Transfer Pricing reporting for 2020: what else you should know
2020, as well as the beginning of 2021, brought a lot of surprises to taxpayers. Surely, not without changes in transfer pricing (hereinafter “TP”) regulations in Ukraine. A short overview of last changes, that should be considered by taxpayers during TP reporting for 2020, is provided to your attention.
Changes regarding justification of economic feasibility and business purpose
The Law of Ukraine No. 1117 as of December 17, 2020 “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Ensuring the Collection of Data and Information Necessary for Declaring Certain Objects of Taxation” (hereinafter “Law No. 1117”) provides changes to the content of taxpayers’ TP Documentation. In particular, according to subpara. 39.4.6 of the Tax Code of Ukraine, henceforth justification of economic feasibility and business purpose shall be provided for transactions with goods in addition to transactions connected to works (services), intangible assets and other transactions not related to goods.
Moreover, the abovementioned Law No. 1117 also extends such requirement to transactions on sale of goods, works (services), intangible assets and other transactions not related to goods. In fact, it means that taxpayers are obliged to provide justification of economic feasibility and business purpose for all controlled transactions.
Based on the results of filed justification analysis, in case (according to the tax authority's opinion) the economic feasibility and business purpose are not being proved, tax authority is entitled to act within one of two options:
- To replace the transaction by an alternative option, realistically available to each party of the transaction, in order to determine contractual terms of the agreement (contract) which in this case would have been negotiated by the parties. Hereinafter, the compliance of terms of such an alternative transaction with the arm's length principle will be determined according to subpara. 39.3 of the Tax Code of the Ukraine. In this case, when determining alternative options of transaction, realistically available to each party of the agreement, it will be taken into the consideration whether there were other real options, available to each party, that might have led to more effective economic feasibility if such party would have made an agreement with unrelated parties rather than with related ones.
- Do not consider (do not admit) such transaction as the controlled transaction. In this case, taxpayer's taxable financial result increases according to the procedure provided by the paragraph 1 of subpara. 140.5.21 of para. 140.5 of article 140 of the Tax Code of Ukraine (namely, it shall be increased on the amount of the transaction, that is not considered (not admitted) by the tax authority because of absence of economic feasibility and business purpose). The tax authority is obliged to adjust the financial result.
Meanwhile the tax authority is also obliged to prove that: (1) commercial and/or financial features of controlled transaction, determined according to actual parties’ conduct and its actual conditions, differ from conditions applied between unrelated parties considering reasonable economic reason (business purpose) in comparable circumstances, and also that (2) unrelated parties that act in comparable conditions and act commercially rational considering alternative options, actually available to each party of the agreement, would not participate in such controlled transaction.
As one can see, systematic analysis of the Law No. 1117 allows to state that the new “requirement” was imposed and must be taken into consideration by taxpayer while preparing TP Documentation. This new requirement regarding presence of realistically available alternative options for conducting controlled transactions (i.e. uncontrolled transactions) will be used by the tax authority in order to prove its position. This clarification is important because changes imposed by the Law No. 466-ІХ as of January 16, 2020 were unclear regarding methodology of justification of economic benefit of controlled transaction.
And what about TP Documentations for prior reporting periods?
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