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Changes to the transfer pricing or not a year without changes

13 January, 2015 Newsletters

In the end of 2014, the Verkhovna Rada (the Parliament) of Ukraine adopted the set of laws on comprehensive tax reform. Among other things, the Parliament has introduced major amendments into the transfer pricing (TP) rules, which had been applied in Ukraine since September 2013. The law #72-VIII of December 28, 2014 that has introduced these amendments is effective since January 1, 2015.

The principal features of the improved system of TP control are as follows.

A. Arm’s length principle.

The arm’s length principle is now explicitly stated and defined in Article 39 of the Tax Code of Ukraine setting forth the system of TP control. These rules follow the OECD standard approach. Namely, the focus of the transfer pricing is in ensuring payment of the tax out of the results of business transactions computed at arm’s length.

It is assumed that the taxable profit complies with arm’s length principle if terms and conditions of the transaction are not different from the terms and conditions that would be applied between independent parties in comparable uncontrolled transactions.

B. Controlled transactions.

According to the improved rules, the following transactions are deemed to be controlled:

  1. Transactions with non-resident related parties.
  2. Transactions on sale of goods through non-resident commercial agents.
  3. Transactions with non-residents registered in low tax jurisdictions according to the list, adopted by the Cabinet of Ministers of Ukraine.

Transactions between related parties with the involvement (as intermediaries) of the independent persons provided that such persons (1) do not perform any significant functions and (2) do not use significant assets and/ or do not bear significant risks in transactions between related parties.

Thus, according to the new rules the transactions between Ukrainian related parties could not be regarded as controlled for the TP purposes. Earlier such transactions may fall under TP control in some cases.

The transactions according to the list are deemed controlled under the following conditions:

  • income of a taxpayer and/ or its related parties from any sources that is reported for the corporate profit tax purposes exceeds UAH 20 million as per results of respective year, and
  • the value of such transactions of a taxpayer and/ or its related parties with one counterparty exceeds UAH 1 million or three percent of the income reported for the profit tax purposes as per results of respective year.

C. Related parties.

The improved rules supplement the definition of the related parties by additional technical details about the indicators of control of one entity over the other one.

The new indicator of control has been introduced. Namely, the persons are recognized as related if the overall value of loans, credits, interest-free loans, provided by one person to the other one, exceeds equity capital of the borrower in more than 3.5 times (in 10 times for financial institutions and lease companies). This rule applies also to the cases when financing is provided by various institutions but under guarantee of one person.

The definition of the related parties also envisages the right of the Ukrainian fiscal authorities to prove in the court that an entity implemented practical control over decisions of another entity, though formally independent.

D. Transfer pricing methods.

The TP methods are the same as earlier and are similar to those defined by OECD Transfer Pricing Guidelines.

At the same time, the new rules set forth the criteria following which a taxpayer should chose the method for establishing the correspondence of the price in a transaction to the arm’s length principle.

The general rule (sub-para. of Article 39 of the Tax Code of Ukraine) provides that a taxpayer may choose any TP method which he deems appropriate with due regard to the mentioned criteria. However, in case it is possible to use comparable uncontrolled price (CUP) method and any other method such taxpayer should apply CUP method.

E. Information Sources.

According to para. 39.5.3 of Article 39 of the Tax Code of Ukraine a taxpayer may use the following information for establishing that the prices are in line with arm’s length principle:

  • information on uncontrolled comparable transactions of a taxpayer and of the entity, which is the party to controlled transaction;
  • any information sources that are open to general use and provide information on comparable transactions and entities.

In case a taxpayer proves the correspondence of the price to arm’s length principle with the use of data from the above mentioned sources, the fiscal authority is required to use the same sources of information. The only exception is the case when it is proved that other information sources ensure higher level of comparability.

This rule is probably the most significant improvement of the TP legislation. Thus, the previous system implied that the state-controlled “official” sources of information had priority over any other sources.

F. Transfer pricing reporting.

Taxpayers that have conducted controlled transactions during the reporting year are required to submit information on such transactions as an annex to corporate profit tax return.

