The Letter of State Fiscal Service regarding transfer pricing as of July 07, 2015. When to expect the fine for the failure to provide TP documentation?
Transitional provisions of the Law No. 609-VII as of July 15, 2015, under which transfer pricing (hereinafter – “the TP”) rules have been amended once again, envisage that other laws and regulatory acts shall be applied in part compliant with adopted law unless legislation is brought into line with adopted amendments.
Considering this, we would like to draw your attention to the letter of the State Fiscal Service of Ukraine as of July 07, 20151, which, although became partially irrelevant due to the recent amendments (regarding amounts of penalties, for instance), but provide a number of crucial “explanations” of the SFSU.
Application of penalties for non-provision of TP documentation
The SFSU defines what it will regard as “non-provision of TP documentation”. Thus, the SFSU actually puts non-provision of TP documentation on the same footing as situation, when the taxpayer has submitted TP documentation on controlled transactions (hereinafter – “the CT”), under respective request of the controlling authority, but, according to the opinion of the SFSU, such information is incomplete. In particular, the letter of the SFSU points out that the penalty, envisaged by para. 120.3 of Article 120 of the Tax Code of Ukraine (hereinafter – “the Tax Code”), shall be applied by controlling authority to the taxpayer in two cases:
- if the taxpayer does not reply upon the request in accordance with requirements of subpara. 39.4.4 of Article 39 of the Tax Code. Provided that, since documentation is submitted by the taxpayer following no particular form, the absence of the reply from the taxpayer on respective request from the SFSU within one month shall be considered as the fact of non-provision of documentation.
- if the taxpayer provides incomplete documentation upon the first request of the SFSU (according to subpara. 39.4.6 of the Tax Code), receives additional request from the SFSU, and a reply to such additional request (to the opinion of controlling authority) also does not contain required scope of information, prescribed by subpara. 39.4.6 of the Tax Code. We understand that by analogy the absence of the reply to such additional request will also be considered as non-provision of TP documentation.
At the same time, in our opinion, such interpretation of “non-provision of TP documentation” groundlessly extends the content of this term and can lead to abuse of power of the controlling authority. Proceeding from the purposes of TP rules, the scope of provided information displayed in TP documentation, shall be sufficient to prove that the terms of controlled transactions are at arm’s length. Thus, in order to determine whether the taxpayer provides the full scope of information the controlling authority shall carry out an audit of the taxpayer to verify that the controlled transactions are at arm’s length (as it is envisaged in subpara. 39.5.1 of the Tax Code).
The letter of the SFSU envisages that the fact of non-provision of TP documentation shall “necessarily be recorded in the act of unscheduled documentary audit, conducted under subparagraphs 78.1.2 and/or 78.1.15 of the Code”. In other words, this is not about an audit to verify if the the terms of controlled transaction are in line with “arm’s length” principle, but an audit conducted in order to establish the fact of non-provision of TP documentation. While we can easily ascertain the abovementioned fact if there is no reply upon respective request of the SFSU, one could hardly prove the incompleteness of information provided in accordance with subpara. 39.4.6 of the Tax Code without analyzation of the subject matter as such. We would like to remind that subpara. 39.4.6 contains only the list of questions, regarding which the information shall be submitted, without any defined minimal scope of information (number of pages etc.)
One may argue that such “extension” of cases, when the abovementioned penalty is applied, is aimed at prevention of “formal” provision of TP documentation, when the taxpayer does not perform economic analysis of controlled transactions. And provides just formal reply upon the request of the SFSU but addresses all questions provided by subpara. 39.4.6 of the Tax Code in a non-informative manner.
At the same time, since the Tax Code in para.120.3 envisages no penalty for provision of TP documentation in breach of the requirements of paragraph 39.4.6 of the Tax Code”, the aforesaid extending of sanctions by the SFSU is unlawful, in our opinion. Thus, provision of incomplete scope of TP documentation may constitute a ground for conducting an audit to verify the compliance of controlled transaction’s terms to the “arm’s length” principle (with further penalties in case of non-compliance), but not for straightforward application of the penalty for non-provision of TP documentation.
Furthermore, it is obvious that the legislator, in contrast to the SFSU, separates the terms “non-provision of TP documentation” and “provision of TP documentation in breach of the requirements of paragraph 39.4.6”. Thus, for instance, “non-provision of TP documentation” and “provision of TP documentation in breach of the requirements of paragraph 39.4.6” (subpara. 220.127.116.11 of the Tax Code) can both be considered as a ground to conduct an audit of controlled transactions, as it was previously mentioned.
Period to submit the information upon the request of the SFSU
It is worth noting that under the Law as of July 15, 2015 the period to reply upon additional request of the SFSU was extended from 10 to 30 calendar days. The SFSU understands that such period shall start at midnight of the day, when such request was received, and terminate at midnight of the last day of the period (i.e., the day of the request receipt is included into the period). To prove such approach the SFSU makes reference to the European Convention on the Calculation of Periods of time as of May 16, 1972.
In our view, it would be more reasonable to refer to Article 253 of the Civil Code of Ukraine, according to which “period of time shall start from the following day after respective calendar date or occurrence of an event, connected with the beginning of such period”. In this case, the period has to be calculated, starting from the day, which follows the day of the request receipt from the SFSU. In this way, the taxpayer would have 30 full calendar days to prepare a reply. Meanwhile, calculation of the period starting from the day of the request receipt, actually, means the “loss” of the first day for collection of the information that may be important, taking into account the considerable scope of information that might be necessary to prepare upon the request of the SFSU. Furthermore, such approach seems to be more acceptable taking into account the fact that the SFSU in its letter refers to the provisions of the Civil Code to interpret the issues regarding definition of the periods of time. Thus, for instance, the SFSU refers to Article 252 of the Civil Code, which contains the definition of the term “period of time”, or Article 254, which defines that in case when the last day of the period is day-off, holiday or other non-working day, the period shall terminate on the following working day.
However, it is necessary to take into account current approach of the SFSU and take every effort to reply to additional request of the SFSU within 30 days, starting exactly from the day when such request was received in order to avoid penalties for non-provision of TP documentation.
The amount and procedure of application of penalties
The SFSU draws attention to para. 11 subsection 10 section 20 of Transitional Provisions of the Tax Code, according to which penalties based on results of audit, conducted by controlling authority, are applied in amounts envisaged by the legislation effective at the date of the decisions on application of such penalties.
In addition to that the letter specifies some procedural aspects regarding application of such penalties. For instance, audit results are supposed to be formed in accordance with Article 86 of the Tax Code and tax notification-decision with calculation of the penalties is to be signed by the head of the controlling authority (or his/her deputy head) under procedure defined by para. 86.8 of Article 86 of the Tax Code. The abovementioned specifications comply with the provisions of the Tax Code, which define that audit of controlled transactions shall be conducted according to the provisions of chapter 8 section II of the Tax Code taking into account peculiarities, envisaged by Article 39.
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As can be seen from the above, the SFSU in the commented letter provided its understanding of certain issues regarding transfer pricing control. It is obvious that there are still a lot of questions; however, even in this answer we can see that the SFSU tries to interpret some controversial aspects of the new TP rules for its own benefit. These aspects are disputable but now we can see the first issues, which can lead to tax disputes upon practical application of new TP rules.
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.
1The letter of the State Fiscal Service of Ukraine On tax control over transfer pricing № 24525/7/99-99-22-01-02-17 as of July 07, 2015.