Taxpayers who carried out controlled transactions during 2013 are preparing to file reports. As the filing deadline approaches, more questions arise concerning justification of prices. In this regard, a great deal of attention is being paid to the analysis of information sources.
In view of the upcoming reporting, the Ministry of Revenue and Taxes of Ukraine held a roundtable initiated by the International Law center EUCON and by the School of Transfer Pricing. The event was attended by experts of the Ministry, businesses and publishers (owners of Internet resources) of official information. During the discussion, they identified the main issues of applicability of sources and generated a list of requirements to be met by the information contained in such sources.
The list of sources of information on market prices was approved by the Cabinet of Ministers on 23 October 2013, No.866-r.
The list of the main sources of information included the following:
— SE Derzhzovnishinform, a monthly newsletter called “Review of prices at the Ukrainian and global commodity markets” and the analytical product “Commodity Monitor. Ukraine”;
— SE Ukrpromzovnishexpertyza: the analytical product “Digest of the commodity prices at global markets” and a weekly “Market of steel: analysis, forecasts, scenarios”;
— The official site of the Agrarian Exchange;
— Bulletin of the Ministry of Revenue and Taxes.
Official websites of the Ministry of Regional Development and the Ministry of Agricultural Policy have been suggested as auxiliary sources.
Since the publications are sources of information about market prices, it means that they apply for calculation of the market price range. “Calculation of the market price range is carried out if the first method is used to determine the price — the method of comparable uncontrolled price (sales comparison) or the method of profit distribution. According to the tax law, the priority method is the one of comparable uncontrolled price”, said Yaroslav Romanchuk, the managing partner of ILC EUCON. If this or any other method can be applied, a taxpayer should use the method of sales comparison. This is the most accurate method and it provides the high confidence, because it is based on a comparison of prices of goods, works (services) of the controlled transaction with the market price range. But in order to apply this method, or basically any other method, it is necessary to find comparable transactions. Taxpayers should start this search from the official sources, because during audits of controlled transactions, representatives of the supervisory authority use information from official sources.
“In order to recognize a transaction as comparable, it is necessary to compare terms of the transaction with terms of the controlled transaction. This procedure includes examination by many criteria and the lack of information on these criteria in the official sources adversely affects the search and the use of sources itself”, explained Mr. Romanchuk.
Criteria for consideration during research
The first one is the criterion of unrelated persons. Since comparable transactions can only be transactions between unrelated persons. As of now, only one publication provides information on the parties to a certain transaction — the Bulletin of the Ministry of Revenue and Taxes. However, it should be admitted that it began to publish information on prices only in 2014.
Also, taxpayers should compare the following factors that influence prices: volume of transactions, characteristics of goods, functions of the parties, risks of the parties, terms of performance, order of payment, features of the given market, business strategies of the parties (if any).
According to specialists of the School of Transfer Pricing, they conducted a deep analysis of all the sources of information and, unfortunately, it can be admitted that the sources cannot meet all legal requirements.
Apart from the lack of information under the main criteria of transactions’ comparability, there is a lot of descriptive and forecast information that taxpayers may use only to understand the market situation. A major problem is the shortlist of commodities. Main industries and products that are represented in the publications include agriculture, energy resources, metallurgy products, chemicals and forestry products, construction materials. There is no information on prices of light industry, household appliances, machinery, furniture and other commodities. There is no information on the cost of services and activities.
“The main consumers of information — taxpayers can only wait until publishers improve their databases and look for other sources of information or apply other methods of pricing”, Mr. Romanchuk added.
According to the Tax Code, if information is insufficient or unavailable in official sources, taxpayers may use the following information:
— the prices prevailing at public tenders (auctions), tenders on specific products, stock quotes;
— statistical data of government agencies and institutions;
— reference prices in specialized business sources (including online publications) and publications (including electronic ones) and other data bases, information programs that are used for the purpose of transfer pricing, and other publicly available sources;
— information on pricing, price ranges, quotes that are published by the media;
— information obtained from accounting and statistical reports of taxpayers that are published in the media, including on official websites;
— results of independent appraisal of property;
— information about taxpayers’ transactions with unrelated persons.
School of Transfer Pricing enables taxpayers to learn in detail about the search algorithms of comparable transactions and independently evaluate the possibility of using information sources.
Yaroslav Romanchuk – Managing Partner, Attorney of the International Legal Center «EUCON»
Source: «The Ukrainian Journal of Bussines Law» No.3, March 2014. http://www.ujbl.info/article.php?id=432