Taxpayers with the volume of controlled transactions with one counterparty exceeding UAH 5 million (VAT excluding) are required to submit the separate report on controlled transactions to the central fiscal authority. Taxpayers should submit such report according to the established form by electronic means by May 1 of the year following the reporting year.

According to the law that introduced the amendments, the TP report as per results of 2014 shall be submitted until May 1, 2015 taking into account the rules effective before January 1, 2015.

G. Transfer pricing documentation.

The new rules of the Tax Code of Ukraine (para. 39.4.3 of Article 39) stipulate the obligation of the taxpayers, engaged in controlled transaction, to compose and keep TP documentation.

The TP documentation should contain the detailed information on the controlled transactions, including details of the parties, description of TP policy of the group, conditions of each controlled transaction, description of goods (works, services), functional and economic analyses of controlled transactions, results of comparability analysis.

Taxpayers are required to submit TP documentation within a month from the day of receipt of the request from the central fiscal authority. The central fiscal authority may request such information after May 1 of the year next to the one, when respective controlled transactions were carried out.

H. Transfer Pricing Audits.

The fiscal authority controls compliance with the arm’s length principle by way of conducting the special tax audits on TP matters. Such tax audit may last for the period not exceeding 18 months with possible extension up to additional 12 months.

I. Penalties.

New TP rules envisage penalties for non-submission of TP report and/or mandatory TP documentation as well as for non-reporting of the controlled transactions. These penalties are as follows:

  • 100 amounts of the minimum wage, set forth as of 1 January of the reporting year – in case of non-submission or late submission of the report on controlled transactions [In accordance with the law # 80-VIII of 28 December 2014 “On State Budget on 2015” a minimum wage is fixed as UAH 1378, thus this penalty makes UAH 137800];
  • five percent of the value of controlled transaction that were not reported;
  • three percent of the value of controlled transactions regarding which a taxpayer failed to provide the mandatory documentation. The maximum amount of such penalty is limited by 200 amounts of the minimum wage [UAH 275600, accordingly]. Yet, the wording of this cap is somewhat ambiguous and we expect practical issues in application of such cap.

J. Self-adjustment and proportional adjustment.

If a taxpayer completes transactions, which do not comply with the “arm’s length” principle, such taxpayer has the right to make self-adjustment of the prices and tax liabilities (sub-para. of Article 39 of the Tax Code of Ukraine) so that to ensure that they are at arm’s length. Such self-adjustment should not result in less tax payable to the budget.

The new rules of the Tax Code of Ukraine clarify the procedure of “proportional adjustment” available to counteragents of the parties, whose tax liabilities were adjusted in line with arm’s length principle either by the way of self-adjustment or during the tax audit. At the same time, it is not clear for the moment how this procedure would work in practice given that such counteragents may only be non-residents of Ukraine following the new definition of the controlled transactions.

K. Advance agreements.

Para. 39.6 Article 39 of the Tax Code of Ukraine provides the improved rules on advance agreements on prices. Such advance agreements are available to taxpayers deemed to be large.

A large taxpayer and the central fiscal authority can agree on the following matters:

  • the types and list of goods (works, services) that are subjects of the controlled transactions;
  • the methods of establishing compliance of the controlled transactions with the arm’s length principle;
  • the list of pricing information sources planned for the use in establishing that the conditions of the controlled transactions are at arm’s length;
  • the period for which the prices are agreed;
  • admitted deviations from the established economic conditions of controlled transactions;
  • procedure, terms of submission and the list of documents, which will be required to confirm compliance with the agreed prices in the controlled transactions.


The new transfer pricing legislation has changed “rules of the game” which by themselves were still a novelty in Ukraine. Thus, before September 2013 there were no comprehensive transfer pricing rules in Ukraine at all. Compliance with the new reporting rules requires an extensive effort on the part of taxpayers. Yet, the recent changes significantly improve the system introduced in September 2013 and bring it closer to the OECD standard.

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. 

Kind regards,

© WTS Consulting LLC, 2015

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