A new proposal law on transfer pricing in Ukraine

17.12.2012

Currently under consideration in the Verkhovna Rada a bill on amendments to the Tax Code relating to changes in the legal regulation of transfer pricing. It is necessary to pay attention to the following legislative developments:

• It changes the transfer pricing methods and their application

• It lists description of the operations covered by the control. It includes transactions between related parties and transactions with low-tax jurisdictions.

• It changes the rules for determining prices for transactions between independent parties

• It secures documentation requirements, and provides penalties for violation of the above rules

On the basis of: http://iportal.rada.gov.ua/

Expert’s opinion

Currently a bill on amendments to the Tax Code relating to changes in the legal regulation of transfer pricing is under consideration in the Verkhovna Rada.

It is necessary to remind that at the moment the Ukrainian legislation on transfer pricing is almost one paragraph 1.20 of Article 1 of the Law of Ukraine "On taxation of corporate profits." Such legal regulation has significant gaps, for example, there are no detailed rules (methodology) determining the normal price, no list of data that could be used to determine the normal price, and no list of the documentation that is necessary to prepare for the taxpayers to support the level of contract prices.

January 1, 2013 Art. 39 “Methods of determination and order of the regular price” of the Tax Code is going to come into force.

This article provides for the following controlled operations:

• Transactions between related parties (both domestic and foreign trade)

• Transactions with unrelated parties

• Barter transactions

• The operations separately referred in the legislation

In addition, Art. 39 regulates the methods for determining the regular price, including:

• comparable uncontrolled price method

• the resale price method

• The method of "cost-plus"

• The method of profit distribution

• The method of the net profit

However, such regulation is also has several "weak spots." For example, 20% of the allowed deviation of the contract price from the regular price, the lack of a detailed methodology for the application of transfer pricing methods, the lack of a minimum threshold for the amount of controlled transactions, the absence of legal requirements for transfer pricing documentation, the burden of proof of the fact that price is not the same level as the normal prices lies on the tax authority, there is no mechanism to monitor the transfer pricing rules.

In view of these shortcomings, December 4, the Verkhovna Rada of Ukraine joined the bill of Ukraine "On Amendments to the Tax Code (in relation to transfer pricing"). It is very similar to the Russian one.

Innovations in legislation are as follows:

• It changes the transfer pricing methods and their application:

It is rejected the repeal the 20% of the contract price from the regular price

Set the priority of the applicable method: the method of comparable market prices is the main

Expanded the list of sources of information that may be used to determine market prices

• A list of the operations covered by the control:

Transactions between related parties

Operation, where one party is a non-resident who is registered in the jurisdiction in which the tax rate is lower than in Ukraine by 5 or more percentage points or who pay income tax at a rate that is lower than in Ukraine by 5 percent or more.

Operations shall be controlled, if the turnover of transactions with each counterparty for the calendar year is equal to or exceeds 50 million USD.

Expanded the list of related parties

• the rules for determining prices for transactions between independent parties are changed

• documentation requirements are secured, and penalties for violation of the above rules are provided

Analyzing all the above, it can be concluded that Ukraine is trying to bring its legislation into line with European standards, but whether it will be applied in practice successful only time will tell.

Mikhno Aleksandra ( Paralegal of Legal Services and Bank Consulting Department of “Honest&Bright”)