BEPS-style Tax Rush
The matter of amendments
The Ministry of Finance has published a draft law prepared jointly with the State Fiscal Service (SFS) and the National Bank of Ukraine (NBU), which is likely to amend the Tax Code in order to implement the Action Plan on Base Erosion and Profit Shifting (BEPS)
Whom it will affect
Business entities cooperating with non-residents and individuals owning foreign companies
Should this draft law become a law, in addition to changes in the transfer pricing and identification of a beneficial owner, will be introduced a completely new procedure, which will allow to tax incomes of resident individuals accumulated abroad on accounts of legal entities controlled by them.
First changes will affect transfer pricing.
A three-level documentation structure for international groups of companies will be introduced, which will include transfer pricing documentation (Local File), global documentation (Master File), and country-by-country report, which will apparently allow to control transactions within international groups of companies. In this case, companies will be obliged to inform regulatory authorities about being a part of international groups.
Furthermore, the substance over form principle will be introduced. From now on, for TP purposes a transaction shall be considered in terms of actual conduct of parties to a transaction.
The list of entities, the transactions of which may be recognized as controlled, will be expanded. Once the law is adopted, transactions of IV group single taxpayers with non-residents will not remain unnoticed. Moreover, quoted prices and comparable uncontrolled price method (CUP method) must be used for the analysis of commodities transactions.
How to prepare / mechanism of the amendments introduction
It is planned to introduce the concept of “constructive” dividends, that is, hidden profit distribution to be regarded as difference between the price in controlled transactions and the price corresponding to arm’s length principle, and is to be defined as hidden profit distribution to a non-resident.
Changes concerning beneficial owners are related to introducing the signs of an actual owner of income, that have already been used by regulatory authorities, into the legislation. Thus, persons who have proper authority to use and dispose of their income, will not transfer the major part of such income in the future, and will perform significant functions and bear the risks related to obtaining and using income, and will have sufficient resources therefor, will be beneficial owners.
Should it be discovered that recipient of income does not meet such criteria, the payment must be subject to a double taxation agreement with a country of real ultimate beneficial owner, if any.
The main feature of the draft law is introduction of an institute of controlled foreign corporations (CFC).
CFCs will be foreign companies controlled by an individual resident of Ukraine. Income of such companies will be subject to tax to the extent not paid as dividends, at a rate of 18 or 9 percent.
However, should a company not be located in tax haven (subject to a double taxation agreement) or should it be a public company with exchange traded shares or should it be a charitable organization, income of such companies in Ukraine will not be subject to tax.
Individuals will be obliged to notify tax authorities of owning CFCs on their own. For failure to perform such an obligation, regulatory authorities will have the right to impose a penalty of 500 minimum salaries, which will, without any doubt, affect the willingness to provide relevant notifications in due time.