With the support ofTax Regulation

The priority areas of reforms planned by the Government of Ukraine are improving the investment climate and combating tax evasion. To achieve the intended results a number of events is scheduled, including:

— Preparing drafts on the deoffshorization of the Ukrainian economy;

— Accession of Ukraine to multilateral agreements on exchange of information that will enable competent authorities to quickly exchange financial and tax information;

— Gradual revision of bilateral agreements of Ukraine on avoidance of double taxation in accordance with the principles of the OECD;

— Improving transfer pricing rules and reporting on controlled transactions.

“The basis of these actions are stages of BEPS action plan to combat erosion of the tax base, which include spending limits under financial transactions with related parties, regulating taxation of controlled foreign companies, acknowledging foreign companies as residents of Ukraine — says Yaroslav Romanchuk, managing partner of International Legal Center EUCON. — One element of reforms is introducing a system of null declaration by citizens, planned for 2016”.

One of primary measures regarding changes in transfer pricing rules is to implement stage 13 from BEPS plan into tax legislation — introduction of a three-level structure of documentation.

According to Mr. Romanchuk, this stage of the plan provides the following general recommendations as to:

— Submission of consolidated report in the context of countries (Country by Country) by multinational group of companies with annual revenue in the amount of over EUR 750 million. This report shall be submitted by the main (parent) company of the group;

— Submission of a Master File report by the main company of the group (in country of its registration), followed by provision of information to other national tax administrations through mechanisms of information exchange;

— Submission of report (Local File) by individual members of the group in their jurisdictions.

As explained by Larysa Vrublevska, partner, recommended formats of Master and Local File contain number of significant innovations/additions — requirements for main factors of added value creation at each stage within the group of companies and information on agreements concluded with tax authorities and other written explanations received.

The report in the context of countries (Country by Country) contains summary information on individual members of a group in individual jurisdictions as to revenues, taxes paid and indicators (revenue, profit, number of employees, fixed assets) as well as on individual members of a group and their functions. Another interesting nuance is that a mechanism of secondary submission of a Country by Country report may be provided. “If a parent company at its country under its legislation is not obliged to submit it, or systematically does not submit such a report, then a secondary mechanism could be applied to a subsidiary company. And a subsidiary company may be appointed as a person reporting for the whole group”, says Ms. Vrublevska.

For non-submission of Country by Country report penalties may be provided. For example, in France, in the amount of EUR 100,000. Identification of facts that some companies receive profits not relevant to their contribution to added value creation in the supply chain is expected. It is worth noting that the world also reacted significantly to the BEPS plan.

On 23 May this year OECD Council approved amendments to the Guidelines on OECD Transfer Pricing for Multinational Enterprises and Tax Services, proposed in the BEPS plan.

“About 20 countries adopted amendments to their national legislation or have already prepared draft amendments on documentation transformation. Among them are Belgium, Britain, Germany, Poland, USA, Finland, France, Australia, and Sweden ... In most countries this report shall be submitted for the 2016 financial year in the period up to 31 December 2017. Switzerland established the first reporting period — 2018, USA — 2017.

On 27 January 2016, 31 states signed multilateral agreement between competent authorities on automatic exchange of these reports that shall be submitted by taxpayers, in some countries the exchange shall start from 2016. The report provided is to be prepared in a unified format; obligations to ensure privacy and possibility of consulting by competent authorities are set. In 2016 the signing of the agreement with number of countries, including China, is expected.

What should Ukrainian taxpayers expect shortly?

Most likely, notification by a supervisory authority as to a taxpayer belonging to an international group of companies shall be provided as a primary control measure.

If a parent company of an international group is a resident of Ukraine, it shall have obligation to submit all kinds of reports, adds Ms. Vrublevska, and notes that Ukrainian companies, members of a group, shall submit a Local File and prepare information for a parent company within the Country by Country report.

“In general, we can conclude that the legislation does not become easier, but as a consultant in the field of tax planning and transfer pricing I can say that aggressive tax planning schemes will gradually retreat into the past. On the other hand, the role of external tax advisers will increase, from whom customers will expect, on one hand, creative ideas, and on the other hand, a client will expect an adviser to take responsibility for such consultations. Within EUCON and the School on transfer pricing we have already began internal education and training among our lawyers, tax advisors and auditors,” Mr. Romanchuk concludes.