Amendments of TP rules 2019 that concern permanent establishments of non-residents: what is new and important
In 2018 transfer pricing rules (hereinafter – TP rules) were extended to permanent establishments of non-residents in Ukraine. Although this new type of controlled transactions is yet to be reported for the first time (TP report for 2018 must be filed by October 1, 2019), already in December respective new provisions of Article 39 of the Tax Code of Ukraine (hereinafter – the TCU) were changed.
The provisions establishing TP control for operations between non-resident and it`s permanent establishment in Ukraine clarified by adding the wording according to which such transactions include also “internal transactions”.
The term “internal transactions” is defined by Regulation (standard) of accountancy 29 “financial reporting on segments” (Order of the Ministry of finance of Ukraine dated May 19, 2005 № 412) as follows:
So, this term is quite special and refers to operations between enterprise`s structural units, if in accounting they are allocated as segments.
From the legal standpoint, permanent establishment is a part of legal entity and any operations between them inherently are not civil. That`s why it is obvious that such “hypothetical” economic operations, determined for TP purposes, can also include internal transactions.
Therefore, this addition is probably an answer to comments, launched after appearance of new rules, that there cannot be any economic operations between non-resident and it`s permanent establishment because they are the single legal entity. Hence, such addition does not mean any change in the rules applied.
For permanent establishments more important are several amendments of Article 39 of the TCU according to which for TP purposes actual actions and circumstances shall have priority over documental arrangement of relations.
For example, subpara. 220.127.116.11 of Article 39 of the TCU that establishes requirements for functional analysis, was supplemented by the next rule:
In addition to that subpara. 18.104.22.168 of Article 39 of the TCU directly establishes that for TP purposes actual actions and circumstances of the operation shall have priority despite the contractual terms.
In the context of TP analysis, significant importance for permanent establishments will have the new rule, incorporated in subpara. 22.214.171.124 of Article 39 of the TCU regarding operations, which are not documented:
In other words, from January 01, 2019 the law establishes the obligation to determine controlled transactions and their conditions according to circumstances of the case even if there are no documents that formally arrange such operation.
Why it is important for permanent establishments of non-residents?
Because it happens rarely that relations between non-resident and it`s permanent establishment are arranged by any documents. Often payments by non-resident are made as funding without linkage to any permanent establishment`s functions.
However, it does not mean that such functions are not performed and do not trigger transaction which must be reflected in TP report. Moreover, there may be a lot of versions of such “hidden” operations and, according to the experience, it could be hard to identify such operations without knowledge of TP and taxation of permanent establishments.
Therefore, these changes should be considered as additional reminder that permanent establishments should be particularly careful in preparing to this year TP reporting exercise to be protected against risks of application of fines, which could be quite material.
Let us remind, that according to subpara. 120.2 of Article 120 of the TCU non-filing of TP report regarding operations made in 2018 results in application of fine in the amount of UAH 528 600 (fine for non-filing of TP report regarding operations made in 2019 will make UAH 576 300).
In case, if tax payer filed TP report but didn`t indicate all controlled transactions it could result in application of fine at the rate of 1 % from the value of undeclared operations (its upper level capped at UAH 528 600 for operations made in 2018 and UAH 576 300 for operations made in 2019).
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
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