The Ministry of Revenues and Duties clarified some aspects concerning the reporting on controlled transactions upon the results of 2013, as well as expressed the position on application of 5% fine
On November 22, 2013 the Ministry of Revenues and Duties has finally adopted by its Order No. 699 the Generalized tax consultation on the application of certain provisions of tax legislation concerning transfer pricing (hereinafter – “the Consultation”). In this newsletter we would like to discuss the most urgent aspects of the Consultation concerning reporting of controlled transactions upon the results of 2013 as well as the fine for the failure to submit the report.
Earlier we have noted that entering of the new rules on transfer pricing control into force on September 1, 2013 may be caused by the intention to expand these rules back to the period of year 2013.
Such anticipation was proved to be true only partially. Thus, according to the response to Question 1 of the Consultation the report upon the results of 2013 shall be submitted in due date, i.e. until May 1, 2014. But only transactions taking part within the period from 01.09.2013 till 31.12.2013 should be reflected in such report.
At the same time in order to determine whether the criteria of turnover with the counteragent in the amount of UAH 50 mln. necessary for the recognition of the transaction as controlled is met, all transactions with such counteragent conducted in 2013 shall be accounted.
The Consultation (responses to the Questions 2, 3 and 4) contains the position of the Ministry of Revenues and Duties regarding the way of calculation of the amount of transactions with each separate counteragent.
In particular, the Ministry of Revenues and Duties considers that the amounts of credit, deposit, loans, accrued interest, amounts of repayable financial aid, as well as the value of goods on commission, agency and other similar agreements, commission (agency) remuneration and the value of investment shall be taken into account.
Such reading is extremely formal, but the wording of the Tax Code unfortunately admits it. Concerning the situations when the taxpayer and the counteragent carry out transactions of both purchase and sales, in order to determine the turnover all such amounts of transactions shall be taken together. With such formal reading we are grateful, that it is allowed at least to determine the turnover based on contractual and not “arm’s length prices” prices.
Regarding determination of the date of transaction for the purpose of composing the report, as the Ministry of Revenues and Duties explained, such date is considered to be the date of passing of title to the goods or the date of drawing up the act or any other document confirming the performance of works or rendering of services.
Thus, the report upon the results of last quarter of 2013 should be submitted in case if there are controlled transactions in that quarter. And it should be done by May 1. Late submission of the report, according to the Ministry of Revenues and Duties, is considered as a failure to submit the report and will result in the application of a fine in the amount of 5 % of the amount of controlled transactions.
In addition, we recommend determining the range of controlled transactions reflected in the report carefully. Thus, the Ministry of Revenues and Duties in the Consultation (response to the Question 7) used the extremely fiscal interpretation of application of 5% fine and decide to set the fine on the amount of controlled transaction, not reflected in the report, even if such report is submitted in due time.
In our opinion, the wording of the Tax Сode does not give the ground for such reading – the given sanction is established for the failure to submit a report and does not pertain to adequacy of its content. For example, the Tax Сode of Russian Federation, on the basis of which the national system of norms which regulates transfer pricing was “developed”, the responsibility is established both for the failure to submit a report on controlled transactions and for the incomplete/ inadequate data submission. In the Tax Code of Ukraine there is no such provision, and thus there is no ground to expand the sphere of application of sanctions in such a manner. We do not see any ground to apply the fine even if 90 % of transactions are not reflected in report, but the report was actually submitted.
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.