22 December 2016 Tax and Legal Newsletter A law amending the Transfer Pricing rules in Ukraine has been adopted Contacts at EY Igor Chufarov Partner +380 (44) 492 8231 igor.chufarov@ua.ey.com Oleksandr Fedosieienko Manager +380 (44) 499 3370 oleksandr.fedosieienko@ua.ey.com On 21 December 2016, the Verkhovna Rada of Ukraine (hereinafter VRU) adopted in the second reading the Law "On Amendments to the Tax Code of Ukraine (on improvement of investment climate in Ukraine)" #5368 as of 7 November 2016 (hereinafter - the Law), which regulates, in particular, transfer pricing (further TP) issues. According to the Law, the changes to the tax legislation on TP issues come into force on 1 January 2017. Currently, the Law is expected to be signed by the President of Ukraine and it shall be published in the official information sources. Below we outline the main changes to the legal framework regarding TP in accordance with the newly-adopted Law.
2 Tax and Legal Newsletter Controlled A list of was supplemented with business with non-residents that do not pay corporate profit tax, or are exempt from this tax and / or are not tax residents of the country where they are registered as legal entities. The list of legal forms of non-residents on countryby-country (territory) basis shall be approved by the Cabinet of Ministers of Ukraine (hereinafter - CMU). In addition, with intermediaries / commissioners involved in provision of services are defined as (only with goods were previously covered). The criteria for inclusion of the state (territory) to the List of CMU 1 The Law provides an additional criterion according to which the states/territories are included into the List of CMU for TP purposes: - States that do not provide exchange of tax and financial information on requests of the central executive body implementing the state tax and customs policy fully and in a timely matter However, it is not specified in which case the exchange of information is considered comprehensive and provided in a timely manner, allowing room for inclusion of a long list of states into the List of CMU. The Law stipulates that with such counterparty are recognized as of 1 January of the year following the calendar year in which the state (territory) was included into the List, and not since the moment of inclusion of such state into the List. Increase in the financial threshold for declaring the Controlled The financial threshold for declaring as is significantly increased. Specifically, if both of the following conditions are met: - Annual income exceeds UAH 150 mln (excluding indirect taxes) for the relevant tax year - Volume of business with each counterparty exceeds UAH 10 mln (excluding indirect taxes) for the relevant tax year Comparability of Contrary to the previous version, the differences in comparability may be eliminated by appropriate adjustments of both and un. As to the possible sources of information used to search for comparable commercial and financial conditions of, the following have been added: - Other information sources, including information received in compliance with the law, if the information is going to be provided to the tax authority - Information received by the tax authority under international agreements Definition of profit level indicator and market range In determining the profit level indicator, legal entities' information may be used, if: 1) the comparable legal entity performs comparable activity and functions based on the Ukrainian Classifier of the Types of Economic Activity 009:2010, as well as international classifications 2) the comparable entity does not operate at a loss in more than one period during the period used for calculation 3) the comparable entity does not own more than 20% of another legal entity and has no shareholder (legal entity) with a share of more than 20%. In order to use financial information of comparable legal entities, such entities should not carry out with related parties. The question of the profit level indicator calculation when using multiple tax periods (years) up to this point has not been addressed, but now it will rely exclusively on weighted average value of profit level indicator. The procedure for calculating 1 List of CMU is the list of countries (territories), with party, registered in such country (territory) are recognized as. Such List is approved by the CMU.
