The Law of Ukraine No. 1117 as of December 17, 2020 \u201cOn Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Ensuring the Collection of Data and Information Necessary for Declaring Certain Objects of Taxation\u201d (hereinafter \u201cLaw No. 1117\u201d) provides changes to the content of taxpayers\u2019 TP Documentation. In particular, according to subpara. 39.4.6 of the Tax Code of Ukraine, henceforth justification of economic feasibility and business purpose shall be provided for transactions with goods<\/u><\/strong> in addition to transactions connected to works (services), intangible assets and other transactions not related to goods.<\/p>\n Moreover, the abovementioned Law No. 1117 also extends such requirement to transactions on sale<\/u><\/strong> of goods, works (services), intangible assets and other transactions not related to goods. In fact, it means that taxpayers are obliged to provide justification of economic feasibility and business purpose for all controlled transactions.<\/p>\n Based on the results of filed justification analysis, in case (according to the tax authority’s opinion) the economic feasibility and business purpose are not being proved, tax authority is entitled to act within one of two options:<\/p>\n Meanwhile the tax authority is also obliged to prove that: (1) commercial and\/or financial features of controlled transaction, determined according to actual parties\u2019 conduct and its actual conditions, differ from conditions applied between unrelated parties considering reasonable economic reason (business purpose) in comparable circumstances, and also that (2) unrelated parties that act in comparable conditions and act commercially rational considering alternative options, actually available to each party of the agreement, would not participate in such controlled transaction.<\/p>\n As one can see, systematic analysis of the Law No. 1117 allows to state that the new \u201crequirement\u201d was imposed and must be taken into consideration by taxpayer while preparing TP Documentation. This new requirement regarding presence of realistically available<\/u> alternative options for conducting controlled transactions (i.e. uncontrolled transactions) will be used by the tax authority in order to prove its position. This clarification is important because changes imposed by the Law No. 466-\u0406\u0425 as of January 16, 2020 were unclear regarding methodology of justification of economic benefit of controlled transaction.<\/p>\n And what about TP Documentations for prior reporting periods?<\/u><\/p>\n <\/p>\n It should be noted that the Council of Experts of the Ministry of Finance recently prepared new general tax consultation regarding transfer pricing that answers this question. Thus, TP Documentations for prior reporting periods before 2020, that have already been made and are kept until receiving of request from tax authority, may be supplemented by justification of economic feasibility (economic benefit) and business purpose at the discretion<\/strong> of the taxpayer.<\/p>\n Changes regarding taxation of profit of non-residents\u2019 permanent establishments from January 01, 2021<\/strong><\/p>\n Hardly had non-residents\u2019 permanent establishments got to know what is TP and how it works when 2020 introduced new changes to the rules of taxation of profit of permanent establishments that should be consistent with the arm’s length principle.<\/p>\n Thus, in 2020 the Law No. 466-IX as of January 16, 2020 came into force and introduced new rules for calculating the taxable profit of permanent establishments that should adhere to the arm’s length principle. Please find more details in our publication \u201cDevelopment of TP control over PEs in Ukraine: new rules apply to profit calculations from May 2020<\/a>\u201d.<\/p>\n According to the new rules, starting from May 23, 2020 a single set of rules shall be applied for taxation of profit of permanent establishments of non-residents, the volume of which is calculated according to the arm’s length principle, and a permanent establishment of a non-resident is treated as a taxpayer, that acts independently from such non-resident.<\/p>\n However, the Law No. 1117 extended the procedure of determining<\/u><\/strong> the object for the profit taxation purposes of permanent establishments of non-residents provided in subpara. 141.4.7 para 141.4 Article 141 of the Tax Code of Ukraine in edition before May 23, 2020<\/u><\/strong>.1<\/a><\/sup><\/u><\/strong><\/p>\n This actually means that during 2020 the profit of a permanent establishment of a non-resident can be taxed in 3 ways: 1) in general order; 2) by compiling a separate balance sheet of financial and economic activity and 3) by determining profit as the difference between income and expenses using a 0,7 coefficient.