Top issues of transfer pricing in 2019
Transfer pricing – is a control of prices in transactions between tax payers and related non-residents, or counterparties from low tax jurisdictions, according to the criteria of the country of registration or the organizational form of counterparty.
For whom the transfer pricing is relevant:
1. Ukrainian tax payers who deal with non-residents and meet 2 criteria: annual revenue of UAH 150 million, market price of the services (including acquisition of fixed assets, assignment of the rights for receivables, debt, interest on loan, royalty, commission, penalties, etc.), or goods in transactions with non-residents of or over UAH 10 million.
2. Ukrainian tax payers that acquire goods or services from non-residents per criteria of the country of registration according to the Order of the CMU № 1045 or per the organizational legal form according to the Order of the CMU № 480.
3. Representations of non-residents in Ukraine that have transaction with such non-residents.
What the tax payers should do
For categories 1 and 3 – to prepare report of controlled operations before 1 October of the year following the reporting year, and to prepare a documentation on transfer pricing.
For category 2 – to prepare documentation on transfer pricing with the justification of prices being on arms-length principle, or according to para 140.5.4. TCU to increase profit before tax for 30% of the price of such transaction.
Key changes in the area of transfer pricing (hereinafter referred to as “TC”), which came into force on 01.01.2019:
1. For the purposes of the TC, the principle of “prevalence of the substance over the form” is regulated by law: for TP purposes the commercial and/or financial characteristics of the controlled transaction are determined in accordance with the actual actions of the parties to the transactions and the actual conditions of their conduct. If the controlled transaction is actually carried out but not documented (not verified), for the purposes of the TC, it should be considered in accordance with the actual conduct of the parties to the transaction and the actual conditions of its execution.
2. The concept of DEMPE for the analysis of intangible assets operations, as provided by Action Plan 8 BEPS 8-10, was introduced. In particular, the definition and analysis of the impact of intangible assets on the conditions of controlled and comparable transactions is carried out taking into account the contractual and actual activities of the parties related to the development, improvement, support, protection and exploitation of such assets.
3. The controlling authority will have the right to request information and, if not provided, to conduct an on-going verification of taxpayers who were involved in the supply chain of goods (works, services) that are subject to controlled operations. This will enable the controlling authority to obtain all necessary information, including for taxpayers who are not parties to the controlled transaction.
4. A new criterion for choosing the investigated party for applying profitability methods has been added, in particular: which is the most complete and documented information on the financial performance of the controlled transaction used to calculate the profitability indicators. This criterion requires additional justification for choosing a non-resident as an investigated party.
5. The norms for introducing the mediation institution during the control of controlled operations are fixed: the supervisory authority has the right to meet taxpayers (authorized persons) to discuss the methodology for determining the conformity of conditions of controlled operations with the principle of “arm’s-length transaction” applied by the controlling authority during the inspection.
6. The norm of the Tax Code of Ukraine (clause 126.96.36.199) regarding the implementation of controlled transactions involving the “nominee intermediary” from 2019 applies not only to related parties, but also to all non-residents whose transactions are controlled.
7. In the case of self correction of the tax liability from the TP, the accrual of the penalties on the amount of the unpaid tax liability begins on the 271st day (earlier – from the 91st day), ie after the deadline for submission of the report – October 1.
How we can help you in transfer pricing issues:
- Identification of actual and potential controlled operations and operations that refer to requirements of para 140.5.4 TCU;
- Risk assessement;
- Preparation of Report on controlled transactions and transfer pricing documentation;
- Support during tax inspection on transfer pricing and support in communication with NFS.