction is a prerequisite for engaging the fiscal authorities of the respective countries in an APA procedure.
In addition, from 2018 an APA can apply retroactively. There are no limitations with respect to list of controlled transactions that may be subject to the APA procedure; however, no APAs appear to have been signed to date.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
The requirements and procedures regarding the application for an APA are outlined in detail in the Cabinet of Ministers of Ukraine Act 504.
Prior to the APA process, a taxpayer may submit a request for preliminary examination of the relevant transaction to the SFS, which has 60 days to confirm whether it would be reasonable to begin the APA procedure.
To begin the APA procedure, a taxpayer must file a petition with the SFS, which must include the following documentation:
- a copy of the taxpayer’s organisational documents;
- the taxpayer’s accounting and financial reporting documents for the preceding three years;
- a description of any ongoing tax disputes involving the transaction;
- a certificate of tax residence of the relevant foreign parties to the controlled transaction;
- a description of how an applicable tax treaty between Ukraine and the relevant foreign jurisdiction would affect the transaction;
- an analysis of the possible influence of the APA on the tax liabilities of the parties to the controlled transaction;
- copies of any documents submitted to the relevant foreign tax authority for an APA by the taxpayer or the counterparty to the transaction;
- copies of documents granting authority to the taxpayer’s representative to take part in the price coordination procedure;
- transfer pricing documentation in respect of such transactions; and
- any other documentation/information deemed relevant by the taxpayer or requested by the SFS.
Once all required documentation has been submitted and reviewed, the SFS will inform the taxpayer in writing as to whether it is ready to move forward and conclude an APA. If the SFS rejects the petition, the taxpayer may file an appeal within 15 days of the decision. The SFS must respond to the appeal with its decision within 30 days.
Information provided to the tax authorities during the APA process cannot be used as a reason for a tax audit.
How long does it typically take to conclude an advance pricing agreement?
To date, no Ukrainian taxpayer has concluded an APA.
What is the typical duration of an advance pricing agreement?
To date, no Ukrainian taxpayer has concluded an APA.
What fees apply to requests for advance pricing agreements?
There is no government fee for consideration of requests for APAs.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
The main advantage of concluding an APA is that if it is complied with, the SFS has no authority to assess additional tax liabilities, late payment interest or penalties with regard to controlled transactions covered by the APA.
However, if a taxpayer fails to comply with an APA’s terms and conditions, the APA becomes void from the effective date. In this case, the tax authorities may charge additional tax liabilities and apply financial penalties with regard to controlled transactions that do not meet the arm’s length principle.
Further, Ukrainian legislature prescribes two situations in case of legislative changes in future:
- a signed APA should not be amended if the laws change with regard to the regulation of relationships that arise out of an APA, or the amendment or termination thereof or if a taxpayer no longer qualifies as ‘large’; and
- a signed APA may be amended if the legal provisions that affect a taxpayer’s activities or set out the criteria for justifying the arm’s length principle. If any party disagrees with the proposed amendments, the APA will be terminated.
Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
The tax authorities monitor transfer pricing risks in several stages. After the deadline for submitting a report on controlled transactions (1 October) has passed, the tax authorities review such reports and identify taxpayers which did not submit the report or indicated unnormal profit level indicators or non-typical information. Next, the tax authorities send a request for transfer pricing documentation to the respective taxpayers. At this stage, the tax authorities consider the documents provided to determine whether the taxpayer’s justifications regarding the arm’s length nature of its controlled transactions are feasible. If the transfer pricing documentation is not submitted or the taxpayer submits incomplete documentation or its conclusions are insufficient, the tax authorities may initiate transfer pricing audit.
The burden of proof lies with the tax authorities. During the tax audit, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the taxpayer selected an unsubstantiated method.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
The duration of a transfer pricing audit cannot exceed 18 months. The tax authorities should update the taxpayer on the status of the audit every six months. The audit may be extended for an additional 12 months if information is required from foreign tax authorities or an expert examination or translation is required.
In practice, the actual duration of transfer pricing audits is between nine and 11 months.
What penalties may be imposed for non-compliance with transfer pricing rules?
If the prices of the controlled transaction do not correspond to the arm’s length principle, the taxpayer may perform the respective self-adjustment and pay additional tax. Such self-adjustment can be made to maximum or minimum values of the range of prices (profitability). Taxpayers have the right to make a self-adjustment without incurring any penalties and fines until 1 October of the year following the reporting year.
However, if non-compliance is detected by the tax authorities during the tax audit, a transfer pricing adjustment will be made to the median price range (profitability) and the relevant penalties and fines will be applied.
