Law on BEPS: key changes in transfer pricing rules

The Law on BEPS has significantly changed transfer pricing (TP) rules. Most of its provisions entered into force on May 23, 2020 (except for reports / documentation)

Things to know about the main novelties:

Updated rules for determination of the controlled transactions («CT»)

Changed criteria of relatedness:

• Threshold for recognizing persons to be related increased from 20% to 25%
• In case of participation in a joint venture without the status of legal entities, such joint venture and participant`s related entity may be recognized as related persons as well (in case the transactions are carried out between them)
• Indirect possession of shares by an individual shall be considered when calculating 25% participation
• The relatedness can be proved by the controlling authority in court based on the indicators of control

Extended list of business transactions subject to transfer pricing rules:

• Transactions shall be deemed controlled if upon completion of the transaction the amount of income / financial result of the taxpayer decreases due to the transfer of functions (with assets (without them), benefits, risks, opportunities) and in relations between unrelated persons such transfer would not be carried out without a compensation
• Implemented methodology for determining the compliance of the conditions of «CT» regarding transfer of functions with arm’s length principle, in case the traditional methods are not applicable

Reporting and documentation

Implemented 3-level documentation on TP and additional reporting documents for companies of the International Group of Companies («IGC»)

The member company of the IGC shall submit not only the local documentation to the controlling authorities (which shall be submitted also by non-members of the IGC), but also the following documents:

• Global documentation on TP (Master-file) – on the request of the controlling authority, in case the income of the IGC equals to EUR 50 million and more (for the first time – for the financial year ending in year 2021)
• Country-by-country report – on the request of the controlling authority, in case the income of the IGC exceeds EUR 750 million and the criteria for submission of the reporting documents in Ukraine provided by the Tax Code of Ukraine («TCU») are met (for the first time – for the financial year ending in year 2021, but not earlier than the year of conclusion of Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports)
• Notification about the participation in the IGC (for the first time – in year 2021 for the year 2020)

The documentation on TP now shall include, inter alia:

• Information on the ultimate beneficial owners (controllers)
• Description of the CT indicating the supply chain (value creation) of goods (works, services) in the CT
• Justification of economic expediency (benefit) and the presence of a business purpose in the acquisition of works (services), intangible assets, other items (except goods)
• If the payer is a member of the IGC – particular documents on intragroup transactions which are related to the CT
• Agreements and any annexes (additions) used as legal basis for CT
• A copy of the auditor’s report to the financial statements (if applicable)

Determination of prices, adjustments and other novelties

Determination of price in CT:

• Criteria for analysis of risks, which take the parties of CT while determination of compliance of the commercial / financial terms with the terms of uncontrolled transactions, were introduced
• Special rules for determining prices in CT with raw materials (necessity of the notification about the conclusion of the agreements, application of quoted prices while application of comparable uncontrolled price method, etc) were implemented

Performance of the adjustments:

• Taxpayers were provided with the opportunity to adjust the prices of CT by themselves if transaction’s conditions do not comply with reasonable economic grounds (business purpose)
• The procedure for proportional adjustment (adjustment of tax obligations of the taxpayer based on the results of tax obligations adjustments by the other party of the CT according to the arm’s length principle) was specified

Controlled foreign companies («CFC») and TP:

• Income and expenses of CFCs transactions with related non-residents, as well as with non-residents from the list of offshore-territories and legal forms, shall be determined according to the arms length principle
• Controlling authority can oblige the controlling person of the CFC to submit the transfer pricing documentation (with primary accounting documents) on transactions of the CFC and mentioned non-residents (if the cost criteria are fulfilled). In case of submission failure – the profit of CFC shall be increased by 30% of the income/expenses if documents concerning such income / expenses were not submitted, as well as fine shall be imposed

Other significant changes:

• Some payments to non-residents in CT over the amount determined according to arm’s length principle can be deemed as dividends and be subject to taxation at the rate 15% (if other rules are not provided by the Tax treaty)
• Tax audit can be carried out due to taxpayer’s submission of the application form for proportional adjustment (compliance with arm’s length principle will be checked for determining the grounds for such adjustment)

Penalties

Introduced (updated) the penalties for violation of transfer pricing rules:

Failure to notify on membership in the IGC >>> 50 subsistence incomes for working people («SIWP») (as of 2020 – 105 100 UAH)

Failure to submit the global documentation on TP (master-file) >>> 300 SIWP (as of 2020 – 630 600 UAH)

Failure to submit country-by-country report >>> 1000 SIWP (as of 2020 – 2 102 000 UAH)

Failure to submit or submission by the controlling person not all the documents on TP, copies of primary accounting documents on CFC on the request of controlling authority >>> 3% of income of CFC, documents and/or copies of primary accounting documents on which weren’t submitted, but no more than 1000 SIWP (as of 2020 – 2 102 000 UAH)