With the support ofTax Regulation

In the event of detection of failure to submit or untimely submission of reporting on controlled operations, a company will receive a fine in the amount of 300 minimum wages set as of 1 January of the reporting year. The amount of such fine for failing to submit reporting in 2015 was UAH 365,400; in 2016 it will be UAH 413,400.

According to the State Fiscal Service, during monitoring (2016) a total of 500 taxpayers were found to have failed to submit their report. Many of those who did not provide their reporting, made a mistake in calculating cost criterion as to recognition of operations as controlled.

According to Article 39 of the Tax Code of Ukraine, a taxpayer’s business transactions with non-resident related parties and non-residents, whose jurisdictions are on the list approved by the Cabinet of Ministers, and which are subject to tax on income affecting taxable item, are recognized as controlled ones if the following conditions are concurrently fulfilled:

— annual income of a taxpayer from any activity, as defined by accounting rules, exceeds UAH 50 million (net of indirect taxes) for the reporting year in question;

— volume of such taxpayer’s business transactions with each counterparty, as defined by accounting rules, exceeds UAH 5 million (net of indirect taxes) for the reporting year in question.

According to the annual results it is important for the company to calculate cost criterion correctly, explains Yaroslav Romanchuk, managing partner of International Legal Center EUCON, since the issue of whether controlled operations were carried out and whether there is a need to file reports depend on this calculation.

“To determine the amount of annual income, income from all activities should be taken into account, not only from sale of goods, works (services). It is a fairly common mistake”, says Mr. Romanchuk. Thus, to calculate the cumulative annual amount the following is included: net product sales income, other operating income, equity income, other financial income and other types of income. At the same time, indirect taxes are not taken into account, which are: value added tax, excise tax, customs duty.

To calculate the criterion in terms of amount of taxpayer’s business transactions (exceeding UAH 5 million with each counterparty), foreign currency transactions are recorded at the date on which they were carried out in Hryvnia equivalent, while exchange rate differences from conversion of transactions, denominated in a foreign currency, are not taken into account when determining the sum of business transactions.

However, income from exchange rate differences for the reporting year in question is taken into account for recognition of business transactions as controlled ones when calculating a taxpayer’s annual income (over UAH 50 million).

According to Mr. Romanchuk, during calculation of volume of business transactions with each counterparty, the key condition that should be taken into account for recognizing operations as controlled ones is the impact of such operations on taxable item, which is subject to corporate profit tax. With this in mind, the amount of granted (received) credits, deposits, loans, reimbursable financial assistance, as well as amounts of investments contributed (received) in cash are not included in determining the cost criterion of controlled transactions for transfer pricing purposes. Yet, the amount of accrued interest (dividends) on such transactions shall be accounted. Moreover, when calculating the cost criterion the amount of investments contributed (received) and made otherwise than in cash form, irrevocable financial aid and dividends received are also taken into account.

As Larysa Vrublevska, partner of ILC EUCON, says, under the terms of foreign trade agreements, changes to the sum of value of goods indemnity are introduced quite often due to the fact that the seller provides the buyer with a discount (credit note). Such discounts are often available as subject to fulfillment of certain established performance indicators or in case of discovery of deficiencies during delivery. Credit notes are issued in a form of supplementary agreement to a specific contract and determine the specific sum of value of goods indemnity.

As the basis for determining the cost criterion of controlled transactions is the negotiated (contract) price of goods, while a credit note changes the cost of goods supplied, which is specified in a contract with a non-resident, then in determining the cost criterion of controlled transactions the volume of controlled operations is calculated at the negotiated (contract) price of such goods, taking into account changes in accordance with a credit note, provided by a non-resident, says Ms. Vrublevska. This means that the sum of a credit note is deductible.

All these conditions should be taken into account in order to determine controlled operations accurately.