The new list of low tax states adopted by the CMU or when one shall prove his right on expenses
The new list of low-tax states (territories) adopted by the Cabinet of Ministers of Ukraine1 (hereinafter – “the CMU”) for the purposes of control over transfer pricing is in force starting from May 14, 2015.
The list covers 76 states and includes all states indicated in the preceding list of states and territories where profit tax rate is by 5 percentage points or more lower than in Ukraine (excluding Albania). The Cabinet of Ministers added Austria, Hong Kong, Turkmenistan, and Savage Island (Niue) to the list.
Therefore, transactions with companies registered in Austria, Switzerland, Georgia, UAE, Hong Kong and other “listed” states or territories are subject of special control.
We remind that taxpayer’s business transactions with non-residents, which are registered in states included into the list, will fall under transfer pricing control on condition that they reach the value threshold (1 mln UAH) and the total income of the taxpayer exceeds 20 mln UAH. In this case the taxpayer is obliged to (1) file a report on controlled transactions and (2) keep documentation on transfer pricing containing confirmation of the arm’s length nature of the prices.
In addition to that, paragraph 140.5.4. of the Tax Code would be applicable. Namely, under this paragraph the taxpayer’s financial result is increased by 30% of the cost of goods (capital assets/works/services), purchased from non-residents, registered in the “listed” states (territories). In other words, the taxpayer has the right to record only 70% of expenses in the case of import of goods/works/services from the listed countries including Georgia, Austria, Luxemburg or Switzerland unless there is due substantiation of the price. Thus, the taxpayer will have the right to deduct 100% of expenses just in two cases:
- if transaction is controlled and the amount of expenses is substantiated in the Report on controlled transactions and respective documentation;
- if transaction is not controlled, but the amount of expenses is confirmed following the arm’s length price rules “according to the procedure, established by Article 39 of the Tax Code without filing the TP report”.
To conclude, the taxpayer will have to substantiate the price by applying transfer pricing methods, i.e. prepare TP documentation, in order to have the right of deducting 100% of expenses on transactions with residents of the “listed” states.
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.
1 The CMU Instruction as of May 14, 2015 No. 449-р “On confirmation of the list of states (territories), which meet the criteria established in subsection 22.214.171.124 subparagraph 39.2.1 paragraph 39.2 of Article 39 of the Tax Code of Ukraine.”