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International groups of companies are striving to reduce the tax burden. For this, many resort to transfer pricing (TP). They set internal prices at which they sell goods favorably to related counterparties. And, for the sake of commercial gain, they make these prices significantly lower than market prices. Consequently, they pay less taxes.
In order not to lose budget revenues, states control the value of transactions with foreign interdependent counterparties, especially with offshore companies. Regardless of the actual amount of sales, taxes on a controlled transaction must be paid at the average market value. That is, not from the real amount of profit, but from the calculated based on average market prices. Such calculations are called transfer pricing. They must be done carefully in accordance with permitted methods so that the tax office does not have any claims.
SION provides transfer pricing services in Ukraine. We will carry out calculations to prove the correctness of the tax base determination. Such a calculation will prove to the State Tax Service (STS) that taxes have been paid correctly.
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Transfer pricing for royalty
Royalty is a license fee for the use of intellectual property objects. These payments significantly affect the amount of taxes. In some cases, regulatory authorities may check whether the royalty rate is in line with the market average. For example, when paying to countries with which Ukraine has entered into agreements for the avoidance of double taxation.
The tax authority pays close attention to pricing under license agreements. If the actual amount of royalties differs from the market average, taxes are recalculated and added. The STS authorities should not suspect that a royalty transaction is leading to an unjustified tax benefit.
Our experts help you choose the right TP method, avoid mistakes in filling out reports. And the main thing is to justify controlled transactions when calculating royalties (say, between related parties in Ukraine and Cyprus) and to prove that they have a business, and not a fictitious purpose. … Its value can reach millions of hryvnias.
Transfer pricing control
TP can be one of the ways to avoid taxes. Therefore, sales with their use are of interest to STS. The objects of interest of the latter are controlled transactions, that is, corresponding to the following features:
- Activities carried out with related parties. Say, non-residents from countries with a low tax rate, or between the parent company and the permanent establishment.
- The annual income of the taxpayer, reflected in the statements, exceeds UAH 150 million.
- The volume of transactions with each of the counterparties is over UAH 10 million.
Low-tax countries are those whose income tax rate is at least 5 units lower than in Ukraine, that is, 13% or less. These are Cyprus, Malta, Ireland, Portugal, UAE, Ireland, some territories of Switzerland.
The purpose of the tax authorities is to determine whether the prices set by the companies are in line with the market average. During the check, it is calculated whether taxes were calculated correctly. If underestimation is found, taxes will be charged additionally. Careful accounting and document management will help to avoid problems with STS. Alternatively, you can outsource these tasks to specialists.
Tax control over transfer pricing
All transactions between related parties, as well as with non-resident persons, are controlled. The Ukrainian tax authorities are allowed to compare the prices used with the market prices and to charge additional taxes if they find a significant understatement of prices from the market ones.
The tax report on controlled transactions is submitted to the STS annually by September 30 for the previous year. That is, until 09/30/2021 – for 2020. There is a special form for the report. The taxpayer is obliged to provide a package of documents specified in clause 39.4.6 of the TCU. It is large enough and is supplemented every year.
A package of documents is submitted in Ukrainian in paper or electronic form. Foreign papers must be translated into Ukrainian. All these documents have an increased storage period – 7 years (2555 days) from the date of filing the declaration.
For violations, a fine may be claimed from the taxpayer:
- Undeclared controlled operation – 1% of its volume, but not more than 300 living wages (LW) for those able to work.
- Failure to submit documents for it – 2% of the volume of the operation, but not more than 200 LW for those who are able to work.
Our employees prepare the report correctly so that there is no need to re-submit clarifications. This will reduce reporting risks. We try to avoid other points that can increase risks.
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Transfer Pricing Law
The last law that concerns transfer pricing is No. 466-IX of 16.01.2020. He made significant changes to the Tax Code of Ukraine (TCU), which sets out significant issues of transfer pricing. Before that, there was law No. 408-VII of 04/07/2013, also with noticeable innovations.
Now in the TCU, article 39 is devoted to the features of transfer pricing. It contains the following points:
- A sign of a controlled transaction in financial terms and in terms of counterparties (the latter are non-resident related persons from low-tax jurisdictions).
- Related persons – means, with a participation share of 25% or more (legal entity), 50% or more (individuals).
- Methods for calculating regular prices for comparison (there are 5 of them).
- Terms of submission of reports on controlled transactions.
SION specialists analyze the company’s activities, occupation, size of transactions, related counterparties and other issues. They will help you figure out whether the company is classified as performing controlled transactions under the law.
Transfer pricing in Ukraine
There are international companies in Ukraine that sell goods to non-residents from low-tax jurisdictions. The STS is showing increased attention to such. To avoid the associated risks, we recommend that you adhere to the following rules:
- Submit reports on controlled transactions on time. Each subsequent clarification stirs up the interest of the inspectors in the enterprise.
- Financial statements, tax documents should not show unprofitableness.
- For “commodities”, set the value using the comparative uncontrolled price method (code 301 in the report).
- The profitability of the operations reflected in the report should not be lower than the market.
- Intra-group services for which money is deposited must have proven performance.
SION transfer pricing consultants provide support to Ukrainian companies whose transactions may fall under the definition of controlled ones. We:
- identify such transactions;
- ensure compliance with Ukrainian legislation;
- identify potential risks in terms of taxation;
- analyze the value chain (to justify the transfer price);
- provide support during inspections;
- accompany you when concluding transactions on preliminary agreement on pricing;
- help in disputes with the STS, we will protect the interests of the client in court.
Transfer pricing methods
To evaluate controlled surgery, the arm’s length principle is applied. That is, they compare it with a reference uncontrolled operation, which is carried out between unrelated persons. The principle underlies the transfer pricing methods set out in clause 39.3 of the TCU. These methods are:
- Comparative uncontrolled prices (priority). The cost is determined by analogs.
- Resale prices. The markup required for implementation is added.
- “Cost plus”. To the cost price is added the markup, which is typical for such objects.
- Net profit. The profitability of similar transactions between independent companies is calculated.
- Profit distribution. The sharing of benefits between the parties is taken into account.
The choice of the method is carried out in accordance with the criteria specified by the TCU. The use of methods must be approached carefully, otherwise the STS can replace the method and charge additional taxes. If a method other than the priority method is used, it must be well justified. In order not to make mistakes, we have carefully studied the requirements of the TCU, the OECD recommendations, and got acquainted with the recommendations of experts based on the practice of audits tax.
There are many subtleties in working with TP, we apply them. If you are interested in cooperation, please mail by us: firstname.lastname@example.org
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