On September 13, 2018, in the park-hotel “Goloseevo” in Kiev, the pragmatic seminar “Transfer Pricing Report. Tax inspections without penalties” has been held. The Event has been organized by the State Enterprise “Derzhzovnishinform” (DZI) and the law firm Crowe LF Ukraine. The partners of the seminar were PwC Ukraine, Taxlink and Euroammonia – one of the world’s largest liquid ammonia pipe transporters and exporters to the markets of Europe and America. The seminar came on the eve of reports submission on controlled operations for 2017. Nearly 100 representatives of Ukrainian companies and organizations, lawyers and accountants, experts from leading auditing and financial firms, who have hands-on experience in preparing the transfer pricing report, took part.
“Transfer pricing has been present in Ukraine for five years. During this time, the importers/exporters and others relevant companies four times submitted the transfer pricing reports, the careful analysis of which has allowed the tax authorities to identify the typical mistakes the taxpayers make during the compilation process. Therefore, for the fifth year in a row, we invite to and gather at our events the best specialists on transfer pricing, who make clear all the details and comment on the features of the transfer pricing report, explain the latest legislation amendments, and highlight the applicable court decisions. We hope that the information received at today’s seminar will allow the participants to complete the reporting this year without mistakes” said Bogdan Dubas, Director of DZI, in his opening address.
The first to take the floor and present the case of the State Fiscal Service of Ukraine (SFSU) was Mykola Mishin, Head of the Transfer Pricing Audit Department of the SFSU, who provided interesting numbers regarding the checks on compliance with the rules of controlled transactions reporting. Among the violations detected, the largest number – 670, related to reports on controlled operations, and 15 violations are related to transfer pricing report documentation. The fines imposed for these violations are UAH 174 million and UAH 4.6 million respectively.
As of September 13, 2018, 70 inspections of controlled operations are in progress, 38 of which are completed. As the result of these inspections the enterprises have been charged with UAH 411 million in additional profit tax; fined for UAH 76 million; booked losses of UAH 3.8 billion have been cut down; UAH 13 million of VAT added to be levied, and UAH 7.9 million of VAT refunds were canceled.
During the first session, Dmitry Mikhailenko, a partner at the Crowe LF Ukraine law firm, gave his comments on some of the topics razed, sometimes agreeing with the point of view and sometimes giving his personal opinion on the subject.
An agreement between the large taxpayer and the SFSU on the prior price valuation is a risk mitigation tool for transfer pricing widely used in the developed countries. This has been brought up by Olga Trifonova, director of the transfer pricing practice PwC Ukraine, and Anna Nikolaiko, PwC Ukraine Transfer Pricing Manager. According to them, about 500 business entities in Central and Eastern Europe submitted applications in order to take part in the price verification arrangements.
“It is very important for the taxpayer to carefully follow all the conditions of the price verification agreement. Otherwise, the tax authority has the right to early terminate the deal. Moreover, the agreement is terminated with backdating, the date the contract has been signed remains the effective date” the experts warned.
A great interest has been stirred by Olga Bogdanova, a partner of the Crowe Horwath AC Ukraine audit company, who spoke on the use of various information systems to administer the tax liabilities arising from transfer pricing and international tax liabilities planning. She gave a comprehensive comparison of more than 10 databases for transfer pricing purposes, assessed the quality of information in each database, and provided a walkthrough how to find comparable companies and the impact of such a choice for the benchmark range.
With examples, Ms. Olga illustrated the segmentation methodology during the import-export operations of separate batches of goods, the mechanism for selecting the basis for the distribution of other operating income and expenses (net profit method) and explained the asset write-off policy using the weighted average cost price for manufacturing enterprises.
Stanislav Lobko, councilor of the Crowe Horwath AC Ukraine audit fir, described common mistakes in determining transfer prices, namely, the use of prices without adjustments; ignoring internal comparable operations, in particular, of the parent company; use of non-focus sources as a consequence of inadequate analysis; using the fourth method in all cases; use of inadmissible sources; use of experts conclusions not as a source of information, but as an unconditional confirmation of transfer prices; incorrect range benchmark assumptions; making the analysis “from the end” in order to fit into the range.
At the end of the second part of the seminar, the representative of Taxlink – an interactive tax knowledge platform, introduced to the participants the capabilities of the system, told how to test the services of the company, and gave examples of use.
Dmitry Donets, a partner of PwC Legal Ukraine, Head of Dispute Resolution practice, unveiled the general statistics of disputes related to transfer pricing in 2018, outlined the current precedents of litigation over transfer pricing. According to him, this year 83 cases were considered, out of which 71 deal with procedural questions, and only 12 on the matter itself. The courts of all authorities made 49 decisions in favor of taxpayers, 39 – in favor of the SFSU. The results of court decisions were UAH 212 million of tax evasions found and UAH 18 million worth of fines imposed.
Litigation on transfer pricing issues is divided into three main categories, the first of which is the cases on the appeal of the order to conduct an inspection. Out of the 9 cases, 5 decisions were made in favor of the taxpayers. The courts confirmed that without a proper order to conduct an inspection of the transfer pricing documentation there were no grounds for the inspection itself.
The second category of cases are the disputes on the matter of the transfer pricing. 14 court decisions, 10 were in favor of the taxpayers, and 3 were in favor of tax inspection. 8 taxpayers who have won disputes were committed to the use of information sources. The case of the price of a forward contract has been sent the second time to the Supreme Court of Ukraine for legal investigation.
The third and the most numerous category are the disputes as to the accepted procedures. This is 47 cases from which tax inspection has won 29. 22 cases of non-submission of the reports, 9 decisions were taken in favor of tax officials which backed up their case of long-term offense as to not submitting or partially submitting the report. In 13 cases, the court has supported taxpayers who argued that no one can be punished twice. The legal investigation of the Supreme Court of Ukraine in the case No. 804/5049/17: reads that penalties for offenses cannot be applied by the tax authority, backed by the clauses effective from January 1, 2017, which is suspended and is to be rewritten and then become the rule.
Ivan Shynkarenko, Ph.D., Partner, Head of Customs Law and Transfer Pricing, KM Partners, spoke about the defense of taxpayers in disputes over transfer pricing. “The taxpayer can and may defend his viewpoint on transfer pricing during the inspection or in the courtroom, as long as the principal of TCP is abided – transparency, consistency, and proactivity”
At the end of the seminar participants, many of whom visited other similar events, noted the high professional competence and expertise of the speakers, as well as the excellent organization of the seminar. Most of them expressed their wish to join the next event organized by DZI on transfer pricing.
Information partners of the seminar: Ministry of Economic Development and Trade of Ukraine, magazine “Independent Auditor”, information agency “Financial Club”, Ukrainian Business Publishing House, Ukrainian Grain Association, ACC, EBA.