Transfer pricing

Transfer pricing (TPP) is a method of international tax planning, the essence of which is that the sale of goods and services between related parties can be carried out at prices that are much lower than market prices. In this case, the distribution of profits is carried out in favor of legal entities registered in jurisdictions with minimal tax rates or tax-free jurisdictions.

The concepts of transfer pricing and controlled transactions refer to companies that carry out transactions for significant sums of money with low-tax or offshore jurisdictions. The application of this mechanism is based on one of the key civil law principles - the principle of freedom of contract, which gives the parties the right to set its terms, including price, at their discretion.

The practice of TCO has been applied in the world since the middle of the last century and does not contradict international legislation, does not entail administrative or criminal liability if the parties act within the law and do not pursue the goal of tax evasion.

Today, TCO is regulated by legal acts of practically all countries of the world. These documents prescribe the rules that prevent the withdrawal of profits from taxation.

Basic concepts

The main principle of TCO is the "arm's length principle", according to which the price of a transaction between related parties should be set at the level that is provided for persons independent of each other.

If the tax authorities determine that the set prices do not correspond to market prices, the income tax is additional to the amount that is stipulated for market prices.

The main international act regulating TCO is a recommendatory document, the OECD Guidelines, adopted in 1995 (the current version was issued in 2017). Most OECD member states have implemented the recommendations into national legislation. Ukraine is not an exception.

Regulation of TCO in Ukraine. Recent changes in legislation

The OECD rules discussed above were implemented in Article 39 of the Tax Code in 2013. In May 2020, amendments to the Tax Code came into force (introduced in accordance with Law No. 466), some of which relate to TCO. In particular, new criteria for the interconnectedness of persons were established. If previously the percentage of ownership by one company (or individual) of corporate rights of another legal entity was 20% for recognizing entities as related, now this figure has been increased to 25%. In addition to individuals and legal entities, the category of related entities may include entities that do not involve the formation of a legal entity. The full list of the criteria of interconnectedness is contained in subp. 14.1.159, paragraph 14.1 of Article 14 of the Tax Code.

Law No. 466 also adds to the list of transactions recognized as controlled (clause 39.2 of Article 39). Transactions with commodities, the list of which is approved by the Cabinet of Ministers, are now subject to state control.

A new model of three-level reporting on TCO was introduced, which includes:

•         TCO documentation;
•         global pricing documentation;
•         a country-by-country report.

Taxpayers engaged in controlled transactions are now required to notify the supervisory authorities of their participation in an international group of companies.

If you are involved in international transactions and you have questions regarding PTRs, order tax advice from Legal Solutions.