From September 01, 2013 the Tax Code of Ukraine was supplemented by new definitions: transfer price, controlled transaction; new criteria for determination and fine system appeared. During 2014 and 2015 the Tax Code of Ukraine was amended, particularly the “long arm” principle was established, “persons connection” criteria were clarified, conditions of the controlled transactions definition were changed and general systematization of regulative base was performed.
We would like to note the improvement of quality of the procedure of transfer pricing management. At the same time having analyzed a range of explanation letters of the Tax Service of Ukraine we can conclude about disloyal position to the payers.
1. The entity falls into the scope of transfer pricing definition in the process of cost criterion calculation, calculation includes total income with a profit from operation and non-operating currency difference;
2. The criteria and conditions for definition of the controlled transactions applied to the Representation office are the same that those for income tax payers enterprises, however the representative offices actually represent the interests of foreign entity on the territory of Ukraine.
We should not forget that the Fiscal Service of Ukraine is able to use AMADEUS and RUSLANA databases and quite well regulated mechanisms for determining the potentially controlled transactions and mechanisms for tax information exchange with other countries.
Transfer pricing litigation practices in Ukraine
In autumn 2015 first judicial disputes on the issues of appliance of the Ukrainian rules of transfer pricing arose. The most significant judicial dispute among all disputes is between Ukrainian Eastern Fish Company, LLC against Specialized State Tax Inspection on servicing major taxpayers in Kharkov (Case No. 820/6897/15).
At this stage the legal proceeding has been already considered by the Higher Administrative Court of Ukraine, and the Ukrainian courts of all three instances have supported the taxpayer position. Doubtless, this judicial dispute may be called as the precedent-setting dispute, because, sooner or later, it may cause the necessity of making amendments to the article 39 of the Tax Code of Ukraine. Within the framework of the abovementioned legal proceeding the taxpayer was imposed a fine for the fail to provide a report on the controlled transactions for 2014, made with the British Limited Liability Partnership, hereinafter - LLP.
The Fiscal Service of Ukraine addressing to the British competent authorities has established that the partners of LLP are the persons registered in the low tax jurisdictions. Particularly, one of the LLP partners is a tax resident of the Marshall Islands, included in the list of low tax jurisdictions for transfer pricing (“The list of countries (territories) where the income tax rate (corporate tax) is lower for 5 and more interests points than in Ukraine”, approved by the Decree of the Cabinet of Ministers of Ukraine No. 1042-p dated December 25, 2013).
Formally Ukrainian Eastern Fish Company, LLC performed transactions with the legal entity registered in the Britain however taken into account LLP essentials, beneficiaries in such operations from LLP are the LLP partners that are the residents of low tax jurisdictions.
Nevertheless, in such case one cannot bring an accusation against the Ukrainian courts for their wrong judicial decisions because the Article 39 of the Tax Code of Ukraine in the version applicable in the dispute period states just the place of registration of the foreign legal entity but not the tax residence.
The controlled transactions have been recognized and recognized to the present time as the transactions with the entities registered in the country of the appropriate list approved by the Cabinet of Ministers of Ukraine.
We may admit that if in relation to this case Article 39 of the Tax Code of Ukraine specifies the transactions with the entities being tax residents of correspondent jurisdictions irrespective of the country of its registration, the Fiscal Service of Ukraine would have more chances to win such judicial dispute in terms of actual transaction essence by proving nominal nature of LLP place of registration when the place of actual deal beneficiaries is in low tax jurisdiction.
When Transfer Pricing is needed in Ukraine?
WHEN two conditions are met at the same time (Provided that):
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