This summer the Organization for Economic Cooperation and Development (OECD) completed its work on a project to introduce amendments to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The Guidelines is a principal methodological document on the arm’s length principle application which regulates all issues in this area.
Following the results of the discussions, the working team proposed the following amendments:
1. Triumph of substance over form doctrine enhancement upon identifying circumstances of transaction. “An agreement remains a reference point for analyzing. Nevertheless, determining the price level is based on factual circumstances of a transaction. And risk allocation is factual, not stipulated by the provisions of an agreement, says Yaroslav Romanchuk, a managing partner of the ILC EUCON. — It means that if factual circumstances do not correspond to or differ from the terms and conditions of the agreement, the regulatory authority can reclassify a transaction for taxation purposes”.
2. For transactions with raw materials it is supposed to introduce a direct provision about market quotation, and provision for introducing amendments in order to make the controlled transaction’s terms and quotations comparable. The amendments can either decrease or increase the value of a quotation.
A similar norm is currently present in Article 39 of the Tax Code of Ukraine.
3. The amendments touched upon transactions with intangible assets (IA). There is a proposal that the concept of economic owner of intangibles be applied. It means that the ownership right to intangible assets does not provide distribution of the whole profit in favor of the beneficial owner. “Intangible asset profit should belong to the company which performed functions on the development, maintenance, modification and protection of the intangible asset. And, thereafter, a profit owned is a profit taxed for such a company”, Mr. Romanchuk pointed out.
The work will be continued in terms of taxation of the transactions with the participation of permanent establishments, financial transactions, over the mechanisms of determining the price of intangibles in complicated cases.
In Ukraine there are special rules for the taxation of imports/exports operations. They have been slightly amended in 2015. In this respect Yaroslav Romanchuk mentioned several important aspects:
1. Previously when the taxation of the exchange goods transactions was regulated by transitional provisions of the Tax Code of Ukraine, the special rules were applied only for residents from low-tax jurisdictions, but at present they are used for all types of controlled transactions.
2. To check the price in such a transaction it is necessary to calculate the price range in general, with quotations to be calculated for a decade before the performance of the controlled transaction.
3. The list of goods quoted on the exchanges as well as the list of world goods exchanges for each group of goods is established by the Cabinet of Ministers of Ukraine.
These lists have not been approved by the Cabinet of Ministers of Ukraine. In March 2015 a draft bill was published with world exchanges on the website of the Ministry of Economy. However, as Mr. Romanchuk specified, it is still a project.
The Chicago Mercantile Exchange (the USA), the London Commodity Exchange (Great Britain), the New York Mercantile Exchange (the USA) were proposed as the main exchanges for almost all groups of goods.
The Ministry of Finance of Ukraine, within the framework of reforming tax legislation, proposed the following amendments:
1. For large business — cancellation of special taxation rules for exchange goods.
2. For small business — cancellation of preparatory documentation on controlled transactions.
3. Increasing the ownership share limit to recognize the person affiliated.
4. Simplifying requirements for the comparability of transactions.
5. Simplification of requirements for documentation on low-added value services.
6. The possibility to submit documents in electronic format.
7. Elimination of cost limit for controlled transactions.
8. Cancellation of the upper limit of penalties for failing to submit documentation.
9. More detailed requirements for documentation for intragroup services.
“We’ll soon find out what proposals are going to be realized, and generally taking innovations into account, it can be said that transfer pricing reform seems to be liberal”, Mr. Romanchuk said, summing up.
Yaroslav Romanchuk – Managing partner ILC EUCON
Source: journal The Ukrainian Journal of Business Law, №10 October 2015 http://www.ujbl.info/article.php?id=674