Thе Law On Transfer Pricing: new rules may be applied to all transactions starting from January 1, 2013?
On July 4, 2013 the Verkhovna Rada of Ukraine in the second reading and finally adopted the Law of Ukraine “On Amendments to the Tax Code of Ukraine On Transfer Pricing” (hereinafter referred to as the “Law”). The official text of the adopted Law is currently not available. At the same time, proceeding from the available information (including the draft law submitted to the second reading) it is possible to conclude that this Law shall come into force on September 1, 2013.
Such approach to setting the date, on which the Law comes into effect, could indicate that the intention is to extend new rules to all transactions starting from January 1, 2013. The circumstance to be taken into account is that the results of business activity of the major part of corporate profits tax (CPT) payers are reported in annual tax return. Controlled transactions are defined in the Law according to the amounts of supplies for the calendar year too. Calendar year is also established as a reporting period for the purposes of control over transfer pricing.
As a result, the approach is possible, according to which the tax results in general for the year 2013 (i.e. from January 1, 2013) shall be defined considering new rules on controlled transactions since these rules would be effective at the moment of the definition of the results for the taxation purposes.
In case of such approach the tax authorities will insist on submission of the report for all controlled transactions made in 2013 in general and on substantiation of the price of such transactions according to the new rules. Namely, in order to define whether transactions are referred to the controlled ones, it will be necessary to take into consideration transactions starting not only from September 1, 2013, but from January 1. And then the report on all abovementioned transactions will have to be submitted.
One may object that such application of new rules to transactions which have been in place before the amendments to the Tax Code contradicts the principle of the tax system’s stability. Practically, such approach deprives the taxpayer of the objective possibility to predict results of the transactions. Giving arguments against such retrospective application of legislation one may refer to Part 1 Article 58 of the Constitution of Ukraine, although the Law does not stipulate directly about its retroactivity in time.
The rush with implementation of the Law at the beginning of autumn may be connected with the intention of the tax authorities to apply new rules to the whole year of 2013 (if the Law comes into force on January 1, 2014, there will be significantly less grounds to demand the reports for the whole year of 2013). An intention may be to take taxpayers unawares, seeing the way transactions have been fulfilled practically “without looking back” on such possible Law.
Perhaps, we dramatize the situation too much and in practice more reasonable approach will be established, according to which the new rules will be applied only in respect of the transactions carried out after the new Law will come into force. However, considering the wording of the Law and the obvious persistence of the tax authorities to ensure the commencement of the new Law till the end of the year, such scenario is unlikely. For this reason we recommend being ready to submit the report on all controlled transactions fulfilled in 2013. And the most likely is that in order to define whether the transactions are controlled it will be necessary to take into consideration all the transactions from the beginning of the year.
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.