Ukraine declared its intention to implement BEPS Action Plan more than five years ago. Since then, Ukraine has become a member of the Inclusive Framework on BEPS implementation, effective as of January 2017 and signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) in July 2018 which was further ratified by the Ukrainian Parliament in February 2019.
The MLI became effective on December 1, 2019, amending about 40 of Ukraine’s designated double taxation agreements. Finally, Ukraine shall duly align its domestic tax legislation – on January 16, 2020 a draft law “On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation” No 1210 (hereinafter – BEPS Draft Law) was adopted in the second reading, introducing a number of changes to the Tax Code, i.e. revising thin-capitalization rules, introducing CFC rules, extending definition of beneficial owner and permanent establishment, introducing Principle Purpose Test, improving Transfer Pricing rules, revising the rules of capital gains taxation and many other revisions. Herewith we will briefly discuss major changes relating to Transfer Pricing (TP) introduced by the BEPS Draft Law.
First, three-tiered TP documentation was introduced to multinational enterprises (MNE) present in Ukraine consisting of master file (MF), local file (LF) and country-by-country report (CbCR). MF is a document which contains general information about an MNE group, its TP policy, descriptions of the main business activities and products produced/services provided globally, group structure geographically and functionally, information on the major group’s intangibles and intra-group transactions, financial position and taxes paid. MF shall be filed if consolidated income of an MNE group constitutes a minimum of 50 million euros. LF shall contain detailed information about controlled transactions and substantiation of their compliance with the “arms’ length” principle.
Ukrainian taxpayers are familiar with LF starting in 2013. CbCR shall contain jurisdiction-wide information on allocation of assets, functions and income among jurisdictions where the MNE group operates, as well as taxes paid in each such jurisdiction. It may serve as a perfect tool for high-level TP risk assessment by tax administrations. CbCRs are obligatory for ultimate parent companies of an MNE group with a consolidated income exceeding 750 million euros and in certain other cases. CbCRs are subject to automatic exchanges of information.
In addition to MF, LF and CbCR, taxpayers shall be required to file notifications on participation in an MNE group, in which the whole MNE group shall be described and all its participants identified, the MNE group member authorized to file CbCR and the financial year of an MNE group shall be identified and the total consolidated income of an MNE group shall be reported. Severe penalties are introduced for failure to file or late filing of an MF, CbCR and notifications on participation in a MNE group. A new penalty was introduced for providing inaccurate information in the notifications on participating in a MNE group.
Mechanisms of secondary adjustment of taxpayer’s financial results for TP purposes are detailed in the Tax Code. Secondary adjustments were allowed by the previously effective TP norms, however, its mechanism has been detailed only now. If the Ukrainian tax authorities reject applying the secondary adjustment by the taxpayer, the latter may initiate the Mutual Agreement Procedure (MAP). MAP is another instrument provided by the majority of the Double Taxation Agreements signed by Ukraine but which was not detailed in Ukraine’s domestic legislation until the BEPS Draft Law was adopted. Under the MAP, competent authorities of several jurisdictions whose taxpayers are involved in a tax disputes shall jointly decide how to settle such dispute. According to the BEPS Action Plan, MAP is recommended as the most effective mechanism to resolve tax disputes related to application of tax treaties.
The definition of related parties is slightly revised, with shareholding requirements increased from 20% to 25%, which is also in line with the international approach.
The definition of dividends is significantly extended, e.g. dividends include consideration payable to a non-resident (related party, resident of low-tax jurisdiction or fiscally transparent entity) for goods, works, services or securities in access of the “arms’ length” amount. Taxpayers shall substantiate compliance with the consideration amount in such transactions with the “arms’ length” principle in accordance with the TP rules.
And finally, the methodology for substantiation of controlled transactions with commodities is improved. In addition to international commodities exchanges recommended by the Cabinet of Ministers of Ukraine, taxpayers shall be entitled to refer to other publicly available sources (e.g., information agencies), internal comparable transactions and comparable transactions of the counterparty in a controlled transaction.
The changes described above will help Ukraine introduce more developed tax rules in line with the best tax practices of the OECD member states. The automatic exchange of information under the Common Reporting Standard, which is also expected to be implemented by Ukraine, will serve as an effective mechanism of control over taxpayers’ compliance with new legislative norms in line with the BEPS Action Plan.
