The First Shots in Ukrainian TP Court Practice
Transfer pricing rules were introduced in Ukraine not a long time ago – from September 1, 2013. However, now we can speak about the first results of TP audits and the first court practice on TP matters.
Court disputes regarding TP rules can be divided into two groups:
- disputes on procedural issues;
- disputes on the essence of TP rules.
Procedural disputes on determination of “controlled” transactions
A notable group of “procedural disputes” relates to situations where the fiscal authority insisted on the recognition as “controlled” transactions with LLP registered in the United Kingdom by the partners that are residents of “low-tax” jurisdictions, included into the special list of “low-tax” jurisdictions, adopted by the Cabinet of Ministers of Ukraine for TP purposes. Such partnerships are fiscally transparent, that means that, they are not taxable in the UK and due to the fact that the UK was not included into the abovementioned list of “low-tax” jurisdictions, such transactions formally do not trigger TP control in Ukraine. The courts mostly applied formal approach and took a side of the taxpayers, concluding that the formal criteria for the recognition of transactions as “controlled” were not met in such cases.
At the same time now we expect that such kinds of disputes will find a new lease of life, due to the recent amendments introduced into the Tax Code, which provide that in addition to the controlled transactions with legal entities registered at the “low-tax” jurisdictions, from 2017 TP control will cover transactions with special legal forms of entities that do not pay corporate income tax at their tax residence. The List of such legal forms for particular countries is in force from July 4, 2017. And, for example, from now on it is directly provided that transactions with LLP from the UK fall under TP control in Ukraine.
The question is whether the courts of cassation will cancel positive appeal decisions for the taxpayers, referring, for example, to the rule of the superiority of the essence over the form of legal relationships.
Another kind of disputes concerns question of numerous wording and re-wording of Article 39 of the Tax Code that laid down TP rules in Ukraine together with the absence of proper transitional provisions.
The existing practice on the essence of TP rules application
The most common are disputes over application of comparative uncontrollable price method. Fiscal authority usually pays special attention to exporters of agricultural products, metal products and chemical products. In one of the case the fiscal authority made a tax assessment based on ranges of prices for agricultural products according to the publications, which were recognized as official sources of information in the period of 2013-2014. The court in the first and in the appeal instances abolished the assessment based on the fact that information available in such publications was not sufficient to determine the comparability of transactions.
Existing disputes also indicate that economic analysis shall not result only at the market-based profitability range. Not less attention should be paid to the way in which the indicator of the profitability of the controlled transaction is calculated. It is necessary to ensure the logic and transparency of such calculation, as well as the competent statement of all the essential aspects of its calculation in TP documentation.