New proportionate TP adjustment rules introduced into Ukrainian tax law since May 2020
Ukrainian TP rules provided for a proportionate adjustment mechanism since 2013. It is defined as the right of a party in a controlled transaction to adjust its tax liabilities following a TP adjustment of the other party conducted to ensure that conditions of the transaction are at arm’s length.
Yet, until recent changes, the procedure of such adjustment was not clear. Namely, the Tax Code only mentioned that the proportionate adjustment should be carried out following the procedure and on conditions set forth by the applicable Double Tax Treaty (“DTT”).
Law 466-IX (in force since May 2020) introduced comprehensive changes into the Tax Code of Ukraine including the implementation of the Base Erosion and Profit Shifting (“BEPS”) three-tier reporting standard. Introduction of the rules detailing the procedure of proportionate TP adjustment is one of such important changes.
The right to initiate proportionate adjustment is available to the taxpayer who receives from its counterparty in a controlled transaction the notification about accomplished TP adjustment of tax liabilities in the country of its residence. Such a right is available only in the event that Ukraine has concluded DTT with the country of the counterparty.
Following such a notification, the taxpayer may apply to the tax authority informing about the intention to make a proportionate adjustment in the period or periods of the controlled transaction. The application should be accompanied with a calculation of the amount of adjustment for each period, other documents that formed the basis for the TP adjustment by the counterparty and also the TP documentation.
The tax authority has 30 workdays to consider the application and after this period adopts one of the following decisions:
- to confirm possibility of such proportionate adjustment;
- to disallow it in full or partially if it considers such adjustment to be unfounded or due to the absence of required documents. The tax authority must provide grounds for refusal;
- to initiate a TP audit of the taxpayer to study the grounds for the proportionate adjustment and to adopt one of the aforementioned decisions based on the results of such audit.
In the case that the tax authority fully or partially disallows proportionate adjustment, the taxpayer has the right to apply to the Ministry of Finance to initiate consideration of the case according to the Mutual Agreement Procedure (“MAP”) according to applicable DTT.
In summary, since May 2020 Ukrainian taxpayers have the mechanism which may be followed to accomplish proportionate adjustment of its tax liabilities in the event of a TP adjustment of the counterparty in the transaction. In future it may prove to be an efficient tool for implementation of the group TP policy goals in transactions involving Ukrainian subsidiaries or to avoid double taxation triggered by one-sided TP adjustments.
Starting from January 01, 2020, the List of legal forms of non-residents that do not pay profit tax and/or are not tax residents in the countries of their registration has been changed in Ukraine
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