“Our clients are quite often interested in issues related to the mechanisms, according to which the supervisory authority makes a decision on conducting the inspection of controlled transactions or on sending a request for submission of transfer pricing documents, says Yaroslav Romanchuk, managing partner of ILC EUCON. “Taxpayers try to understand the way the companies, the operations of which will be meticulously studied, are selected”, he adds.
To get an insight into this, it is necessary to review current provisions of the Tax Code of Ukraine and the laws and regulations governing the procedure for conducting inspections.
Pursuant to provisions of the Tax Code of Ukraine, the tax control of compliance of the terms and conditions of controlled transactions with the “arm’s length” principle shall be exercised by monitoring such transactions and conducting inspections.
In September 2015 the Ministry of Finance of Ukraine published the Procedures for Monitoring Controlled Transactions and for Interviewing Officials and Employees of Taxpayers on Transfer Pricing Issues.
Pursuant to the procedure, the monitoring shall be carried out through:
— observation, by comparing the prices, terms and conditions of the transactions applied by parties of the controlled transactions;
— analysis of information on controlled transactions, reports on controlled transactions and documents on transfer pricing submitted by the taxpayer;
— analysis of information sources containing information and data on economic activities of the taxpayer necessary for establishing the compliance of the terms and conditions of controlled transactions with the “arm’s length” principle.
To conduct the monitoring, the supervisory authorities use:
— information on comparable non-controlled transactions of a taxpayer or its counterparty — a party to controlled transaction;
— any information sources, which are publicly available and provide information on comparable transactions and persons;
— software programs and data stores at the disposal of the tax authority;
— information (materials and data) of supervisory authorities, public authorities of Ukraine, state agencies of other countries;
— any publicly-available information on the potential risks of understating by taxpayers of tax liabilities in the course of transactions.
Financial and operating performance is considered, in particular, loss ratio in the previous three years, the industry-average profit margins, conducting of economic transactions not typical to the current operations of the taxpayer. According to Mr. Romanchuk, should the supervisory authority find that the conditions of the controlled transaction fail to comply with the “arm’s length” principle, it may send a request to the taxpayer asking for submission of transfer pricing documentation. Based upon the results of the documents review, a decision may be taken to conduct an unscheduled documentary inspection.
When conducting the analysis of reports and documentation and the inspection, the tax authority may interview officials and employees of the taxpayer. The following persons may be involved in the interview:
— those who were responsible for making decisions in the relevant areas of economic activities;
— those who prepared (executed) and/or signed the relevant documents (contracts, agreements, treaties, financial, technical and other documentation) related to the controlled transaction;
— those who prepared the report on the controlled transactions, information on the controlled transactions carried out (annex to the declaration) and/or documentation on transfer pricing.
“In this context we recommend our clients to analyze the risk criteria in accordance with their economic activities and to take prompt actions to prepare their officials and employees who may be potentially interviewed. After all, the course of the review of controlled transactions depends on how these persons understand the economic intentions behind the transactions and realize the importance of their comments during the interview. As part of preparatory actions, we suggest studying the details of the economic analysis of the transactions, the procedures justifying the choice of the method. It would be nice to introduce additional provisions to job descriptions of such employees”, Mr. Romanchuk noted.