<\/p>\n New rules provided by the Law No. 466-IX are valid from January 01, 2021<\/u><\/strong>.<\/p>\n At the same time, if the tax reporting of the permanent establishment for the reporting periods \u2013 half a year and\/or three quarters of 2020 \u2013 was drawn up in accordance with the Tax Code of Ukraine in edition after May 23, 2020, then such permanent establishments are not required to submit a clarifying declaration<\/u> (calculations), that is directly provided in the clarification that is given in the Letter of the State Tax Service of Ukraine dated January 27, 2021 No. 2367\/7\/99-00-21-02-01-07 (available by the link<\/a>).<\/p>\n The priority of TP methods is returned<\/strong><\/p>\n The Law No. 1117 has returned the priority of TP methods that had been applied before the Law No. 466-IX as of January 16, 2020 came into force and abolished it.<\/p>\n Now according to subpara. 39.3.2.1 para. 39.3 Article 39 of the Tax Code of Ukraine the taxpayer uses any method that he considers as the most appropriate, however, if it is possible to apply the Comparable Uncontrolled Price Method and any other method, the Comparable Uncontrolled Price Method shall be applied. And in case if it is possible to apply equally the Resale Price Method or the Cost Plus Method as well as the Transactional Net Margin Method or the Transactional Profit Split Method, then the Resale Price Method or the Cost Plus Method shall be applied. However, the Tax Code of Ukraine allows not to use more than 1 method to determine whether the transaction\u2019s terms and conditions are consistent with the arm’s length principle.<\/p>\n The Law No. 1117 also returned criteria for choosing the most appropriate TP method to the Article 39 of the Tax Code of Ukraine (namely, the appropriateness of TP method is defined in view of results of functional analysis, presence of full and reliable information and also comparability between controlled and uncontrolled transactions including adjustments in case if any applicable).<\/p>\n To determine whether the controlled transactions of the taxpayer are at arm’s length, the tax authority shall use the same TP method as the taxpayer has used unless the tax authority will prove that a different method is more appropriate. Change of TP method by the tax authority is not allowed in case if there is an agreement about preliminary harmonization of prices with a taxpayer.<\/p>\n Other changes provided by the Law No.\u00a01117<\/strong><\/p>\n Other changes provided by the Law No. 1117 are about splitting of assets, risks and functions in case of insufficient justification of controlled transaction. If the parties of the controlled transaction do not provide sufficient justification for the actual conduct of the parties of the controlled transaction and its actual conditions, then functions, risks, assets shall be split in favor of the party that is a resident of Ukraine (this can significantly affect the results of economic analysis and the compliance of the controlled transaction with the arm’s length principle).<\/p>\n Changes regarding commodities<\/strong><\/p>\n Taking into account the latest changes in the TP sphere, in December 2020 new list of commodities was approved (the Resolution of the Cabinet of Ministers of Ukraine No. 1221 as of December 9, 2020 “On Approving the List of Commodities and Recognizing Invalid the Resolution of the Cabinet of Ministers of Ukraine No. 616 as of September 8, 2016”). The list of commodities is effective from January 01, 2021.<\/p>\n According to mentioned Resolution, at the end of 2020 the State Tax Service of Ukraine published the recommended (non-exclusive) list of sources of information for obtaining quoted prices on its official web portal (available by the link<\/a>).<\/p>\n Also, the Order of the Ministry of Finance of Ukraine dated December 31, 2020 No. 840 “On Approval of the Form and Procedure for Notification on Forward, Futures or Commodities Contract Conclusion\u201d (hereinafter Order No. 840) came into force. This Order No. 840 provides next changes regarding notification about transactions with commodities (hereinafter \u201cNotification\u201d):<\/p>\n Moreover, if several forward, futures or commodities contracts<\/em> are concluded, the taxpayer shall file separate Notification for each contract.<\/p>\n![\"\"](\"https:\/\/kmp.ua\/wp-content\/uploads\/2021\/03\/Table-TP-reporting-for-2020.jpg\")
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