Your Controlled Transactions Report and transfer pricing (TP) documentation are in order. However, this may still not be enough… So, how can you be fully prepared for an audit by the State Fiscal Service?
There are a ton of hidden pitfalls when it comes to TP reporting. However, your company has to make sure that it avoids possible penalties and draining lawsuits.
We offer you some clarifications from Artem Gorchynskyi, Manager of TP Projects at the Agency of Industrial Marketing (AIM).
- So, what do additional accruals mean?
- There are uncontrolled transactions which, however, require an increase in the financial result of the tax (reporting) period by 30% of the value of the goods (works, services) in question or the preparation of relevant documentation.
This goes for import transactions involving counterparties registered in countries with reduced corporate income tax rates (the so-called low tax countries, Order No.1045) and governed by provisions of the Article 140.5.4. of the Tax Code of Ukraine. I once again stress, these are import transactions,
In cases where the threshold of 10 million is not exceeded, the documentation shall still be prepared, and the financial result has to be increased by 30%. Then you will have to pay the corporate income tax out of the aforementioned 30%.
140.5.1 is an additional accrual within the controlled transaction.
- What challenges does it come with?
- First of all, you will still have to prepare controlled transaction documentation.
Second of all, the additional accrual is done based on market ranges within controlled transaction established in the documentation. This means that you need to have documentation in order to get this very range. You have to do a research whatever the case may be.
So, we do the research, get the market range lower limit, and additionally accrue the profit to the lower limit in terms of controlled transaction. And then pay 18% out of this additional accrual.
If you fail to take these steps, tax authorities will additionally accrue to the median value of the price. Not the lower limit, but the half. They will take the average value i.e. the difference between the lower limit and the median value. There were instances where if we had additionally accrued to the median value, the difference would have been over UAH 100,000. And this is just for one transaction!
You will still need documentation and there’s no way you can avoid this. Based on available data, AIM experts can help determine the additional accrual.
- When are the additional accruals relevant?
- The penalties can be avoided if the company submits a clarifying report by October 1. That will save you 3-5%.
As a matter of fact, if the price is lower than the market range boundaries in export transactions or higher than the market range boundaries in import transactions, the tax will be additionally accrued in any case. "
The Sub-clause 140.5.4 of the Tax Code of Ukraine states that:
140.5.4. for the amount of 30 percent of the goods value, including non-current assets, works and services (excluding transactions referred to in clause 140.2 and sub-clause 140.5.6 hereof and transactions recognized as controlled pursuant to the Article 39 of this Code) purchased from:
non-profit organizations listed in the Register of Non-Profit Institutions and Organizations as of the date of such purchase, except where the sum of the goods value, including non-current assets, works and services purchased from such organizations, during the reporting (tax) year does not exceed 25 sizes of minimum salary established by law as of January 1st of the reporting (tax) year, and except for state-financed institutions and a non-profit organization that is an association of insurers, should the participation of the insurer in the said association be a condition for the carrying out of activities by the said insurer subject to the law;
non-residents (including affiliated non-residents) registered in the states (territories) included in the list of the states (territories) approved by the Cabinet of Ministers of Ukraine pursuant to the Sub-clause 18.104.22.168 of the Sub-clause 39.2.1 of the Clause 39.2 of Article 39 of the said Code;
non-residents whose legal form of organization is included in the list approved by the Cabinet of Ministers of Ukraine pursuant to Sub-clause "d" of the Sub-clause 22.214.171.124 of the Sub-clause 39.2.1 of the Clause 39.2 of the Article 39 of this Code who do not pay corporate income tax, including tax on income obtained outside the state of registration of non-residents in question and/or are not the tax residents of the state, wherein they are registered as legal entities.”
Let's sum it up.
So, there are two types of additional accruals for controlled and uncontrolled transactions.
If it is a controlled transaction and the price does not fall within the relevant market range, 18% of the tax on the difference between the price established by the customer and the market price set by the tax authorities shall be paid. In turn, if it is an uncontrolled transaction, you have to add 30% to your financial results and pay 18% of the tax.
So, why is it better to do additional accrual before you get audited by the regulatory authorities?
"The tax authorities make calculations based on the average, on the median value. The average value between the higher and the lower price is identified and then it is stated how much they have to pay additionally. Even if we try to reduce the obligations accrued by the tax authorities, it will still be associated with the red tape, litigations and whatnot,” Vladyslav Kuts, Head of the Sales Department at the Agency of Industrial Marketing (AIM) notes. “When we make additional accrual, we start out from the lower boundary. It is more beneficial that way.
It is crucial to react timely and be all set. For instance, in terms of controlled transactions, it was possible to make a tax prior to additional accrual by October 1. If you haven’t done it in time, it leads to the penalties for failure to pay income tax."
So, in order to avoid misunderstandings and disputes with regulatory authorities, when buying the goods and services from non-residents referred to in Sub-clause 140.5.4 in 2018, you have to seek assistance from the experts who will consult you on this matter and help prepare relevant reporting documents.
We work to ensure your success and peace of mind.
Sincerely, AIM Team