August 12, 2020 · 6 min read
In the previous article, we began to delve into the nuances and intricacies of taxpayers' application of the norms of sub-paragraph 140.5.4 of the Tax Code of Ukraine. In particular, we examined some features of applying this sub-paragraph to transactions with various groups of taxpayer counterparties when preparing profit declarations for the reporting periods of 2018.
Features of applying this norm to all groups of non-residents mentioned in sub-paragraph 140.5.4 of the Tax Code of Ukraine without exception
- The necessity to increase the financial result of the reporting period according to sub-paragraph 140.5.4 of the Tax Code of Ukraine arises, among other cases, when acquiring non-current assets – that is, when the impact on the financial result of the current reporting period is either absent altogether (for example, when such non-current assets have not yet been put into operation), or it is incomparably smaller (only in the amount of depreciation accrued in the current reporting period) than the 30% adjustment value.
- Also, the necessity to make such an adjustment to the financial result does not depend on the fact of using (or not using) goods (works, services) acquired from such non-residents in one's economic activity during the reporting period (i.e., it does not depend on whether these affected the financial result of the current and/or previous reporting period).
- All 30% limitations stipulated by this sub-paragraph do not apply to:
- transactions involving the recognition of interest expenses on loans received by the taxpayer from non-resident related parties (the accounting rules for which are set out in sub-paragraph 140.2 of the Tax Code of Ukraine)
- transactions involving the recognition of royalty expenses accrued in favor of non-residents (the accounting rules for which are set out in sub-paragraphs 140.5.6 and 140.5.7 of the Tax Code of Ukraine)
- transactions with non-residents that fall under the definition of "controlled" in accordance with Article 39 of the Tax Code of Ukraine
- transactions that are not controlled, but the amount of expenses for which is confirmed by the taxpayer at prices determined using the "arm's length" principle in accordance with Article 39 of the Tax Code of Ukraine (even without submitting the relevant report).
As mentioned in our article from May 2018, as of 07.03.2018, 5 countries (Georgia, Estonia, Latvia, Malta, and Hungary) were excluded from the List of Countries with Low-Tax Jurisdictions, approved by Resolution of the Cabinet of Ministers of Ukraine No. 1045 dated 27.12.2017 (hereinafter – List No. 1045).
According to the specialists of the SFS (see, for example, Letter dated 02.05.2018 N 12908/7 / 99-99-15-02-01-17), transactions with residents of such countries can be recognized as controlled only if the total volume (i.e., not only acquisition-related transactions) of transactions carried out with residents of these 5 countries exceeded 10 million UAH for the period from 01.01.2018 to 06.03.2018 (provided that all other criteria for determining transactions as controlled, established by Article 39 of the Tax Code of Ukraine, are simultaneously met).
This position of the tax authorities should be recognized as a "lenient approach," as domestic legislation does not establish clear timeframes for cases of excluding "low-tax countries" from the relevant List (for example, for 2017 transactions with non-residents whose organizational and legal form is included in the List approved by Resolution of the Cabinet of Ministers of Ukraine No. 480 dated 04.07.2017 (hereinafter – List No. 480), the SFS required the "10-million threshold" to be determined based on the entire year 2017 for recognizing transactions as controlled, despite the fact that this Resolution came into force on 27.07.2017).
Furthermore, as of 25.04.2018, Bulgaria was also excluded from List No. 1045 (in accordance with Resolution of the Cabinet of Ministers of Ukraine 295 dated 11.04.2018). Therefore, for transactions with residents of Bulgaria, the aforementioned features for determining controlled transactions (as well as for applying the "30-percent limitation" stipulated by sub-paragraph 140.5.4 of the Tax Code of Ukraine) should be applied using the temporary period "from 01.01.2018 to 24.04.2018".
- Since current Ukrainian legislation establishes the possibility of determining certain transactions as controlled only based on the results of the reporting year, the 30% adjustment of expenses for transactions involving the acquisition of goods (works, services) by the taxpayer from non-residents from List No. 1045 and List No. 480, as stipulated by sub-paragraph 140.5.4 of the Tax Code of Ukraine, must be applied when preparing all "non-annual" profit declarations (for the 1st quarter, half-year, and 9 months) – the possibility of recognizing the full cost of goods (works, services) acquired by the taxpayer from non-residents in such transactions that meet the definition of "controlled" in accordance with Article 39 of the Tax Code of Ukraine can be realized exclusively when preparing the annual profit declaration. This is confirmed, among other things, by the position of the controlling authorities – see, for example, Letter of the Main Directorate of the SFS in Volyn Oblast dated 12.03.2018 No. 959 / IPK / 10 / 03-20-12-04-08.
- The last paragraph of sub-paragraph 140.5.4 of the Tax Code of Ukraine stipulates that even if transactions for the acquisition of goods (works, services) from non-residents from List No. 1045 and/or List No. 480 were determined by the taxpayer as "controlled" (or for those not falling under the definition of "controlled" – the amount of expenses for which was determined using the "arm's length" principle), the taxpayer is still obliged to adjust their financial result – "by the amount of the difference between the acquisition cost and the cost determined based on the price level established using the "arm's length" principle." At the same time, of course, the taxpayer can practically determine such a potential difference only after completing the preparation of the Report on Controlled Transactions and transfer pricing documentation for the reporting year (i.e., much later than the deadline for submitting the profit declaration – closer to October 1 of the year following the reporting year). Before 2018, all taxpayers, in order to comply with this requirement, in most cases (with the exception of the absence of a declared tax liability) faced the need to accrue and pay the penalty stipulated by Article 50 of the Tax Code of Ukraine for self-correction of errors in tax reporting. As of 01.01.2018, the updated Article 50 of the Tax Code of Ukraine allows for the submission of the corresponding "clarification" by October 1 of the year following the reporting year, without any penalties.
