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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
According to Ukrainian legislation, all taxpayers performing controlled transactions must prepare, maintain and implement place local transfer pricing documentation for each reporting period (ie, calendar year). Local transfer pricing documentation, substantiating the arm’s-length nature of prices and profitability, should be submitted only on request of the tax authorities and within 30 calendar days. Such requests can be sent to the taxpayer no earlier than 1 October of the year following the calendar year in which the controlled transaction was performed.
In addition, all taxpayers performing controlled transactions should file a report on controlled transactions (transfer pricing notification) by 1 October of the year following the reporting year.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
The Ukrainian legislation requires only local transfer pricing documentation and report on controlled transactions (transfer pricing notification) to be filed. Neither master file nor country-by-country report are currently required.
The Tax Code sets out requirements for local transfer pricing documentation. In particular, it should include:
- information regarding related parties, including information on parties which directly or indirectly own at least 20% of the taxpayer and parties of which the taxpayer owns at least 20% (directly or indirectly);
- information regarding the group, including its legal structure, a description of its activities and its transfer pricing policy. This should be provided with the information about the entities, whom the taxpayer provides with local management reports (eg, names of entities and countries where such entities have head offices);
- a description of the taxpayer’s management structure (ie, its organisational structure);
- a description of the taxpayer’s activities and business strategy (including information regarding economic conditions, an analysis of the markets where the taxpayer operates and its main competitors);
- information regarding the taxpayer’s participation in business restructurings or transfers of intangible assets during the reporting or preceding year, along with an explanation of the aspects of those transactions that had or still have an impact on its activity;
- a description and the conditions of the transaction and copies of the relevant agreements (ie, contracts);
- a description of the goods, works or services;
- information regarding the payments that were actually made in the controlled transaction (ie, the amounts, currencies and dates of payments, and payment documents);
- factors that influenced the price determination, including business strategies of the parties to the controlled transaction (if any) that significantly affected the prices of the goods, works or services;
- a functional analysis of the controlled transaction (ie, information regarding the functions performed, assets used and economic risks assumed by the parties to the controlled transaction);
- an economic analysis, including:
- a benchmarking study;
- substantiation of the transfer pricing method(s);
- the profitability indicators and sources of information used;
- the allocation of the supplier’s income (profit) or expenses relating to the controlled transaction that were considered when calculating the profit level indicator;
- a calculation of the arm’s length range of prices/profitability; and
- a description and calculation of comparability adjustments performed in respect of controlled and non-controlled transactions; and
- substantiation of the use several tax periods (years) for determining the profitability range and the calculation of the weighted average profitability indicator;
- information regarding the proportional transfer pricing adjustment performed by the taxpayer (if any);
- information regarding the individuals and entities that are party to the controlled transaction and parties relating to the taxpayer (in the reporting period in which the controlled transaction was performed and at the time of submission of the transfer pricing documentation); and
- information regarding the taxpayer’s total number of employees, with a breakdown based on its specific divisions as of the date of the transaction or the end of the reporting period.
Local transfer pricing documentation should be prepared in Ukrainian only. No mandatory form for transfer pricing documentation has been prescribed and the information may be contained in a single document or series of documents.
The Ukrainian tax authorities may require taxpayers to provide additional information and documentation.
What are the penalties for non-compliance with documentation and reporting requirements?
Ukrainian legislation contains a significant number of specific transfer pricing penalties. The penalties are calculated using the value of the subsistence minimum (SM) established for 1 January of the reporting year. The SM in January 2018 was UAH1,700 (approximately €53); in January 2019 it was increased to UAH1,853 (approximately €58).
The penalties for non-compliance with the transfer pricing reporting requirements are as follows:
- 3% of the controlled transaction value for failure to file transfer pricing documentation (limited to 200 SMs) for all controlled transactions in the respective tax year;
- 1% of the controlled transaction value for failure to declare the controlled transaction in the report on controlled transactions (limited to 300 SMs for all unreported controlled transactions);
- 300 SMs for failure to file (or the late filing of) the report on controlled transactions;
- 5 SMs for each calendar day for non-submission of the controlled transactions report or transfer pricing documentation within 30 calendar days following the last day of the deadline for settlement of the fine;
- 2 SMs for each calendar day (up to a maximum of 200 SMs) for late submission of transfer pricing documentation; and
- 1 SM for each calendar day, but no more than 300 SMs, for late submission of the controlled operations report or late declaration of the controlled transaction in such report when submitting an adjusting report.
Paying penalties does not exempt the taxpayer from its obligation to file a report on a controlled transaction or prepare transfer pricing documentation.
In addition, the taxpayer’s management could be subject to criminal liability if the total amount of additional tax liabilities assessed by the tax authorities during the tax audit exceeds 1,000 times the amount that is equal to 50% of the statutory subsistence minimum for able-bodied individuals (ie, UAH960,500 of additional tax liabilities for 2019).
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Since the introduction of transfer pricing documentation requirements, the burden of proof has been transferred to the tax authorities.
As Ukrainian legislation prescribes clear content requirements in transfer pricing documentation, taxpayers can prepare proper transfer pricing documentation justifying the arm’s length nature of the controlled transactions. If detailed documentation is in place, the tax authorities must demonstrate that the selected method, search criteria and identified uncontrolled comparables are not applicable. This assumes that if the functional and economic analysis were determined correctly, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the selected method is incorrect.
That is why the best practice is to prepare the transfer pricing documentation in advance (without the tax authorities’ request), preferably prior to the submission of the transfer pricing report (transfer pricing notification). Proper and comprehensively prepared transfer pricing documentation is a major factor in reducing transfer pricing audit risks.
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