Have you approached preparation of the Controlled Transactions Report and transfer pricing documentation with a great deal of responsibility? Then it means that somebody else will be paying the fines.
Based on information from the State Fiscal Service (SFS), as of September 20, 2017, a lot of fines have been imposed. According to the findings of the audits which commenced in 2015 and were linked to observance of the Arm’s Length Principle:
- Profit tax has been additionally accrued - UAH 314 million
- Net loss has been removed - UAH 2.2 billion
- VAT has been additionally accrued - UAH 4.8 million
- VAT reimbursement amount has been reduced - UAH 3.5 million
- Penalties have been accrued - UAH 34 million
Getting yourself under the magnifying glass of the State Fiscal Service is a major pain in the neck
Obviously, everyone would wish to avoid it, and everyone did it differently. Some companies used their best efforts to draft reports and documentation on their own. The taxpayers claim that the common culprit of the problems linked to the transfer pricing is the volume of work and time required to prepare the necessary documentation.
Other companies - mostly those which have already gotten their fingers burned once - engaged the experts, or whole companies. The demand for highly specialized TP experts is increasing every year.
We offer you to take things a step further in order to get rid of any issues relating to 2017 TP today.
Above we have outlined the types and causes of the TP pain in the neck and found not only a remedy to help you deal with it, but also some preventive medications in the form of recommendations on how you can avoid falling under the displeasure of the fiscal services.
Supervision over the TP by the State Fiscal Service involves two stages:
- Observance of the Arm’s Length Principle by the payers;
- Timeliness and completeness of Controlled Transactions Report;
- Transfer pricing risk analysis;
- Analysis of procedures for pricing prior approval.
Performed by: Department for Legal Entities Taxation of the State Fiscal Service
- Arrangement and implementation of the audits intended to check the observance of the Arm’s Length Principle according to the established TP risks;
- Supervision over implementation of desk audits with respect to submission of Controlled Transactions Reports.
Performed by: Audit Department of the State Fiscal Service
To avoid a rendezvous with the SFS next year, you have to know the reasons behind it, namely, which attributes of the company’s business operation can lead to the tax audit.
Reasons for audits according to the information of the State Fiscal Service
- Company remaining unprofitable during several reporting (taxable) periods;
- Taxpayer's financial performance being inconsistent with the average profitability indices in the industry;
- Considerable portion of activities involving provision or receipt of intra-group services;
- Considerable amount of paid royalties and/or interest on financial loans;
- Business transactions which are non-typical for the payer’s current activities.
The Report "Dealing Effectively with the Challenges of Transfer Pricing" adds the following aspects to this list:
- Large portion of transactions involving affiliated parties and those registered offshore or in the countries with lower tax rates;
- Considerable difference between the amount of controlled transactions and payments made to or coming from affiliated counterparties;
- Considerable difference between the amount of controlled transactions and the amount of the relevant goods in the customs declaration for the delivery of the said goods.
In addition, the State Fiscal Service takes into account the quantitative risks of underreporting taxable profits of the taxpayers in the course of controlled transactions.
Based on statistics from the Fiscal Service, only 10% of the companies which have been required to provide TP documentation got audited. The remaining portion has avoided this, having substantiated their transfer prices and explained the selected price determination method in controlled transactions.
Your task is to avoid getting in a hot water
To achieve that, you have to take care of the TP documentation, starting today.
Have not you submitted TP documentation for 2016, and gotten audited yet?
The amounts of penalties for failure to submit and late submission of documentation vary considerably. If you failed to submit reports and documentation for 2016, we suggest that you do that as soon as possible before the audit is scheduled to commence. After it is scheduled, “late submission” status becomes void and turns into “failure to submit”, resulting in much larger penalties. Also, keep in mind that you may not submit documentation at the time of the audit.
To perform an accurate profit tax calculation, you need to:
- factor in the criteria for recognizing transactions as controlled;
- control the pricing within the scope of controlled transactions;
- understand the market value of controlled transactions;
- and lastly follow our advice.
Example of how one ukrainian company has calculated the TPFind out