Arm’s length prices in uncontrolled transactions
The provisions of the Tax Code on arm’s length prices, as amended on September 1, 2013, were considerably revised.
The general proclaimed direction of the legislator regarding introduced amendments was settlement of issues of transfer pricing in controlled transactions between related parties upon transactions which volume for the calendar year exceeds UAH 50 mln.
At the same time, the mentions of arm’s length prices with regard to other transactions, notwithstanding the fact whether they are considered to be controlled or not, are not excluded from the Tax Code in revision effective since September 1.
These particularly are:
- price of alienation of finished products, goods and inventories which are in tax pledge (para. 92.1);
- determination of income in the form of cost of goods, works, services which were received free of charge (subpara. 135.5.4);
- recognition of first cost of fixed assets which were obtained in exchange for similar object (para. 146.9);
- determination of income from sale or any other disposal of fixed and intangible assets (para. 146.14), land (para. 147.5);
- determination of the basis for accrual of an advance payment due to when the dividends are paid in the form other than monetary (subpara. 153.3.2);
- determination of incomes and expenses from conducting countertrade (barter) transactions (para. 153.10);
- determination of the VAT base in case of cancellation of registration of a taxpayer (para. 184.7), in case of liquidation of fixed productive and non-productive assets (para. 189.9) and obtaining services from non-residents free of charge (para. 190.2);
- determination ofthe Personal Income Tax base during accrual (provision) of incomes to individuals in any non-pecuniary form (para. 164.5) as well as fringe benefits in form of cost of goods, works or services, received free of charge ( subpara. “g” of subpara. 164.2.17).
What is it, a mistake of the legislator (just did not have time for proofreading of the text of the Tax Code for its compliance with the novelties regarding the limitation of application of arm’s length prices, and thereafter additional amendments are to be expected), or is it an intended act aimed at applying arm’s length prices not only to controlled transactions but to part of other transactions as well?
Prepared draft law ‘On Introduction of Amendments to the Tax Code of Ukraine (regarding application of a concept of “arm’s length price”)’ as of September 9, 2013 which is published on the official web-site of the Ministry of Revenue and Duties of Ukraine avouches that it is NOT A MISTAKE.
Mentioned draft law foresees that in the transactions other than controlled another criterion shall be applied – “fair market price”. For this purpose a new definition is to be introduced “14.1.291. Fair market price is a price which was formed on a market of identical (and in their absence similar) goods (works, services), upon which the goods are transferred (works are performed, services are rendered) in transactions between not related parties”.
It is suggested to exclude provisions that remained as an “echo” of the former revision of Article 39 of the Tax Code, namely subpara. 20.1.36 of the Tax Code with regard to application of controlling authorities to the court “regarding accrual and settlement of tax liabilities, adjustment of negative object of taxation or another indexes of tax accounts as a result of application of arm’s length prices”. Also it is suggested to exclude the subparagraph ten of the para. 153.9 of the tax Code according to which “Norms of this Code regarding arm’s length prices are not applicable by repurchase agreements or transactions with derivatives”.
If the amendments are introduced, one may argue that provisions of para. 73.3 of the Tax Code according to which controlling authorities have a right to apply to the taxpayers with the written request for provision of information «2) for determination of the level of arm’s length prices on goods (works, services) during carrying out the audits and in other cases, foreseen by Article 39 of this Code», would be applicable exactly to controlled transactions. With regard to other transactions the controlling authorities would have no right to request respective information with the reference to the mentioned norm.
Generally, prior to introduction of suggested amendments, there are grounds to argue that according to the revision of the Tax Code as of today, “arm’s length prices” in transactions other than controlled are not applicable. This is indicated by para. 39.7 of the Tax Code, according to which “Provisions of this article are applied during the determination of the tax base in controlled transactions for purposes of chapters III and V of this Code”.
Since the controlling authorities are obliged to act solely “on the basis of, within authorities and in the way foreseen by the Constitution and laws of Ukraine“, they actually do not have any right to carry out audits and perform additional accrual of monetary liabilities while applying arm’s length prices in another UNcontrolled transactions. But this so called “exemption” would exist only till introduction of respective amendments to the Tax Code which are suggested by the draft law of 09.09.2013.
However, the prepared draft law does not establish any mechanism of how exactly the “fair market price” is to be determined and from which sources the respective information should be taken both by the taxpayers and controlling authorities. The issue regarding unique transactions, upon which there are no markets of identical (similar) goods (works, services), remains unsettled.
Besides, in fact such “new definition” – “fair market price” is one of the methods of determination of an arm’s length price. Namely, it is a method of comparable uncontrolled price (analogues sales) which is foreseen by subpara. 39.3.3 of the Tax Code.
Thus, the declared contraction of the field of application of arm’s length prices showed to be just another shadow. In fact, everything remained as it was, only conditionally the transactions were separated to controlled, in which an arm’s length price is applied, and other transactions, in which such method of determination of a price as fair market price is applied.
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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