Which states would be considered as states with low tax rate for the purposes of the Law on Transfer Pricing?
Updated on December 6, 2013
The rules of determination of countries, which fall under the category of the states with low tax rate for the purpose of transfer pricing, experienced transformation with entering into force of the respective provisions of the Law of Ukraine of 24.10.13 No 657-VII “On introduction of amendments to the Tax Code of Ukraine regarding taxpayers’ registration and improvement of some provisions”.
In particular, according to the Final provisions of the Law, paragraph 5 of the Law on amendments in Article 39 of the Tax Code of Ukraine (hereinafter the “TC of Ukraine”) enters into force on the next day following its publication. In the official edition of “Holos Ukrainy” the respective Law was published on 12.11.2013, which gives grounds for application of the respective amendments since 13.11.2013.
Thus, the provisions of para. 126.96.36.199 of Article 39 of the TC of Ukraine currently imply that the controlled transactions for purposes of transfer pricing are “transactions, where one of the parties is non-resident, registered in the state (territory), where corporate income tax rate (corporate tax) is by 5 and more percentage points lower, than in Ukraine, or which pays corporate profit tax (corporate tax) under the rate by 5 and more percentage points lower, than in Ukraine”.
It means that henceforth controlled transactions include, among other things, business transactions with non-residents who are not considered to be related parties, but registered in the states, where corporate income tax rate is by 5 percentage points and more lower than in Ukraine. Let us remind that previously the legislator has determined such differentiation as 5 percent or more.
At the same time, the only substitution of the word “percent” with the phrase “percentage points” influences the taxation significantly.
By 5 percentage points and more – what does it mean?
Firstly we would like to differentiate between the notions “percent” and “percentage points”. Thus, by usage of the notion “percent” of a certain number, one means “a hundredth part of this number”. Such definition gives us the Ukrainian Wikipedia, and herewith explains that:
“When one refers to “an increase by 10%” or “decrease by 20%” it is assumed that the change is compared with the previous value.
- “a decrease by 50 % means halving (decrease of twice)
- a decrease by 60 % means decrease in 2,5 times.
Moreover, with the purpose of clear differentiation between the notions “percent” and “percentage points” Wikipedia adds the following:
“when there is a need to compare 2 values expressed as a percentage, their difference expressed in percentage points (pp). For example, if the deposit rate increased from 10 % to 12 %, they say that it has increased by 2 percentage points (pp). The statement “rate is increased by 2 %” is not correct, since 12 is greater than 10 by 20% rather than by 2 %”.
Hence, whereas in previous wording of para. 188.8.131.52 of Article 39 of the TC of Ukraine transactions with non-residents registered in states with corporate income tax rate of 18,05 % (19-19 * 5/100) and lower fell under the category of controlled transactions, now this rule refers to the states with substantially much lower corporate income tax rate.
Thus, by deduction from the corporate income tax rate in Ukraine (19 %) of 5 percentage points we have the following calculation:
Therefore, the respective regulation of para. 184.108.40.206 of Article 39 of the TC of Ukraine concerns operations with non-residents only of those countries, where the corporate income tax rate is 14 % and lower.
How the list of states with low tax rate, approved by the Cabinet of Ministers of Ukraine, will be applied?
The full answer on the list of states, transactions with residents of which would be qualified as controlled transactions for the purposes of transfer pricing, was provided by the Cabinet of Ministers of Ukraine after publication of the respective list. As in para. 220.127.116.11 of the Law it is specified that “the list of such states (territories) is approved by the Cabinet of Ministers of Ukraine”.
In general, according to the Regulation of the Cabinet of Ministers of Ukraine of 25.12.13 No. 1042-r, 73 states (territories) are included to the list of states with low tax rates (the list is provided at the end of this newsletter).
Аlong with the publication of such list the question arises: to which transactions it should be applied? Should it be all transactions which would be fulfilled after the date of publication of the list or only those that have been made since September 1, 2013 as a date when rules on transfer pricing entered into force?1
For example, for regulations of transactions with non-residents with offshore status in subpara. 2 para. 161.2 of Article 161 of the TC of Ukraine it is well established that the respective rule “…starts being applied from the calendar quarter following the quarter of the official publication of the offshore zones list established by the Cabinet of Ministers of Ukraine”.
However, for the respective provisions of paragraph 18.104.22.168 of Article 39 of the TC of Ukraine such rules have not been foreseen. Such uncertainty gives grounds to a dual interpretation regarding the date of application of the respective regulation. So there are the risks of applying this list to the transactions since September 1, 2013, which is the date of entry into force of this Law.
As you can see, the Law on transfer pricing includes many surprises, so, get ready for them!
Nevertheless, we emphasize that these “surprises” are relevant not for all cases of interaction with unrelated parties, but only for those relationships with counterparties which volume of transactions is equal or exceeds 50 million UAH per year for each individual counterparty, as it has been noted in the Newsletter of 09.08.13.
Therefore, in case of transactions with significant amount with unrelated parties which are residents of the states not included into abovementioned list of the Cabinet of Ministers of Ukraine, we recommend specifying in the agreements the corporate income tax rate applied in the state of residency of the counterparty. However, practical realization of such recommendation depends on counterpart’s position regarding inclusion of respective provision into the contract.
List of states (territories), in which the income tax (corporate tax) rate is by 5 or more percentage points lower than in Ukraine, according to the Regulation of Cabinet of Ministers of Ukraine of 25.12.2013 No. 1042-p
- The Republic of Albania
- Principality of Andorra
- Antigua and Barbuda
- Commonwealth of the Bahamas
- Kingdom of Bahrain
- Bosnia and Herzegovina
- The British Virgin Islands
- Brunei Darussalam
- Virgin Islands of the United States of America
- The Republic of Vanuatu
- Autonomous Community of the Canary Islands Kingdom of Spain
- The Republic of Cape Verde
- Cayman Islands
- State of Qatar
- The Kyrgyz Republic
- Republic of Cyprus
- Autonomous Province of Kosovo and Metohija Republic of Serbia
- Kingdom of Lesotho
- Republic of Liberia
- Lebanese Republic
- Principality of Liechtenstein
- Grand Duchy of Luxembourg
- Special Administrative Region of China Macau
- The former Yugoslav Republic of Macedonia
- Federal Territory of Labuan Malaysia
- The Republic of Malta
- Kingdom of Morocco
- Republic of the Marshall Islands
- Federated States of Micronesia
- Republic of Moldova
- The Republic of Nauru
- United Arab Emirates
- Sultanate of Oman
- Isle of Man
- Cook Islands
- Turks and Caicos Islands
- Republic of Palau
- The Republic of Panama
- The Republic of Paraguay
- Commonwealth of the Northern Mariana Islands
- Madeira Autonomous Region of Portugal
- The Republic of San Marino
- Democratic Republic of Sao Tome and Principe
- Republic of Seychelles
- Saint Vincent and the Grenadines
- Saint Kitts and Nevis
- St. Lucia
- The Republic of Singapore
- Sint Maarten (Dutch part)
- Republic of the Sudan
- Democratic Republic of Timor-Leste
- The Republic of Uzbekistan
- French Guiana
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.
1According to the Law of Ukraine “On introducing amendments to the Tax Code of Ukraine regarding transfer pricing” as of July 04, 2013 No. 408-VII.