In addition to these penalties, late payment interest should be applied. This is calculated by the application of an annual rate of 120% of the prime rate of the National Bank of Ukraine, effective from the actual date of underpayment on the amount of additionally assessed tax liabilities for the whole period of underpayment.
Taxpayers are prohibited from making self-adjustments once a transfer pricing audit has begun.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
The Ukrainian tax authorities may make transfer pricing adjustments within seven years (2,555 days) following the deadline for submission of the corporate income tax return for the tax year concerned (ordinary adjustments). If a taxpayer submits an adjusted corporate income tax return, this term is calculated as of the date of submission of the adjusted corporate income tax return.
How can parties challenge adjustment decisions by the tax authorities?
Taxpayers can appeal tax assessments by way of an administrative procedure or in the courts.
During an appeal procedure, either administrative or in court, the requirement to pay a tax assessment notice is suspended.
Taxpayers have 10 business days from the date of receiving a tax assessment notice to initiate administrative appeal procedure. Taxpayers should file appeals to the higher level tax authority. The tax authority reviewing the administrative appeal has 20 calendar days to dismiss or satisfy the appeal. The tax authority reviewing the appeal may extend the consideration of the appeal up to 60 calendar days.
After exhausting the administrative appeal procedure, taxpayers have 10 calendar days to pay tax assessments or initiate a court appeal in order to avoid the tax assessment becoming due.
In general, taxpayers have 1,095 calendar days from the date of receiving the tax assessment notice to initiate a court appeal.
The system of courts includes:
- local administrative courts as courts of first instance;
- appellate administrative courts as courts of second instance; and
- the Supreme Court as the court of third instance.
Despite a lack of case law on transfer pricing, the Supreme Court’s conclusions should be followed by the lower-instance courts.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Ukrainian legislation provides for proportional transfer pricing self-adjustments after the respective approval has been received from the tax authorities. Proportional adjustments are also allowed in case of transfer pricing assessments by the tax authorities and based on the provisions of double tax treaties.
To date, there is no established practice; however, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
The beneficial ownership test is still the main anti-avoidance instrument for the Ukrainian tax authorities. All taxpayers wishing to access treaty benefits must prove that the income’s recipients are its beneficial owners. In general, beneficial owners are determined based on the object and purpose of double taxation conventions, including the avoidance of double taxation and the prevention of fiscal evasion and avoidance, following the substance-over-form doctrine.
In 2019 the substance-over-form doctrine for transfer pricing purposes was introduced to the Tax Code. In addition, the Ukrainian government has developed a draft law on Amendments to the Tax Code of Ukraine for the Purposes of Implementing the Action Plan on Base Erosion and Profit Shifting. This draft law includes provisions concerning the taxation of controlled foreign companies (CFCs) – in particular, Ukrainian resident individuals which control of foreign companies will be subject to personal income tax on CFC profits.
The draft law also contains provisions in respect of three-tier transfer pricing documentation and constructive dividends. It also elaborates on and expands the concept of beneficial owners.
The draft law will have a significant impact on international groups and Ukrainian companies engaged in international business, as well as on individuals (ie, tax residents of Ukraine who own or control said businesses). These changes will require businesses and their owners to revise their existing group structures and established business practices.
Such changes are expected to be implemented in 2019.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
The Ukrainian tax legislature on transfer pricing has focused on the implementation of the Base Erosion and Profit Shifting Action Plan in national tax legislation. Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on 23 July 2018.
Ukraine notified its intention to apply the following key provisions of the convention to all 77 of its applicable bilateral tax treaties with other Organisation for Economic Co-operation and Development (OECD) member countries:
- the provisions dealing with the purpose of a covered tax agreement (Article 6), the prevention of treaty abuse and concept of ‘business purpose’ (Article 7) and the mutual agreement procedure (Article 16);
- the provisions of Article 9(4) regarding capital gains derived from the alienation of shares or interests of entities deriving their value principally from immovable property; and
- the provisions on artificial avoidance of permanent establishment status through the specific activity exemptions (Article 13).
The MLI will enter into force in Ukraine on the first day of the third month after Ukraine deposits its instrument of ratification with the OECD. Ukraine has not yet ratified the MLI and no timetable for ratification has been announced.
Is there a legal distinction between aggressive tax planning and tax avoidance?
There is no legislative distinction between aggressive tax planning and tax avoidance. However, the tax authorities always try to challenge aggressive tax planning and reclassify it as tax evasion since the latter qualifies as a criminal offence. Ukrainian legislation prescribes the following types of liability in case of breaches of tax law:
- administrative; and
What penalties are imposed for non-compliance with anti-avoidance provisions?
There are no specific penalties for non-compliance with anti-avoidance provisions. However, additional tax assessments, fines and late payment interest apply.