3 Tax and Legal Newsletter the weighted average rate of profit level indicator shall be set forth by the CMU. Transactions based on futures or forward contracts If the transaction is based on a forward / futures contract, establishing the conformity with the arm s length principle shall be performed on the basis of forward or futures commodity exchange quotations (prices) for the 10 days preceding the date of the conclusion of a forward or futures contract. Widening requirements to the TP preparation According to the Law, in addition to the existing requirements for the preparation of TP, the following information shall be included: - Data on related parties should include information on subsidiaries (ownership share of 20% and more) - Information on the legal persons who receive local management reports (a country, in which head offices of these legal persons are located) - Description of the transaction, its terms and conditions as well as information on any restructuring events or transfer of intangible assets - Copies of the contracts - Business strategies of the parties - Reasoning behind the tested party s choice, information on comparable (parties) and sources of information - Allocation of expenses attributable to the transaction, providing detailed explanation on such allocation and outlining methodology of applying any allocation keys as well as actual profit level indicator calculation Application of Transactional net margin method As before, the Transactional net margin method is used, in particular if information for the application of CUP, Resale Price method, "Cost Plus" method is insufficient or absent. Clarification is provided on the possibility of Berry Ratio application within Transactional net margin method. Report on Submission of is moved forward from May 1 to October 1 of the year following the reporting year. Thus, a Report on for the FY2016 should be submitted by 1 October 2017. Grouping of The Law allows for grouping of in case of: - Purchase/sale of goods (works, services) within long-term contracts - Transfer (receipt) of rights to use various intangible assets related to one product (service) - Purchase/sale of a series of closely related products (product groups) and/or services - Purchase/sale of various goods (works, services), provided that each product or group of products (works, services) creates demand for other goods or group of goods (works, services) Grouping of, which previously has not been directly prescribed for, eases the analysis on compliance of the conditions of with the arm s length principle and allows for analyzing in a consolidated way. Tax audit regarding the compliance with TP legislation The Law provides for only two grounds for tax audit regarding the compliance with the arm's length principle: - Submission of TP - Non-submission or submission with the violation of requirements as to and/or TP The questions on the compliance with the arm's length principle cannot be grounds for a planned documentary audit.
4 Tax and Legal Newsletter Besides, self-adjustments of the prices in and tax liabilities are prohibited during the audit of such. During the documentary tax audits it is not allowed to submit an adjusted Report on and perform selfadjustments. Additional tax liabilities If the price or profit level indicator of the transaction is outside the market range, the self-correction of additional liabilities should be made to the level of the maximum or minimum value of the range, and in case such adjustments are made by the tax authorities to the median of the market range. Basis (adjusted report) and/or TP after 30 calendar days after the completion of the term for penalty payment for non-submission Late submission of the TP Late declaration of the in the submitted Report on (in the case of the adjusted report submission) Penalty 2 times the subsistence minimum, for each calendar day of late submission, but no more than 200 times the 1 equivalent, for each calendar day of late declaring of transaction in the submitted Report, but no more than 300 times the subsistence minimum Responsibility for violation of TP legislation According to the Law, the list of penalties is changing significantly and changes are being made to their amount (see table below). Basis Non-inclusion of into the Report on the TP Late submission of Penalty 300 times the subsistence minimum for a working person, as of January 1 of the tax (reporting) year (hereinafter - the subsistence minimum) 1 % of the amount of undeclared in submitted report, but no more than 300 times the 3 % of the amount of, but no more than 200 times the for all the 1 equivalent for each calendar day of late submission, but no more than 300 times the 5 times the subsistence minimum, for each calendar day of non-submission Deduction restrictions for the purposes of Corporate Profit Tax As before, the financial result before tax has to be increased by excess of the contract value of purchased goods (works, services) over the price determined with regard to the arm's length principle. However, it is clarified that the provisions of this subparagraph shall apply to the results of the tax (reporting) year. The financial result before tax is increased by 30% in case of acquisition of goods (works, services) from non-residents registered in the states included into the List of the CMU. These requirements do not apply if the transaction is either or un and the level of such expenses comply with the arm's length principle (without the submission of the Report). If the purchase price of goods and services exceeds the price determined in accordance with the "arm's length" principle, adjustments of the financial result before tax are made by the difference between the acquisition cost and the value determined by the arm s length principle. We will continue monitoring the developments and will inform you of further changes in the tax legislation. ***
5 Tax and Legal Newsletter EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY works together with companies across the CIS and assists them in realizing their business goals. 4,500 professionals work at 20 CIS offices (in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Togliatti, Vladivostok, Yuzhno- Sakhalinsk, Rostov-on- Don, Almaty, Astana, Atyrau, Bishkek, Baku, Kyiv, Tashkent, Tbilisi, Yerevan, and Minsk). EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Contacts Kyiv +380 (44) 490 3000 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. 2016 Ernst & Young LLC All Rights Reserved.