Arm’s length prices in uncontrolled transactions: Part II Related parties and non-residents are back…
On December 20, 2013 the Ministry of Revenues and Duties of Ukraine on the official web site published the amended draft Law of Ukraine “On Introduction of Amendments to the Tax Code of Ukraine (regarding application of the concept of “arm’s length price”)”, which initial wording was reviewed in our previous Newsletter at the end of the year 2013.
What are the main amendments? Namely, it is the extension of the new subparagraph 14.1.2291 of the Tax Code, which introduce the definition of the term “fair market price”, in comparison with the initial wording of this draft law.
Thus, now it clearly establishes that for determination of the fair market price a method of comparable uncontrolled price (analogues sales) shall be applied in order, stipulated by subpara. 39.3.3 of the Tax Code in accordance with usage of information sources stated in subpara. 39.5.3 of the Tax Code (paragraph two of subpara. 14.1.2291 of the Tax Code).
In paragraphs three-eight of subpara. 14.1.2291 of the Tax Code there is actual doubling of provisions of subpara. 14.1.71 of the Tax Code “arm’s length price”, while in paragraphs nine-thirteen it is foreseen that:
- the duty of proof of the fact that the price of a contract (deed) does not correspond with the level of fair market price lies on the controlling authority in order, stipulated by the law (para. 39.14 of the Tax Code in wording effective till 01.09.2013);
- during audit of a taxpayer the controlling authority has right to send a request, and a taxpayer is obliged to justify the level of contract prices (para. 39.14 of the Tax Code in wording effective till 01.09.2013);
- base, object of taxation and other indexes of tax accounting, determined by means of application of fair market prices are used by the controlling authority for calculation of tax liabilities, adjustment of negative value of an object of taxation or other indexes of tax reporting upon the results of tax audit (para. 39.15 of the Tax Code in wording effective till 01.09.2013);
- issuing of tax notifications-decisions upon the results of this tax audit and their challenging shall be performed in order, foreseen by Articles 86 and 56 of the Tax Code;
- for goods, previously imported to the customs territory of Ukraine in customs regime of import or reimport, fair market price on the customs territory of Ukraine shall be deemed a market price, however not lower than the customs value of goods, based on which taxes and fees were paid during their customs clearance (para. 39.13 of the Tax Code in wording effective till 01.09.2013).
Thus, regarding the application of fair market price in uncontrolled transactions we have practically all old provisions of the Tax Code regarding the arm’s length price (in wording, effective till 01.09.2013) with the difference that now these rules should be “working”, since there is concrete mechanism of determination of arm’s length price and, accordingly, of fair market price.
The further – the funnier! In the amended draft law the tax officers’ “favorite” subpara. 153.2.1 and 153.2.2 of the Tax Code return and concern with the application of arm’s length prices now in the form of “fair market price” for the determination of income/ expenses in the transactions with related parties, non-payers of corporate profit tax (including non-residents), benefit recipients (subpara. 153.2.1-153.2.3 of the Tax Code in wording effective till 01.09.2013). Herewith there is no more mentioning of admissible 20 % deviation of contract prices.
However, the amended draft law also provides for the provision (subpara. 153.2.4), according to which the aforementioned rules are not applicable to the transactions “with individuals-residents, who do not perform private entrepreneurial activity”. However, a question arises at once: it concerns only transactions with individuals-residents of Ukraine, and what about stateless persons and citizens of other states? If foreigners – citizens of other states hold the managerial positions in the enterprise, than should the arm’s length prices in a form of “fair market price” be applicable to relations with such employees?
And this is not it… The most interesting are:
“188.1. Tax base of transactions on supply of goods/ services is determined proceeding from their contract price, however not lower than a fair market price (in transactions recognized according to Article 39 of this Code as controlled – arm’s length price) taking into account state taxes and fees…”
“198.3. Tax credit of the reporting period is determined based on contract (trade) price of goods/services, however not higher than the level of fair market prices (in transactions, recognized in accordance with Article 39 of this Code as controlled – arm’s length prices) and is composed of amounts of the taxes accrued (paid) by a taxpayer at a rate, envisaged by paragraph 193.1 of Article 193 of this Code, during such reporting period in connection with: […]”.
So what has changed due to the introduction of new rules of application of arm’s length prices exclusively in controlled transactions? Where is declared contraction of application of arm’s length prices? In case of adoption of the draft law in the proposed (amended) wording as of December 20, 2013 it turns out that all promises were given with one purpose – to assure taxpayers that introduction of special rules regarding controlled transactions and special reporting with “draconian” fees even for technical mistake in such reporting are aimed at improvement of their “life”…
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.
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