Annual International Bar Association Conference Tokyo, Japan. Recent Developments in International Taxation. Ukraine.

Transcription

1 Annual International Bar Association Conference 2014 Tokyo, Japan Recent Developments in International Taxation Ukraine Alexander Minin KM Partners

2 1. RECENT HIGHLIGHTS 1.1. Transfer Pricing The rules of Article 39 of the Tax Code of Ukraine regarding arm s length prices, effective since January 1, 2013, were set forth in completely new wording, which became effective since September 1, The new rules are far more comprehensive in compare to the rules that existed earlier and are different in many respects with the emphasis on administration and control of transfer pricing-related matters. These transfer-pricing rules are applicable only with respect to controlled transactions, namely: (i) transactions with related non-resident entities, (ii) transactions with related resident entities in some specific cases (e.g. declared tax losses, tax benefits), (iii) transactions with non-residents, registered in the low tax states (areas) with the income tax rate at least five percentage points lower than in Ukraine. In order to be deemed controlled the annual aggregate value of the transactions in any of the above cases must be equal to or exceed UAH 50m with each of the counterparties. The established TP methods are in line with the OECD Guidelines. At the same time, the comparable uncontrolled price method is set as the basic method according to the Tax Code. This method should be primarily used for determining the price. The new TP rules do not allow 20% deviation from the arm s length price. However, the amendments introduce new concepts of market price range and market range of profitability computed according to the set rules in applying the TP methods thus ensuring flexibility of the methods application. Article 39 of the Tax Code envisages two groups of sources of pricing information, which are the so-called official sources and other sources. The Cabinet of Ministers adopts the list of official sources of information. They include information of various state institutions and enterprises and have priority over any other sources according to the Tax Code. The important novelty is requirement to file annual reports on controlled transactions before May 1 of the year following the reporting one (in 2014 the deadline was shifted to October 1). The monitoring department, which is in charge for controlling the TP matters, should be created within the central tax office. The tax authorities have the right to request documentation for confirming the prices set in controlled transactions. Article 39 of the Tax Code establishes requirements to such documentation, which in case of large taxpayers should include information about the group, controlled transactions, conditions of contracts, economic and functional analysis confirming the price and other information regarding controlled transactions. The new TP rules envisage the possibility of advance agreement on prices in controlled transactions, which is available for large taxpayers Profit and Value-added Tax Rates The Law of Ukraine On prevention of financial catastrophe and creation preconditions for economic growth in Ukraine No VII of March 27, 2013 (hereinafter the Law ) introduced significant changes to the tax rates in Ukraine. The Law fixed the corporate profit tax (CPT) rate at 18% and cancelled the gradual reduction of the CPT rate to 16%, which had been envisaged by the Tax Code before. 2

3 The Law cancelled expected reduction of the VAT rate from 20% to 17%, which should have been applied from January 1, New 7% VAT rate was introduced for transactions with medicines and medical purpose products earlier exempt from this tax. The Law also envisaged the raise in the rates of excise taxes on spirits, alcohol, tobacco products and passenger vehicles Progressive Taxation of Individual Passive Incomes The Law introduces progressive personal income tax (PIT) rate for the interest, dividends, and royalty income and investment profit instead of five percent rate. This change means actual revision of the tax policy in respect of individual passive incomes, earlier taxed at the flat rate lower than salary. Namely, starting from June 1, 2014 (from January 1, 2015 for dividends) the following rates will be applicable to these types of income: 15% for the annual income in the amount not exceeding 204 amounts of the minimum subsistence level 1 ; 20% for the portion of the annual income exceeding 204 and up to 396 amounts of the minimum subsistence level; 25% for the portion of the annual income exceeding 396 amounts of the minimum subsistence level Payment for Subsoil Use The Law envisaged reduction of the number of rates depending on the group of minerals extracted. In addition, the obligation to compare the base for computing the payment with the value, determined according to marginal values set by the Tax Code, was cancelled. The legislator also specified the coefficient of profitability for the cases of determining the value of minerals by computation. The novelty is that mining enterprises that fail to carry out regular geological and economic assessment of mineral reserves shall compute the tax liabilities with applying the coefficient equal to three amounts of the National Bank discount rate New Tax on Purchase of Foreign Currency The Law introduced the contribution for mandatory pension insurance on purchase of foreign currency starting from April 1, This contribution is levied on legal and natural persons who purchase the foreign currency in cash or non-cash form. The amount of contribution is computed at the rate of 0.5% from the amount of transaction on purchase of foreign currency VAT Exemption on Supplies of Grain Crops The Law extended the VAT exemption (earlier effective until January 1, 2014) on supplying certain grain and technical crops (but for their first supply by producers and first intermediaries) until October 1, The Law also specified that this exemption does not cover exportation of these crops by agricultural producers that cultivated such crops on lands in their ownership or permanent use Vehicle Utilization Duty Cancelled 1 UAH 1176 (around USD 100 under the current exchange rate) in

