The key to victory in the war is a functioning economy. To help the economy survive it is possible, among other things, to adapt and soften the rules of tax control.Over the past two years, the peculiarities of tax administration have been established due to the introduction of quarantine related to COVID-19, but now some rules, such as those governing the liability of taxpayers for non-compliance with tax obligations, have undergone certain changes and, in order to avoid risks, we always advise you to monitor such changes carefully.
In 2022, under conditions of martial law in the area of transfer pricing, taxpayers shall report for 2021. This year, during the phased legislative changes to implement the BEPS Plan, a three-tier structure of transfer pricing documentation was chosen to introduce innovations. The three-tier reporting model enables the control of transactions within international groups of companies.
So, taking into account these changes, the following reporting forms exist for tax control on transfer pricing issues as of the current year, 2022:
- Report on Controlled Transactions and Notification on Participation in an International Group of Companies – deadlines for submission are 1 October of the year following the reporting year (for 2021, until 1 October, 2022);
- Transfer pricing documentation (local file) – submitted at the request of the State Tax Service within 30 calendar days from the date of receipt of the request. The request can be sent no earlier than 1 October of the year following the reporting year (for 2021, after 1 October 2022);
- Global documentation (master file) – submitted at the request of the State Tax Service within 90 calendar days from the date of receipt of the request, but the request may be sent no earlier than 12 months and no later than 36 months from the date of the end of the fiscal year established by the international group of companies to which such taxpayer belongs. The request applies for the first time in respect of 2021;
- Country-by-country report of an international group of companies – for the first time applies to the fiscal year ending in 2021, but no earlier than in the year in which the competent authorities concluded a multilateral agreement on the automatic exchange of country-by-country reports (Мultilateral Сompetent Authority Agreement on the Exchange of Country-by-Country Reports) (Article 53 of the Final Provisions of the Tax Code of Ukraine). The Ministry of Finance of Ukraine has not yet concluded such an agreement. If such an agreement is not concluded by the end of 2022, the provision on submission of the country-by-country report for 2021 shall not apply.
Now regarding the new norms that came into force on 27 May, 2022 and that establish the peculiarities of control over the fulfillment of tax obligations by taxpayers – that is, the obligation to calculate, declare and pay the amount of tax in the manner and within the time limits determined by the Tax Code of Ukraine. Temporarily, for the period until the termination or cancellation of martial law in Ukraine, the collection of taxes and fees is carried out taking into account the following:
- the taxpayer is unable to fulfill his/her tax obligations in a timely manner – exempted from liability, but obliged to fulfill such obligation within 6 months after the termination or cancellation of martial law;
- the taxpayer is able to fulfill the tax obligation in a timely manner – exempted from liability for late submission of tax reports until 20 July, 2022 and payment of taxes and fees no later than 31 July, 2022;
- the taxpayer has regained the ability to fulfill the tax obligations, the term of fulfillment of which falls on the period from 24 February, 2022 to the day of restoration of the opportunity – exempted from liability for late submission of reports within 60 calendar days from the first month following the month of restoration of such opportunities.
The Procedure defining the procedure for taxpayers to confirm the possibility or impossibility of timely fulfillment of their tax obligations until the termination or cancellation of martial law in Ukraine was approved by Order No. 225 of the Ministry of Finance of 29 July 2022 (came into force on 6 September, 2022). According to this Procedure, those taxpayers who were not able to report on controlled transactions in 2021 had to submit to the supervisory authority a statement on the absence of such an opportunity no later than 30 September, 2022, together with a list of documents confirming such impossibility. The list of supporting documents is separately approved by the same Order of the Ministry of Finance. If the taxpayer does not have the opportunity to submit such an application and relevant documents (copies of documents) by 30 September, 2022, then the application and documents shall be submitted simultaneously with the acquisition of the possibility to submit reports, payment of outstanding tax obligations, etc. but no later than 60 calendar days from the first day of the month following the month of restoration of such opportunities for the taxpayer.
In addition, it should be taken into account that in the event of detection of violations of the law based on the results of audits, taxpayers are subject to liability under the Tax Code of Ukraine. At the same time, the requirements of legislation on the moratorium (suspension) of the application of penalties (fines) for the period of martial law, state of emergency and/or for the period of quarantine established by the Cabinet of Ministers of Ukraine throughout the whole territory of Ukraine in order to prevent the spread of coronavirus (COVID-19) do not apply.
