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Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

The tax authorities monitor transfer pricing risks in several stages. After the deadline for submitting a report on controlled transactions (1 October) has passed, the tax authorities review such reports and identify taxpayers which did not submit the report or indicated unnormal profit level indicators or non-typical information. Next, the tax authorities send a request for transfer pricing documentation to the respective taxpayers. At this stage, the tax authorities consider the documents provided to determine whether the taxpayer’s justifications regarding the arm’s length nature of its controlled transactions are feasible. If the transfer pricing documentation is not submitted or the taxpayer submits incomplete documentation or its conclusions are insufficient, the tax authorities may initiate transfer pricing audit.

The burden of proof lies with the tax authorities. During the tax audit, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the taxpayer selected an unsubstantiated method.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

The duration of a transfer pricing audit cannot exceed 18 months. The tax authorities should update the taxpayer on the status of the audit every six months. The audit may be extended for an additional 12 months if information is required from foreign tax authorities or an expert examination or translation is required.

In practice, the actual duration of transfer pricing audits is between nine and 11 months.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

If the prices of the controlled transaction do not correspond to the arm's length principle, the taxpayer may perform the respective self-adjustment and pay additional tax. Such self-adjustment can be made to maximum or minimum values of the range of prices (profitability). Taxpayers have the right to make a self-adjustment without incurring any penalties and fines until 1 October of the year following the reporting year.

However, if non-compliance is detected by the tax authorities during the tax audit, a transfer pricing adjustment will be made to the median price range (profitability) and the relevant penalties and fines will be applied.

In addition to these penalties, late payment interest should be applied. This is calculated by the application of an annual rate of 120% of the prime rate of the National Bank of Ukraine, effective from the actual date of underpayment on the amount of additionally assessed tax liabilities for the whole period of underpayment.

Taxpayers are prohibited from making self-adjustments once a transfer pricing audit has begun.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

The Ukrainian tax authorities may make transfer pricing adjustments within seven years (2,555 days) following the deadline for submission of the corporate income tax return for the tax year concerned (ordinary adjustments). If a taxpayer submits an adjusted corporate income tax return, this term is calculated as of the date of submission of the adjusted corporate income tax return.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

Taxpayers can appeal tax assessments by way of an administrative procedure or in the courts.

During an appeal procedure, either administrative or in court, the requirement to pay a tax assessment notice is suspended.

Taxpayers have 10 business days from the date of receiving a tax assessment notice to initiate administrative appeal procedure. Taxpayers should file appeals to the higher level tax authority. The tax authority reviewing the administrative appeal has 20 calendar days to dismiss or satisfy the appeal. The tax authority reviewing the appeal may extend the consideration of the appeal up to 60 calendar days.

After exhausting the administrative appeal procedure, taxpayers have 10 calendar days to pay tax assessments or initiate a court appeal in order to avoid the tax assessment becoming due.

In general, taxpayers have 1,095 calendar days from the date of receiving the tax assessment notice to initiate a court appeal.

The system of courts includes:

  • local administrative courts as courts of first instance;
  • appellate administrative courts as courts of second instance; and
  • the Supreme Court as the court of third instance.

Despite a lack of case law on transfer pricing, the Supreme Court’s conclusions should be followed by the lower-instance courts.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Ukrainian legislation provides for proportional transfer pricing self-adjustments after the respective approval has been received from the tax authorities. Proportional adjustments are also allowed in case of transfer pricing assessments by the tax authorities and based on the provisions of double tax treaties.

To date, there is no established practice; however, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure.

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