4 The Law on Amendments of the Tax Code of April 8, 2014 No VII excluded the provisions of the Tax Code regarding the ecological tax on utilization of the passenger vehicles which had been levied on the passenger vehicles imported and produced in Ukraine Tax regime in respect of the territories temporary occupied by Russia (Crimea) No specific regulations are adopted at the legislative level to regulate the matter on the tax aspects. Yet, the tax authorities issued certain implementation guidelines addressing certain practical aspects. As the taxes are generally to be paid at the place of registration of taxpayer, the tax authorities suggested re-registering Crimean business in the mainland of Ukraine. Supply to Crimea is treated as domestic supply. Yet, there is no right for VAT credit in respect of supplies from Crimea to Ukraine. Other specific issues are also addressed to certain extent in such implementation guidelines. 2. FUTURE DEVELOPMENTS 2.1. Comprehensive Tax Reform The comprehensive tax reform is currently on agenda in Ukraine. In late April, the Prime Minister of Ukraine has announced the plans of the Government to redraft the Tax Code in order to make the tax system more efficient and more attractive for both national and foreign investors. The suggested ways of reforming the tax system are elaborated by several working groups created under the auspices of the Ministry of Economic Development and the Ministry of Finance. These groups are yet to produce any clear proposals on reforms. At the same time, as follows from various public declarations of the state officials, the main directions of their work include reducing the number of taxes (up to eight types of taxes according to the Prime Minister) and making the entire tax system more understandable Revision of the Transfer Pricing Rules Although Article 39 of the Tax Code has been comprehensively revised only last year the number of amendments is currently suggested for implementing into it. Respective draft laws have been submitted to Verkhovna Rada of Ukraine. The principal changes envisage exclusion of transactions between residents of Ukraine from the TP rules. The other important amendment implies rejection of the twofold system of pricing information sources by excluding the official sources of information from the list of sources of pricing information thus limiting the possibility of power abuse by the tax authorities Financial Investigations Service The Cabinet of Ministers has developed the draft Law On Financial Investigations Service in order to establish the single body in charge for auditing the enterprises on financial and economic matters. Thus, currently around seven state bodies (including tax militia) has the right of investigating these matters. The new body would unify respective controlling functions and limit the number of investigations. Per recent statements of the government (at the end of May, 2014) such Service is to be established soon on the base of respective departments of the Ministry of Revenues and Duties (tax police department), Ministry of Interior, Security Service etc. Yet, no official document on the matter is publicly revealed. 4

5 2.4. Contemplated transformation of the Ministry of Revenues and Duties into Fiscal Service Per statement of the Prime Minister of May 27, 2014, the Ministry of Revenues and Duties is to be transformed into the Fiscal Service under the Ministry of Finance. As such, the existing ministry responsible for tax and customs matters is expected to be deprived its status of separate ministry and be subordinated to the Ministry of Finance. It is announced also that the new Fiscal Service shall not have right of proposing legislative acts (as the Ministry of Revenues and Duties) and shall be merely execution body. Yet, no official document on the matter is publicly revealed. 5