But with regard to audits, as of the current date, only the following are allowed:
- cameral audits;
- non-scheduled documentary audits conducted on the grounds specified in sub-clauses. 78.1.7 of the Tax Code of Ukraine (reorganization of a legal entity) and 78.1.8 of the Tax Code of Ukraine (VAT is claimed for refund from the budget and/or negative VAT value is more than UAH 100,000), and/or documentary non-scheduled audits of taxpayers, concerning which tax information was received, which indicates that the taxpayer violated currency legislation in terms of compliance with the deadlines for the receipt of goods for import operations and/or foreign exchange earnings for export operations;
- factual audits.
Certainly, the subject of the cameral audit may be, among other things, the timely submission of tax declarations (calculations). But, according to the definition of the term “tax declaration” given in the Tax Code of Ukraine, the report on controlled transactions cannot be equated to it. Taking into account the current provisions of the Tax Code of Ukraine, the issues of transfer pricing, including failure to submit the report on controlled transactions, compliance with the arm’s length principle by the taxpayer, etc. may be subject only to non-scheduled documentary audit (grounds are provided by sub-clauses 78.1.2, 78.1.14 – 78.1.16 of the Tax Code of Ukraine).
Therefore, tax audits on transfer pricing cannot be initiated during martial law in Ukraine, and audits that have been initiated must be suspended. The deadlines for filing objections to the act of completed audits of controlled transactions and appealing against adopted tax notifications-decisions are also suspended for the period of martial law. Thus, summing up, the possibility of imposing penalties exists only based on the results of audits, and they are prohibited. In fact, all control in the area of transfer pricing is currently conducted by way of monitoring controlled transactions and risk tracking.
It should be taken into account that the moratorium on audits will not affect the general limitation periods in any way in the future. For audits of controlled transactions, such period is 2,555 days (7 years) following the last day of the deadline for submission of the report on controlled transactions and/or the deadline for payment of monetary obligations accrued by the controlling authority, and if such report is submitted later – following the day of its actual submission. The statute of limitations in terms of transfer pricing control has been suspended since 18 March, 2020 with the introduction of quarantine established by the Cabinet of Ministers of Ukraine throughout the whole territory of Ukraine in order to prevent the spread of COVID-19. The quarantine norm has been suspended for the period of martial law but, at the same time, another general provision of the Tax Code of Ukraine is in force, according to which the statute of limitations for the period of martial law, state of emergency for taxpayers and the controlling authority is suspended.
In addition, legislators still plan to restore fully-fledged audits regarding compliance with transfer pricing rules, citing the need to increase budget revenues and the growing risks of underpayment of corporate income tax due to the moratorium. The Government tried to do this earlier by adopting Resolution No. 89 on 3 February, 2021, which expanded the list of non-scheduled audits and reduced other quarantine restrictions. An appeal was submitted against the Resolution of the Cabinet of Ministers and on 5 July, 2022 the Sixth Administrative Court of Appeal in case No. 640/18314/21 finally cancelled it.
Currently, in order to restore audits, on 1 September, 2022, the Verkhovna Rada registered Draft Law No. 7720, which provides for amendments directly to the Tax Code of Ukraine and, among other things, restores the possibility of conducting documentary non-scheduled audits on the following grounds:
- failure by the taxpayer to submit reports for tax control on transfer pricing;
- receipt of documented information and data indicating that the terms of a controlled transaction do not comply with the arm’s length principle and/or establishment of non-compliance of the terms of a controlled transaction with the arm’s length principle;
- failure to submit, or submission with violation of the report on controlled transactions and/or transfer pricing documentation, or in the event of detection of violations during the monitoring of such report or documentation;
- receipt of the report on controlled transactions sent by the taxpayer.
To sum up, in general terms, taxpayers should prepare for the restoration of full control over transfer pricing by the tax authorities. If audits do start, the controllers will have the opportunity to impose fines despite martial law. The fines are significant. For example, for failure to submit the Report on Controlled Transactions and the Notification on Participation in an International Group of Companies for the 2021 reporting year, such fines amount to UAH 681,000 (300 times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year), and UAH 113,500 (50 times the subsistence minimum for an able-bodied person established by law as of 1 January of the tax (reporting) year), respectively. The only way to avoid a fine during martial law will be to document the impossibility of fulfilling one’s tax obligations or force majeure as a circumstance exempting one from financial liability for committing tax offenses.