Ukraine’s long-awaited draft law on transfer pricing has finally been sent to parliament for consideration. 

Ukraine has been planning to update its transfer pricing regulations for many years now. However, the topic suddenly heated up in 2012, when first drafts of a possible new transfer pricing law started to appear. The latest one, which is generally regarded as the version most likely to be adopted, is draft law ? 2515, "On the amendment of the Tax Code of Ukraine as to transfer pricing." 

The currently available version of the Draft Law introduces a number of changes into Ukrainian tax legislation. In this article, we review the most notable ones.

The Draft Law is generally based on the OECD guidelines. The five most widespread transfer pricing methods are recognized: comparable uncontrolled price, resale price, cost-plus, transactional net margin and profit split.  It is notable, however, that the Draft Law neither describes the OECD guidelines as a source of law, nor directly refers to them.

Currently, it is unclear whether the conventional sources of information (such as Amadeus, Bloomberg, Royalstat, ktMine and other databases) will be respected in practice.

An important feature of Ukrainian transfer pricing is that transfer pricing regulations will, in particular, apply to the following:

  • transactions between related parties who are residents of Ukraine (since consolidated tax reporting is not available in Ukraine) and

  • transactions between residents and  non-residents (who are non-related) that are subject to corporate tax at a rate 5 percent lower than Ukrainian's corporate profit tax rate (the current CPT rate is 19 percent and will be reduced to 16 percent in 2014).

The qualification criteria for controlled transactions is expected to be UAH 50 million (about €4.8 million or US$6.1 million).

Transfer pricing reporting will likely become mandatory under the new law. The reporting period is set as a calendar year. The deadline for submission will be May 1 of the year following the reporting year.

In addition to transfer pricing reporting, large taxpayers will also be required to submit primary documentation on controlled transactions.

The Draft Law envisages significant penalties for non-compliance with transfer pricing reporting requirements, as follows:

  • 5 percent of the amount of all controlled transactions for non-submission of the transfer pricing report and 

  • 5 percent of the amount of a specific controlled transaction for non-submission of primary documentation on that transaction.

It is expected that Ukraine’s parliament will likely bow to input from the business community and enact penalties that are significantly lower than those noted above.

Although the Draft Law envisages the possibility for large tax payers to enter into advance pricing agreements (APAs),it does not clearly address whether such APAs will cover customs valuation issues.

Tax authorities will establish dedicated teams to conduct transfer pricing examinations.

To become effective, the Draft Law must be adopted by the parliament (usually following two parliamentary hearings) and then must be signed into law by the President. Although as of this writing none of these actions have taken place, it is highly expected that the Draft Law will be adopted in the nearest future. If so, its expected effective date should be mid-2013 or January 2014.