Ukraine: Interview: Transfer Pricing Enforcement Is Key To Collecting Essential Taxes

Last Updated: 18 June 2019
Article by Andriy Reun
Most Read Contributor in Ukraine, July 2019

As Ukraine integrates with the world economy, experts say it must bring its taxation system in line with international standards and better abide by rules that are championed globally.

Doing so is in the country's best interests. Ukraine's allies and financial supporters also expect Kyiv to align its taxation policies with best practices worldwide.

Thus, the Organization for Economic Cooperation and Development and the European Union, supported by the International Monetary Fund and the World Bank, are pushing for the initiative known as BEPS (Base Erosion and Profit Shifting), part of which addresses transfer pricing rules. The goal of BEPS is to ensure that taxes get collected "where economic activities generating the profits are performed and where value is created." In turn, rules aim to ensure that companies set prices for their "in-firm transactions" at market prices so that such transactions can be properly taxed.

What is transfer pricing?

The internal price of transactions involving "goods, works, services between connected economic entities" is the issue, said Ivan Shynkarenko, of the Kyiv-based WTS Consulting firm.

"In principle, this opens possibilities for manipulating prices in order to shift profit to be taxed into other jurisdictions" with low or no taxes.

Transfer pricing regulations started in the United States in the 1930s, accelerated after World War II when a global financial framework emerged. Developed economies saw an emerging trend in which enterprises wanted to shift their profits into low-tax countries, sparking the need for state regulation.

Without the enforcement of rules, some countries are starved of tax revenue while low-tax jurisdictions collect revenue from production centers located all over the world.

But more countries are complying with the BEPS global initiative to redress the unfairness. Compliance takes place in the form of raising taxes in low-tax jurisdictions and through improved exchange of information among fiscal authorities.

To prevent profit shifting, the European Union lists tax havens and calls them "non-cooperative tax jurisdictions." Currently, there are 15 countries on the list. The EU has been keeping the list since 2017 and it "has proven its worth in promoting... the EU's agenda of improving global tax practices, fighting tax avoidance and improving good governance and transparency," Romania's Finance Minister Eugen Teodorovici said on March 12.

Starved of taxes

In Ukraine, it is hoped that the enforcement of rules can replenish the coffers of a state with a national budget of only $40 billion annually. The State Fiscal Service of Ukraine claims that since 2013 it has managed to grow the tax base in Ukraine by 8.2 billion hryvnias, or about $311 million, thanks to better implementation of transfer pricing rules.

Simply prohibiting "in-firm transactions" regulated by transfer pricing rules will not solve the issue, Andriy Reun of the Kyiv-based EVRIS Law Firm explains:

Transfer pricing is a source for increasing the payments of enterprise profit tax all over the world. By prohibiting transfer pricing the state will just fail to collect money needed for development of infrastructure and other socially important projects. So, prohibition is definitely not a solution.

Svitlana Musienko of the Sayenko Kharenko law firm has been working in tax law for 20 years and says that enforcement of transfer pricing rules, including audits performed by fiscal authorities, "requires so much expertise from both the business and the state auditor that this always takes time."

Business advantage

Businesses are at an advantage against the state, because firms can move faster by "employing an expert, training him, or hiring an external advisor," Musienko explains.

The state moves at a slower pace. But it's worth the investment. Shynkarenko says international experience shows that "each euro invested into development of the fiscal service in the sphere of profit shifting brings 10 (additional) euros of paid taxes."

Reun believes that, since the moment transfer pricing was introduced to Ukraine in 2013, the State Fiscal Service has undergone a serious transformation into a service-centered organization aimed at assisting businesses: "What they are doing now really looks more like a service function. But when they are starting an audit, then" things can go badly, Reun said.

Reun said tax authorities have understood that it is much easier to persuade business to pay taxes in full voluntarily than to enforce them in courts.

Musienko is confident that if the State Fiscal Service keeps developing a service-centered culture that respects confidential information, companies are likely to reciprocate with better cooperation. This will build trust in the state, Musienko suggests: "Sensitive information to be exchanged by fiscal authorities must remain protected by rules and not get sold at a (black) market in Kyiv," she said.

Transfer audits, ruling

Transfer pricing expert Olga Trifonova of PwC believes that the tax authorities do not act irrationally when selecting businesses for transfer audits but use a risk assessment method in picking their target companies. "Indeed, tax authorities select those tax payers with risk areas based upon the results of documentation analysis and visit them spot on," she said.

Musienko said that "currently 90–95 percent of transfer pricing cases in courts have been dealing with procedural issues" rather than with significant violations. However, the appearance of cases being considered on their merits makes lawyers feel optimistic, as court decisions will eventually build case law on transfer pricing.

Musienko praises the Supreme Court of Ukraine for passing its first final ruling on a transfer pricing dispute in Ukraine based on the merits of the case. The dispute was resolved by the Supreme Court of Ukraine on March 5. The fiscal services and a company called SIS GROUP clashed in the case, in which the court supported the position of the Ukrainian taxpayer. In particular, the court supported the company's position that market prices had to be established at the moment of entering into a transaction, and not while the title was transferred from seller to buyer.

The court also ruled that tax authorities needed to rely on several methods for establishing market prices and use several sources of information for doing so. Plus, the judges ruled that operations performed after July 27, 2017 with British partnerships had to be considered as controlled operations.

This and other final decisions in Ukrainian courts on the subject of transfer pricing will help both the business community and the fiscal authorities in properly understanding the law, and in their correct structuring of transactions.

In general, however, the courts still need to build up their expertise.

Trifonova explains: "Unlike the tax authorities, which have had six years to learn about transfer pricing and its application, our courts regrettably are not well aware of the approaches in application of transfer pricing rules." The fact that transfer pricing is more of an economic than a legal category can also account for slow learning pace of Ukrainian judges.

But Trifonova is confident that the Ukrainian judges will learn eventually. "In Eastern and Central Europe transfer pricing rules have been in place for a while and judges decide on the merits and not on the formalities."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions