to countries
with low tax jurisdiction. In contrast, the United States, whose tax disputes
focus on intra-corporate transactions. The research is based on the
requirements of the fundamental documents of the Organization for Economic Cooperation and
Development (OECD) and by the United Nations Tax Committee (UN), International Accounting Standards Board (IASB), Generally
Accepted Accounting Principles (GAAP), as well as on
statistical data obtained in the process of analysis of tax authority
reporting.
Keywords: Transfer Price; Transfer
Pricing; Arm’s Length Standard; Related Parties; Arbitration Practices;
Controlled Operations; Regulation of Transfer Pricing; Multinational Companies;
Implementation of Transfer Pricing
1.
INTRODUCTION
As globalization broadening, foreign
direct investment (FDI) enterprises start to increase their international
investment and trade, transfer pricing (TP) becomes developed with varieties of
methods (Agarwal, 2016). Under this context, many governments from developed
and developing countries pay keen attention to have control over transfer
pricing in FDI enterprises (Akpojevwa, 2014).
Looking back studies conducted over
the past years, the studies of TP for tax avoidance carried out by FDI
enterprises have always been highlighted at relevant conferences and meetings
around the world, including the Summit of G8, G20 or global forums on tax
issues of OECD. In several developed countries, the governments have
implemented several methods including tariff and non-tariff barriers to deal
with these phenomena, which have brought significant results. Specifically, the
G20 member countries passed the BEPS package of “base erosion and profit
shifting” with 15 action plans since 2015. The so call BEPS package aims at developing
solutions to prevent and to minimize the profit shifting, tax avoidance of
multinational corporations.
OECD transfer pricing documents are
guided in their activities not only by member states of this organization, but
also by individual states that are not members of the OECD, including Ukraine.
The study of transfer pricing activities and documents of the above
organizations on such issues should be considered together (because such
documents are of a recommendatory nature) (table 1).
Table 1: Documents that establish and explain
the methodology, procedure, procedures and features of regulation and control
of transfer pricing at the global level
|
The organization
that develops the document
|
Documents
governing transfer pricing
|
|
Organization for
Economic Cooperation and Development
|
1. OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations,
Paris, 22 July 2010;
2. Model Tax
Convention on Income and on Capital: Condensed Version, OECD, Paris, 22 July
2010; Model Tax Convention on Income and on Capital: Full Version (as it read
on 22 July 2010). OECD
(2012), Paris;
3. OECD Transfer
Pricing Legaslation — A Suggested Approach, Paris, June 2011;
|
|
European Union
(since 2002 EU Joint Transfer Pricing Forum)
|
1. Convention on the
Elimination of Double Taxation in Connection with the Abjustment of Prifits
Beetween Associated Enterprises, 90/436/ECC, Brussels, 23 July 1990;
2. Code of Conduct
on transfer pricing documentation for associated enterprises in the European
Union (EU TPD), 9738/06, Brussels, 21 June 2006;
3. Code of conduct
for the effective implementation of the Convention on the elimination of
double taxation in connection with the adjustment of profits of associated
enterprises, 2006/C 176/02, Brussels, 28 July 2006;
4. Guidelines for
Advance Pricing Agreements within the EU. COM(2007) 71 final {SEC(2007) 246}, EU, Brussels,
26/02/2007;
5. JTPF Report:
Guidelines on Low Value Adding Intra-group Services, JTPF/020/REV3/2009/EN,
Brussels, February 2010;
|
|
United Nations
|
1. United Nations Practical
Manual on Transfer Pricing for Developing Countries, ST/ESA/347, United
Nations, New York, 05/2013;
2. United Nations
Model Double Taxation Convention between Developed and Developing Countries,
ST/ESA/340, United Nations, New York, 2011/2013;
3. United Nations
Handbook on Selected Issues in Administration of Double Tax Treaties for
Developing Countries, United Nаtions, New York,
06/2013.
|
Source: own generalization
KPMG
(2011) recognizes the current directions of development of world practice in
regulation and control of transfer pricing for tax purposes:
·
streamlining
and explaining the rules of transfer pricing in order to consider specific
areas of activity in which the current rules have led to undesirable results;
·
formulation
and coordination of general requirements for documentation of controlled
transactions;
·
development
of materials on risk assessment of transfer pricing and recommendations on
avoidance of such risks with further development of mechanisms for effective
resolution of disputes on transfer pricing;
·
accumulation
of materials, their analysis and explanation of schemes for the provision / use
of intangible assets and the transfer / receipt of rights to such assets
(intellectual property), as well as schemes for the provision / use of goods
and services in digital format; inclusion of the results of such work in the
transfer pricing rules and providing explanations on the use of such new rules;
·
accumulation
of materials, their analysis and explanation of aggressive tax planning schemes
and their analytical processing (in terms of schemes using transfer pricing);
·
development
of initiatives on mandatory disclosure and exchange of information, forms of
joint supervision over compliance with the conditions of such disclosure and
exchange (in part of the parties involved in controlled transactions), etc.
Effective management of
transnational corporations involves the formation of a clear organizational
management structure, development of effective economic relations between the
departments. At a time when there is a need to find the optimal variant economic
independence of business units, a clear definition of income and expenses of
each department of the enterprise and for its impact on the overall result of
the problem of research and application of transfer pricing is becoming
increasingly important. In this context, the problem of transfer pricing in the
enterprise management processes concerning the results of its operations, and
are therefore relevant.
Multinational companies have some
motivation in transfer pricing, one of which is tax reasons. According to
Yuniasih et al. (2012), the purpose of transfer pricing is to reduce the tax to
be paid.
The role of taxes has a considerable
impact on net income and cash flow of the firm so that the impact of foreign
investment decisions, financial structure and capital cost determination
(MacKie‐Mason, 1990; Dechow, 1994; Eiteman et al., 2012). This proves
that tax motivation has a significant role in influencing a company's decision
to practice transfer pricing.
Gresik (2010) gives a comprehensive
perspective on practical multinational transfer-pricing behavior.
A series of survey studies by
Tang (1979, 1992, 1993, 2002) provides empirical evidence
regarding transfer pricing based on surveys of Fortune 500 firms. In
particular, Tang quantifies the importance of the environmental factors
affecting the transfer price. For instance, in 1977, “overall profit to the
company” ranks first, whereas “differentials in income tax rates and income tax
legislation among countries” ranks fourth (Tang, 1979). However, by the
1990 survey, the latter factor is ranked second (Tang, 1993).
Tang (2002) involves similar surveys
conducted in 1997 and 1998, where “transfer pricing and other tax regulations
in the United States” ranks first, and “overall profit to the company” ranks
second. Notably, “overall profit to the company”, which is ranked first in the
1979 and 1990 surveys, falls to second rank in the 1997 and 1998 surveys, and
is replaced by “transfer pricing and other tax regulations in the United
States”.
This evidence suggests that MNFs are
tending to pay increasingly more attention to the risk of additional tax
imposition by national tax authorities.
2.
METHODOLOGY
The methodological basis for the
research, presented in this article, was analysis of regulatory documents,
scientific literature, statistical information as well as corporate
publications. The comparison and sampling methods were used in the course of
the research. The systematization and information modeling methods became
the basis for formation of generalizations and conclusions, while the tabular
and graphic methods -– for visual presentation of the results of the research
conducted.
3.
RESEARCH PROBLEM
International transfer pricing deals
with those intra-group transactions where the open market regulator is absent.
The concept and definition of transfer pricing is relevant both for business
from the perspective of managing a MNE, without accurate transfer prices, the
company would not be able to identify those parts of the enterprise performing
well and those performing less so and for tax purposes the determination of the
correct transfer price is likely to be the main determinant of how the tax base
of MNEs is divided between jurisdictions in which they operate.
There are many reasons why
enterprises charge transfer prices on goods and services and transfer pricing
deals with the charged price among associated enterprises established in
different countries for their inter-company transactions. Since non-independent
associate companies set the prices, it implies that prices do not reflect an
independent market price.
The main goal for a MNE is to
maximize its overall profit so, thus, it would try to allocate profits to a low
tax country and losses to a high tax country. Therefore, transfer pricing mechanism
is the tool that corporations use in order to avoid high taxation in certain
countries. The fact is that globalization of the world economy, the
mobilization of production factors and tax competition has forced tax
administrators and legislators to seek new sources of revenue.
Consequently, this represents a
major warning sign for tax authorities concerned with the fact that
multinational entities use transfer prices on cross border transactions in
order to reduce taxable profits in their jurisdictions. This has resulted in
tax avoidance rules and in an intensified inter nation struggle for the tax
revenues of MNEs.
In the case of MNEs, the need to
comply with laws and administrative requirements that may differ from country
to country creates additional problems. The differing requirements may lead to
a greater burden on an MNE, and result in higher costs of compliance, than for
a similar enterprise operating solely within a single tax jurisdiction.
In the case of tax administrations,
specific problems arise at both policy and practical levels. At the policy
level, countries need to reconcile their legitimate right to tax the profits of
a taxpayer based upon income and expenses that can reasonably be considered to
arise within their territory with the need to avoid the taxation of the same
item of income by more than one tax jurisdiction. Such double or multiple
taxation can create an impediment to cross-border transactions in goods and
services and the movement of capital. At a practical level, a country’s
determination of such income and expense allocation may be impeded by
difficulties in obtaining pertinent data located outside its own jurisdiction.
The OECD estimates the total annual
loss of the world economy due to the blurring (erosion) of the tax base and the
withdrawal of income from taxation at between 100 and 240 billion dollars. USA,
which is from 4 to 10% of global tax revenues.
The tax authorities note that the
relevance of the introduction of transfer pricing rules in Ukraine is
unconditional. And this is due not only to world practices, but also the
traditions of domestic business of withdrawing funds abroad. For example, in 2014,
$ 4.0 billion was taken offshore. USA, 2015 - 4.8 billion dollars. USA.
Interestingly, as of January 1, 2015, the country's total gold and foreign
exchange reserves amounted to 6.4 billion dollars. USA, ie during the year 75%
of the NBU's gold and foreign exchange reserves were exported.
According to the head of the customs
subcommittee of the Committee on Tax and Customs Policy of the Verkhovna Rada
Ostrykova, budget losses from non-payment of income tax for the use of transfer
prices amount to about UAH 50 billion per year. Borysiuk (2018) notes that in
2013-2017, Ukraine adopted a number of regulations, which indicates the
introduction of new approaches to state regulation and control of business
transactions in accordance with international standards. Such changes can be
explained by the need to fill the state budget, implement international
standards and principles of transfer pricing in Ukraine.
Figure 1:
Reports on controlled transactions submitted to the tax authority in 2015-2019
Source: own generalization based on data of State Statistics Service of Ukraine
Figure 2: The volume of controlled transactions in 2015-2019
Source: own generalization based on data of State
Statistics Service of Ukraine
The growth of the volume of
controlled transactions provides significant opportunities to increase the tax
base and, accordingly, the amount of corporate income tax.
In 2019, the largest number of
taxpayers who carried out controlled transactions were large taxpayers 39.72%,
and the amount of transactions conducted by these taxpayers is 92% of all
controlled transactions.
Figure 3: The volume of controlled transactions in regions of
Ukraine
Source: own generalization based on data of State Statictics Service of
Ukraine
Thus,
the conduct of controlled operations significantly depends on the scale of
activity and location of the enterprise. Banking operations account for the
largest share in the structure of controlled transactions - 57%, the share of
goods is quite significant - 30%, financial services account for 6%.
Cyprus,
Russia, Switzerland and the UAE are the main countries with residents of
controlled transactions (excluding banking operations; 27%, 18%, 15%, 12%,
respectively).
Another
important criterion for the analysis of uncontrolled transactions and their
comparison in the context of foreign economic activity is the country of origin
or representative office of the counterparty. The State Statistics Service of
Ukraine constantly monitors export-import operations in terms of cooperation
countries. Comparing their list with the list of countries that the Cabinet of
Ministers of Ukraine classifies as meeting the requirements of tax legislation,
we can identify those countries whose transactions with residents will
automatically become the subject of attention of tax authorities, and only then
analyzed for control.
A
comparison of these lists of countries made it possible to identify those of
them whose transactions with residents will be the object of priority attention
of the tax authorities (Table 2).
Table 2: Volumes of foreign economic activity
with resident countries subject to analysis of transfer pricing norms, thousand
dollars USA
|
Country
|
2016
|
2017
|
2018
|
2019
|
|
Export
|
Import
|
Export
|
Import
|
Export
|
Import
|
Export
|
Import
|
|
Bahamas
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
13224,2
|
-
|
|
Bahrain
|
1446,8
|
31,3
|
722,0
|
57,6
|
5216,6
|
81,4
|
4653,6
|
57,3
|
|
Belize
|
360,3
|
5629,1
|
3666,9
|
28,4
|
930,2
|
710,2
|
10517,1
|
865,8
|
|
Bosnia and
Herzegovina
|
10759,3
|
29308,9
|
7409,9
|
9723,9
|
9235,4
|
10776,0
|
12472,5
|
12491,3
|
|
Virgin
Islands (British)
|
110706,6
|
1111,5
|
8073,4
|
419,1
|
8863,9
|
0,7
|
902,6
|
23,9
|
|
Virgin
Islands (USA)
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
-
|
544,1
|
|
Guatemala
|
4674,7
|
67650,1
|
6503,3
|
88994,3
|
353,3
|
76821,8
|
576,4
|
71504,0
|
|
Hong Kong
|
25864,3
|
17186,4
|
15439,5
|
12246,0
|
49013,4
|
17629,9
|
54074,8
|
29120,1
|
|
Djibouti
|
89528,9
|
-
|
59774,3
|
0,9
|
14893,5
|
-
|
8852,7
|
-
|
|
Dominican
Republic
|
25783,9
|
4517,6
|
6483,1
|
3591,0
|
5817,5
|
2695,6
|
1141,5
|
4008,1
|
|
Islamic
Republic of Iran
|
703421,7
|
52954,0
|
533571,2
|
30517,3
|
705165,5
|
39952,2
|
552584,7
|
70059,9
|
|
Ireland
|
69479,4
|
134006,9
|
59182,6
|
75396,4
|
45483,9
|
84712,5
|
55298,4
|
113890,3
|
|
Qatar
|
18720,2
|
11308,0
|
15991,3
|
8353,6
|
12433,4
|
26268,8
|
42325,2
|
11200,5
|
|
Kyrgyzstan
|
102545,8
|
4304,6
|
75501,8
|
5801,7
|
40430,8
|
1773,6
|
34315,4
|
3001,1
|
|
Cyprus
|
283724,9
|
50298,8
|
61526,1
|
16922,9
|
53481,4
|
22081,6
|
79637,6
|
20527,1
|
|
Cuba
|
84801,1
|
1607,3
|
36384,8
|
1183,2
|
7393,7
|
959,7
|
10710,7
|
1011,1
|
|
Lao People's
Democratic Republic
|
313,2
|
1084,6
|
1616,0
|
530,4
|
2385,3
|
744,2
|
174,1
|
860,9
|
|
Liberia
|
2549,6
|
886,1
|
4235,6
|
508,5
|
2982,6
|
3265,1
|
21784,6
|
1513,0
|
|
Lebanon
|
2722317,0
|
1413,5
|
300135,3
|
1310,6
|
338523,6
|
1077,6
|
426977,0
|
2324,1
|
|
Mauritius
|
6040,5
|
1024,3
|
862,2
|
283,3
|
767,8
|
269,3
|
911,3
|
353,1
|
|
Morocco
|
294771,6
|
35461,0
|
212502,0
|
28481,1
|
247323,6
|
33437,0
|
221305,5
|
39082,6
|
|
Marshall
Islands
|
2941,1
|
41,5
|
748,4
|
189,0
|
2536,6
|
404,2
|
51902,2
|
1283,2
|
|
Republic of
Moldova
|
743630,1
|
61859,5
|
524294,0
|
41242,4
|
481145,4
|
47623,2
|
707583,5
|
106719,5
|
|
Monaco
|
166,7
|
131,8
|
д\н
|
д\н
|
д\н
|
д\н
|
1344,2
|
137,3
|
|
United Arab
Emirates
|
394943,6
|
66612,7
|
301767,2
|
57607,5
|
277604,1
|
63287,5
|
384533,4
|
59401,1
|
|
Cook Islands
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
2522,4
|
68,5
|
|
Panama
|
31531,4
|
1713,2
|
9908,4
|
11807,6
|
13904,7
|
2414,3
|
28125,8
|
1280,9
|
|
Puerto Rico
|
61,1
|
5376,6
|
138,8
|
2978,4
|
945,6
|
3978,5
|
1797,0
|
4708,9
|
|
Republic of
Macedonia
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
д\н
|
30694,8
|
11920,5
|
|
San Marino
|
2684,3
|
913,8
|
3642,4
|
453,8
|
3347,9
|
704,8
|
1948,4
|
724,7
|
|
Seychelles
|
289,5
|
384,6
|
д\н
|
д\н
|
д\н
|
д\н
|
3748,9
|
526,4
|
|
Saint Kitts
and Nevis
|
д\н
|
д\н
|
д\н
|
д\н
|
1800,9
|
18,1
|
2735,0
|
365,9
|
|
Serbia
|
111732,8
|
140739,6
|
105917,8
|
83256,4
|
156132,5
|
106506,9
|
170866,0
|
132422,7
|
|
Sudan
|
77736,6
|
309,5
|
75217,3
|
237,9
|
34361,1
|
1037,3
|
72080,6
|
189,6
|
|
Turkmenistan
|
431232,6
|
24578,5
|
170325,7
|
16318,4
|
108981,9
|
34336,1
|
62142,3
|
89345,8
|
|
Uzbekistan
|
308563,7
|
72916,1
|
174497,3
|
62329,5
|
142392,7
|
71060,2
|
167113,3
|
122721,1
|
|
Montenegro
|
1796,4
|
1082,6
|
1139,9
|
4881,7
|
4670,2
|
2710,9
|
8871,5
|
3597,5
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: own generalization based on data of State Statictics Service of Ukraine
The main violation of taxpayers is
incomplete and untimely filing and declaration of controlled transactions,
which is confirmed by the relevant statistics of violations identified by the
tax authorities: 600 facts in 4 reporting periods. In 2014-2019, the analysis
of the submitted reports on controlled transactions resulted in the sending of
235 inquiries to 538 taxpayers in order to provide information on controlled
transactions, as a result of which 58 inspections were conducted and UAH 400
million were accrued. corporate income tax, accrued VAT in the amount of UAH
5.8 million, accrued interest in the amount of UAH 68 million. This has
increased the level of transparency of companies and the level of their
responsibility by changing prices to increase taxable income by taxpayers.
It should be noted that domestic
researchers focus their attention mainly on studying international experience
in transfer pricing adjustment, as Ukrainian companies often use this mechanism
in transactions with offshore companies, which is a commercial secret.
In the course of the historical
development of economic system of many countries undergoing significant
changes. Which, let's try to understand, considering foreign experience
pricing, its patterns and trends.
History has confirmed the
ineffectiveness of a monopolized, and the market economy, has shown the
benefits of a mixed type of economy. Most of the economies in the mixed type as
the overall strategy selected certain pricing rules. These rules are formalized
in the form of legislative acts regulating the procedure and methodology for
pricing.
Methodological aspect of pricing in
developed countries is to develop public authorities of general principles,
methods and standards for pricing. In addition to making decisions on strategic
and tactical issues of public authorities are taking over the function of the settlement
of specific prices for goods and services that are crucial for the national
economy.
In addition to the direct
establishment and management of public authorities exercise control over the
prices. In developed countries with mixed economies in the state-controlled
pricing scope is 10-30% of the total output (CMU, 2013).
On the ways and methods of state
regulation of prices is influenced by multiple factors (national, climatic,
raw, political) as well as a place that takes the country in the global division
of labor. Consider, by what measures and methods of state regulation of prices
carried out in different countries.
The first country, which adopted
specific legislation, particularly governing transfer pricing issues, the
United States began. In August 1971, on the initiative of the administration of
US President Richard Nixon for the first time in the postwar years has been
established centralized control of prices (Nepesov, 2007).
US law is substantially different
from the laws of other countries concerned. That is what prompted many
governments to seek acceptable for most countries, the principles and methods
of determining the order of transfer pricing tax regulations.
Total US government is adjustable
from 5 to 10% of the price (Vasilieva, 2013). Particularly noteworthy are the
methods of state regulation of prices for the products of the agricultural
sector. As part of federal farm programs, farmers, growers of grain products,
obtained from the Ministry of Agriculture loans to finance production. Harvest,
they can sell at market prices and pay for part of the loan proceeds. If market
prices fall below the reference price set by Congress, the farmer can pass the
crop to the state at the reference price, paying for a loan and getting
revenue.
Likewise rates are regulated in the
dairy industry. Congress determines the fair level of the reference price for
milk, butter, cheese. If market prices fall below the level of the state buys
products. They go to the free breakfast for school children, helping the poor,
food aid to underdeveloped countries and sales to other states.
The main legal acts are the US
Internal Revenue Code, interim instructions to the Code, the Tax Code of the
United States «IRC». Transfer pricing control is carried out as follows (IRS,
2020):
·
Control
of the competent authorities of related parties by dividing the distribution of
gross income, discounts, allowances, if the authority determines that such
distribution entails tax evasion;
·
Verification
of cost saving in the case of actions under the jurisdiction of the conditions
characterized by low costs;
·
Check
the price determination methods that do not meet the principle of "arm's
length» (arm's length principle);
·
Analysis
of the financial ratios of the taxpayer with statistics data (SOI);
·
Verification
of methods for determining prices (comparable uncontrolled price method, resale
price method, the method of "cost-plus" method profit sharing, profit
comparison method).
In this case the authority may make
the analysis of the distribution of gross income, if revenues exceed $ 10
million per year.
At present current trends of the
global regulatory practices and monitoring of the transfer pricing for tax
purposes of the OECD and the EU experts are recognized (Malis, 2014):
·
ordering
and providing explanations on the rules of transfer pricing to address specific
areas of activity in which the current rules have led to undesirable results;
·
the
formulation and approval of the general requirements for documentation of
controlled transactions;
·
the
development of materials with respect to risk assessment of transfer pricing
and advice on avoiding such risks to the further development of effective
mechanisms for settling disputes on transfer pricing;
·
accumulation
of materials, their analysis and to provide explanations regarding the schemes
with the provision/use of intangible assets, and send/receive rights to such
assets (intellectual property), as well as schemes to the provision/use of
goods and services in a digital format; the inclusion of such work results in
transfer pricing rules and provide explanations on the use of these new rules;
·
accumulation
of materials, their analysis and to provide explanations regarding aggressive
tax planning schemes and their analytical processing (in terms of circuits
using transfer pricing);
·
development
of initiatives related to the mandatory disclosure and exchange of information,
forms of joint supervision of compliance with the terms of such disclosure and
exchange (in the part of the parties that are members of controlled
operations), etc.
It should be emphasized that in the
developed countries control over transfer pricing line practically does not
apply to intra-group transactions. Of course, the abuse of this practice among
taxpayers quite common, but in most countries it is legalized (through a
consolidated taxpayer concept-household taxpayer, etc.) or offset by other
means. Among the latter can be identified unitary taxation system applied at
the level of regional authorities in several countries; taxation at the main
place of the company (regardless of where it is registered); natural forms of
taxation (for example, under the terms of production sharing agreements); the
order of taxation for each area of the company (the latter, incidentally, is already
present in the Ukrainian legislation regarding regulation of taxation
"permanent missions").
The tax control of transfer pricing
applies only in respect of transactions which are related parties. Universal
list of interdependent parties, adopted in all countries does not exist.
Different countries use different rules for determining the degree of control
under which the parties considered related transactions. Most of the countries
as the interdependence test uses a threshold to overcome 50% direct or indirect
participation of the subject in a different transaction. In some countries, the
existing legislation on transfer pricing set a lower threshold.
In addition, in some countries there
are rules by which the parties to the transaction can be recognized as
interdependent in the event that they have common economic or political
interests, or are under common control.
Adopted by the OECD Model Convention
on taxes on income and on capital based on the conditions of the international
economy and international cooperation of countries in the field of tax
administration. Definition Article 9 of the Model Convention recognizes the
interdependent taxpayers if (2014):
·
The
organization directly or indirectly in the management, control or capital of
another organization of one or another state;
·
The
organization set between a specific commercial and financial conditions, which
differ from those which would occur between independent organizations.
Thus, the definition of
interdependence is always based on the criteria of the existence of common
interests between the two parties to the transaction, arising from the
different possible conditions. These document the reasons for the recognition
of interdependent organizations are not the only ones possible. Model Convention
deals with the tax authorities of the member states can use other methods to
identify non-market relationships in order to implement tax audits on transfer
pricing, thereby allowing some freedom of use of the shopping center in the
face of economic realities of individual States.
Most of the countries - participants of the OECD use a definition of
interdependent persons quite widely. Moreover, the relationship may not be the
only vertical - the parent company - subsidiary,
but also horizontal.
The law on transfer pricing in US
concept of interdependent persons replaced by the controlled entity. Literally
translated, the control definition is interpreted as: "... any form of
control, direct or indirect, legal or not formalized, including the control,
which is the result of the actions of two or more taxpayers working on a mutual
agreement, or with a common goal, or intention artificially to redistribute the
revenue or expense items between these taxpayers and controlled by" (GAAP,
2020).
If one person directly or indirectly
owns more than 50% of the capital of another person in transactions between
such persons control will fail. In those cases where a formal one person owns
50% or less of the authorized capital of the second person, the tax authorities
should conduct a more detailed analysis of the relationship between the parties
for the establishment of the need to control. US tax authorities, for example,
found that if one person sells the property to another person, then it returns
the property of the seller, but on lease, then these people have reason to
recognize the controlled.
Article 39 of the Tax Code
significantly expands the concept of "related parties" in Ukraine, as
well as in contrast to the old version of the Tax Code defines the possibility
of joint influence. Earlier, the tax authorities have tried to prove the
economic interdependence of people by defending their position in court, and
now such litigation are minimized, since the criteria established by law
depending. The list is closed and formalized, classified by regions of
interdependence (TCU, 2020).
Thus, in foreign countries, the tax
control of transfer pricing is focused on the content of the transaction rather
than its form. Thus, the relationship of objects of the transaction is
determined based on actual rather than the formal relationship between the
parties, and the list of criteria for determining the interdependence of
individuals is wide, and takes into account the impact of the various options
on the parties to the transaction price.
Article 39 of the Tax Code
introduces the concept of controlled transactions for which the tax authorities
in Ukraine will be entitled to check the level of prices. According to the Tax
Code of Ukraine recognized as controlled transactions between related parties,
as well as the equivalents of the transaction. Under Articles 39, not all
transactions between related companies, are controlled and not all transactions
between independent companies are not subject to control. The tax legislation
of Ukraine in the field of transfer pricing in the recognition of transactions
controlled, divides them into foreign trade and domestic. Among the controlled
foreign trade transactions are all transactions with related parties, as well
as transactions with the counterparty is registered in an offshore zone in
excess of the total threshold for all transactions of 10 million UAH (TCU,
2020).
In countries that are members of the
OECD, as well as in some other countries have a different procedure. Taxpayers
should make special pricing on transactions that fall under the risk of tax
control. At first glance it may seem that it only complicates the situation.
But the statistics of foreign practice of tax control of transfer pricing shows
the opposite picture. In most cases, all the differences that arise between the
taxpayer and the tax authority in relation to the prices used in controlled
transactions are settled through negotiations.
Despite the fact that in most
countries the legislation based on the recommendations that the OECD has
developed, yet well-defined hierarchy, the use of these standards for the
purpose of tax control there. The tax authorities and taxpayers have the right
to use any method that allows you to get a result in which the market price
will be determined. This position should be the majority of European countries.
Moreover, the tax authority is obliged in the course of his research to
determine compliance rates using the same method as that of the taxpayer. A
similar position on the use of the definition of transfer pricing methods
adhere to the Ukrainian tax authorities, which is provided by law in the tax
code.
The rules adopted in the United
States have some differences compared with the approach of the OECD regulated.
Guided by the "best method rule" must use the method that allows you
to get a more accurate result, despite the fact that other methods can also be
applied to transactions that the taxpayer makes in the course of a tax audit.
The tax authority, as well as the taxpayer has the right to use the method,
which, in his opinion, is more appropriate in a particular case (Malis, 2014).
An important aspect of the tax
control of transfer prices in international practice is to establish the tax
authorities of the market price range within which the market price of the
transaction is recognized for tax purposes and the corresponding level of
market prices. The application range of market prices provided by the
legislation on transfer pricing in most countries, including Ukrainian.
With the differences in the
approaches to the choice of transfer pricing method are closely related and the
differences in the requirements for documentation that can confirm the
taxpayer's policy on transfer pricing. Thus, the tax authorities have specific
requirements for documentation. It should contain:
·
Characteristics
of goods sold and services rendered;
·
Analysis
of the organization, including risk analysis undertaken by the organization in
the process of activity, the analysis of the involved property;
·
The
conditions of the contracts concluded between the parties, which are related
parties;
·
Economic
conditions of work and analysis of the organization's strategy on the external
and the internal market, if the strategy has any influence on pricing (for
example, promotion of new products on the market or policy aimed at capturing
new markets as soon as possible).
This documentation, which has
prepared and submitted a taxpayer must confirm and justify the choice of method
for establishing the price of the transaction.
In order to ensure effective fiscal
supervision of transactions for transfer pricing, the tax authorities of
countries with large-scale and open economy, such as in the US, you must have
the required number of well-trained and qualified personnel in this field. For
this reason, the tax authorities a lot of money invested in the development of
these countries and training specialists who would be able to effectively carry
out the analysis of controlled transactions and, if necessary, to challenge the
position of the taxpayer in court. For example, the tax authorities have
special employees who are engaged exclusively in monitoring and tracking
activity of taxpayers to identify violations of the transfer pricing rules.
In the international practice of tax
control of transfer pricing is often applied enter into preliminary agreements
on pricing and consolidated financial statements.
OECD Guidelines provide for the
possibility to conclude the parties to the transaction and the tax authorities
on prior agreements setting prices, this means that before committing taxpayer
transactions are defined economically justified criteria, according to which
there is a price for such transactions for a certain time. Agreement does not
allow to carry out additional checks on the validity of used prices for the
purpose of accrual of a number of taxes, because they are fixed conditions for
determining prices for tax purposes and its duration. If this is available
legislation of a specific country, the taxpayer can get a pre-approval of the
transfer price (or its method of application of transfer pricing) from the tax
authority, which, of course, radically reduces the tax risks.
Institute of the pricing agreements
is widely used in international practice. Institute of pricing agreements - a
tool used to determine the pricing procedure (method of comparable transactions
information necessary adjustments to prices, etc..). Taxpayers and tax
authorities, and in the course of preliminary discussions, and at the conclusion
of the Agreements are way to increase mutual trust. As world practice shows,
the process is quite complex and lengthy procedure. In economically developed
countries are not more than two or three dozen contracts per year. The main
obstacle to the conclusion of preliminary agreements on prices becomes that the
taxpayer and the tax authorities negotiation procedure can be long and in
special situations occur more than a year.
The preliminary agreement between
the tax authorities and taxpayers about the prices are particularly prevalent
in the United States and is an effective form of tax control of transfer
pricing. The practice of concluding preliminary agreements on prices and
perceived quite positively by many taxpayers. According to the international transfer
pricing studies conducted by experts, about 21% of the companies to enter into
preliminary agreements on pricing. At the same time 86% of them have learned
from this practice positive experience and express their willingness to prolong
these agreements expire, since the preliminary price agreements are an
effective way to manage the risks arising from transfer pricing (Vasilieva,
2013).
The maximum term of imprisonment of
the Institute of the pricing agreements on one or several transactions, having
one and the same thing, is not more than 5 years (the conclusion is not
more than 3 years, plus the extension - no more than 2 years). As a
general rule, for consideration and agreement in international practice fees
are not charged. In the US, the size of fees can range from 5 to 50 thousand.
USD. Depending on the category of the taxpayer and the number of transactions
provided for in the Agreement. Pricing agreements can be terminated if at its
conclusion was submitted false information, there has been a fraud, or the
terms of the Agreement are not met by the taxpayer. Termination of this
Agreement shall cease to be bound by it as a taxpayer and the tax authority,
signed such an agreement.
A major innovation in relation to
the tax administration of transfer pricing in Ukraine is the possibility of
concluding a preliminary agreement on pricing among the largest taxpayers and
tax authorities. The main objective of the Institute of the pricing agreements
is as follows: the taxpayer to the tax authorities opened a market method of
calculating the price at which it will work with other companies, and in return
receives a guarantee that does not face the problem of unannounced inspections
and additional charges.
Agreement between the tax
authorities and taxpayers in Ukraine had never committed. The law is built
almost on the same monitor application of transfer pricing rules, which exist
in the world of tax control over pricing, particularly in Europe and the United
States. Under the new rules in Ukraine are set entirely new mechanisms of tax
administration of transfer pricing - pricing agreements. The law contains a
number of provisions clearly favoring the representatives of big business. It
is, first, an exemption from recognition of controlled transactions between
members of the consolidated group of taxpayers, and secondly, the possibility
of concluding an agreement on pricing for the largest taxpayers
Institute of fiscal consolidation
and the formation of a consolidated group of taxpayers established in many
countries, regardless of the fact that the mechanisms and procedure for
implementation differ significantly.
With regard to the tax control of
transfer pricing organizations, one group, note that the tax authorities of
certain countries apply the correlation corrections. This means that the price
change in terms of transfer pricing to reduce the tax burden, the first group
of organizations should lead to certain restrictions to make appropriate
changes to the price of the second group of the organization, which operates in
the same country. Therefore, application of the tax consolidation significantly
contributes to reducing the amount of these adjustments within a single state.
The calculation and payment of
corporate income tax consolidated group of taxpayers produces a responsible
member of a consolidated group of taxpayers. The main feature of the
consolidated group of taxpayers - the consolidation of tax liabilities, which
allows you to apply for the control of transfer pricing preferential treatment.
The union organizations in the
consolidated group of taxpayers create conditions for the unification of a
number of tax administration procedures used in relation to the participants of
the consolidated group of taxpayers by shifting the basic obligations of the
calculation and payment of corporate income tax, the payment of fines and
penalties, as well as on the proposal to the tax authorities of the appropriate
tax return for one person - the responsible member of a
consolidated group of taxpayers. It also reduces the costs associated with the
execution of the tax legislation.
Comparative analysis of normative -
legal regulation of transfer pricing in Ukraine and abroad is presented in Table
3.
Table 3:
Comparison of Ukrainian and foreign experience in transfer pricing control
|
Feature
comparison
|
Foreign
experience
|
Ukrainian practice
|
|
Interdependence
|
1. Vertical and horizontal
control (mostly ownership share of> 50%)
2. Analysis of the content of
the transaction
|
1. Vertical and horizontal
control (share of ownership 20%)
2. Analysis of the content of
the transaction
|
|
Controlled
transactions
|
1. Between related parties
|
1. Between related parties
2. Transactions with
independent persons from the countries of the "black list"
|
|
Methods of transfer pricing
|
1. Comparable Uncontrolled
Price Method
2. The method of subsequent
implementation
3.Zatratny method
4. The method of comparable
profitability
5. profit distribution method
|
1. Comparable Uncontrolled
Price Method
2. The method of subsequent
implementation
3. Cost method
4. The method of comparable
profitability
5. profit distribution method
|
|
The hierarchy of
the application of tax control methods
|
The hierarchy is
preferred, the presence of the best method of rules
|
Comparable
Uncontrolled Price Method is a priority, if not suitable, use one of the
others.
|
|
The value of the
market price
|
Definition range of
market prices on the basis of the approach interkvantilnogo
|
Determination on
the basis of a statistical approach the market price range
|
|
Documentation
confirming the transaction price
|
The list of
documents is a recommendation, while in some countries can be established.
|
The list of
documents is mandatory
|
|
The presence of
experts in the field of
transfer pricing
|
As part of the tax
authorities allocated individual employees concerned transfer pricing
|
Created department inspections of
transfer pricing tax and customs Audit Department
|
|
Institute of the consolidated group of
taxpayers
|
widely used
|
Lack of organic
|
Source: own generalization
based on published statements
Thus, the analysis of foreign
experience of tax control of transfer pricing, has revealed major differences
between the Ukrainian practice of tax control of transfer pricing and foreign
practice. Comparison of Ukrainian and foreign experience in transfer pricing
tax control enables the following conclusions.
The international standards of tax
control of transfer pricing, in contrast to the principles of monitoring
Ukrainian tax authorities are focused on the economic substance of the
transaction rather than its form through the implementation of functional
analysis. Thus, in the field of transfer pricing tax control in the tax law in
most countries the relationship is determined based on actual rather than the
formal relationship between the two companies, to make a deal.
In addition, there is a difference
and the determination of threshold values the share of direct and indirect
participation. The tax authorities in most countries define the relationship by
calculating interest on the one hand to the other transaction, more than 50% as
having a smaller volume of participation, the organization really has no way to
significantly affect the applicable organization share price which it owns. In
Ukraine, interdependence, depending on the type of test participation is more
than 20%.
As international experience shows,
are only controlled transactions concluded between related parties, in contrast
to the Ukrainian practice of tax control of transfer pricing. On the basis of
Article 39 of the Tax Code of Ukraine under the tax control and can get a deal
with independent organizations (TCU, 2020).
Another distinctive feature of the
international experience of tax control is the fact that in most of the
countries require taxpayers to provide additional information or special
calculation prices controlled transactions. The tax legislation of Ukraine in
relation to transfer pricing also provides the current form of tax control,
according to which the taxpayer is obliged to notify the tax authority to hold
each controlled transaction, and at the request of the tax authorities to
provide additional documentation.
Special attention is the fact that
most foreign countries is not strictly defined and regulated by the hierarchy
of the use of various methods of tax control of compliance used by taxpayers
market level price, as well as the existence of additional tax control methods
- method of distribution of profit and the method of comparable profitability.
foreign legislation establishes the right to use any method, if the result is
received the result, in which the set price corresponding to the market. And in
the tax law on transfer pricing in Ukraine is a priority method of comparable
market prices, and only when it is impossible to identify the specific
situation with the help of his market price, and the rest are used.
Another notable difference between
the foreign experience and Ukrainian practice of tax control of transfer
pricing is a multi-faceted approach to the determination of the market price.
Both international and Ukrainian practice of tax control of transfer pricing
involves determining the market price range. However, used in the Ukrainian
legislation on transfer pricing statistical calculation of interval differs
significantly from interkvantilnogo under international practice.
Today the Ukrainian tax legislation,
as well as the legislation of many foreign countries, established the
possibility of concluding an agreement with the tax authority on pricing.
Agreement to enter into an algorithm sufficiently long, has a number of
features, which create difficulties for its application in practice. First, an
application for the conclusion of such an agreement have the right to submit
only the taxpayer is recognized by the largest. Second, when applying for a
review of the tax authority, the taxpayer and the state duty paid by the funds
will not be returned in case of refusal to sign the Agreement. Third, long-term
review, which can be 6 months, and in exceptional cases, extended for another 3
months (TCU, 2020).
Which came into force with the
changes of the Tax Code of Ukraine significantly closer together the US tax
laws and regulations of the tax control Tax Code abroad, its provisions have
become increasingly close to the international principles of transfer pricing,
in particular the recommendations of the Organization for Economic Cooperation
and Development, but still not completely eliminate the existing problems and
shortcomings (OECD, 2014).
Thus, a comparative analysis of
foreign experience of transfer pricing tax control with the current Ukrainian
legislation, suggests a tendency to reduce the significant differences in the
implementation of tax control of transfer pricing in Ukraine and other
countries. However, despite this, a large number of differences still persists.
The analysis of the practice of tax control of transfer pricing showed that the
tax authorities are often faced with the inability to verify the conformity of
transfer prices to market levels of the organization.
For this reason, the elimination of
tax control of transfer pricing problems is largely possible through the use of
international experience. On this basis, the use of foreign experience in order
to modernize the tax control of transfer pricing should take into account the
economic and political situation in the country and rely on the rules and
regulations on taxes and duties of the national legislation. Judicious use of
the international experience of tax control for the realities of Ukrainian
reality will lead to greater effectiveness of control activities for the prices
used by taxpayers.
Transfer pricing problems can be
most clearly studied by analyzing arbitration practice. Court decisions,
firstly, help to clarify the position of state bodies in the application of
legislation and, secondly, allow to draw attention to the disagreements of the
points of view of taxpayers and tax authorities. Given the laboriousness and
long-term nature of the stage of tax audits and further stages of appealing
against decisions of tax authorities, we can still talk about the recent
emergence of transfer pricing norms. A limited number of transfer pricing tax
disputes have been formed in the arbitration practice of Ukraine.
The analysis of foreign
jurisprudence, in particular the United States, carried out in the study, shows
the following:
·
The
court cases that have been analyzed apply the transfer pricing rules;
·
Application
of transfer pricing rules are aimed at protecting the national tax base when
taxing cross-border transactions;
·
The
methodology of transfer pricing rules is based on approaches developed by the
OECD, which is reflected in the high similarity of terminology used to regulate
transfer pricing. The national transfer pricing rules of Ukraine are close to
the OECD methodology, but not identical.
·
Transfer
pricing judgments tend to create a precedent system of judgments in which
findings from one case are used to rule on other cases, effectively filling legislative
and administrative regulation with additional rules based on case studies.
The grouping of cases by
transactions, in respect of which a dispute arose on the application of
transfer pricing rules, indicates that the largest number of disputes were
associated with transactions for the supply of goods and with operations for
the provision of services (Table 4).
Table 4: Grouping of US arbitration practice on
the subject of the dispute
|
Case name,
country, year
|
The subject
of the dispute
|
The amount
of primary additional charges
|
The amount based on the results of the trial
|
|
Choosing the
applicable method
|
|
|
|
WESTRECO, US 1992
|
The possibility of applying
a coefficient to the size of the salary of the company's employees to
determine the size of the taxpayer's potential income, which would be
received in such a calculation of the cost of research and development work
for the parent company.
|
$7,115,584
|
-
|
|
SEAGATE TECHNOLOGY, US 1994
|
Whether a
post-implementation method can be used.
|
-
|
-
|
|
COMPAQ COMPUTER CORPORATION, US 1999
|
Possibility of using the
comparable uncontrolled price method.
|
$232,402,000
|
$214,852,000
|
|
VERITAS SOFTWARE CORPORATION, US 2009
|
Can the method of comparable
uncontrolled transactions be used to determine the market size of the
remuneration of a taxpayer under a license agreement with a subsidiary.
|
$2,5 billion
|
-
|
|
Glaxo Smith Kline, US 2006
|
Balancing the value of
research and development versus marketing and promotional efforts and
choosing the appropriate method.
|
-
|
$3.4 billion
|
|
|
Redistribution of
income without economic justification
|
|
|
|
UNITED PARCEL SERVICE, US 2001
|
Whether the group insurance
transactions through an offshore company have economic substance.
|
-
|
$1,2 billion
|
|
|
Cost allocation
issues
|
|
|
|
SEAGATE TECHNOLOGY, US 2000
|
Should controlled entities
share the costs of the US parent company to issue employee options to
employees who are involved in R&D on intangible assets.
|
-
|
-
|
|
XILINX INC., US 2005
|
Whether independent
companies have to share costs in the form of an option for employees under a
cost-sharing agreement.
|
-
|
-
|
|
|
Whether the
transaction is controlled
|
|
|
|
DHL CORPORATION AND SUBSIDIARIES, US 2002
|
Whether a transaction that
is not formally related to a controlled one, as it was concluded with an
independent person, relates to a controlled transaction.
|
-
|
-
|
Source: own generalization
based on published statements
Control
over transfer pricing is one of the priorities of the US tax authorities. The
auditors of the Internal Revenue Service of the US pay special attention to
transfer pricing when they audit the activities of multinational corporations.
In the United States, transactions involving transfers of intangible assets to
other countries are closely monitored, with a particular focus on cost-sharing
agreements. In addition, in the United States, more and more checks are carried
out on the services provided to each other by enterprises of the same group.
The
State Tax Service of Ukraine (2020) announces 80 inspections on transfer
pricing issues - will check the values in controlled transactions for
compliance with the rules of the "outstretched hand". Of these
inspections, 56 have already been completed. Court decisions have already been
made in 29 transfer pricing disputes (Figure 4).
Figure 4: Winning
business decisions in courts, %
In addition to the category of
"dispute on the merits of transfer pricing", we can distinguish the
category of so-called technical structures for transfer pricing, which relate
to issues of forward data, correctness of data and reporting forms of
controlled transactions, obtaining criteria for control transactions,
unavailability of verification.
Ukrainian modern case law already
has examples of resolving tax disputes that bring the above rules to a new
level of adjustment and improvement of tax legislation. The case law of the
Supreme Court of Ukraine (2019) mostly shows that decisions are made in favor
of taxpayers, when considering cases in court they are carefully considered in
all aspects, if necessary sent for reconsideration so that the decision was
reasonable and balanced (table 5).
Table 5: Ukrainian court practice on transfer
pricing
|
Case name, year
|
The subject of the dispute
|
Decision to court
|
Note
|
|
Sumikhimprom, 2017
|
Appointment
of forensic economic examination and recognition as illegal and cancellation
of the tax notice-decision.
|
In
favor of the taxpayer
|
-
|
|
"AZOT", 2017
|
Application
of the method of comparative uncontrolled price.
|
In
favor of the supervisory authority
|
Objectivity
in pricing in controlled transactions.
|
|
Odesky Port Plant, 2017
|
Questions
regarding business operations on import of natural gas in gaseous state from
a non-resident company.
|
In
favor of the taxpayer
|
The
issue of completeness of accrual and payment of taxes during the
implementation of controlled transactions for the export of mineral
fertilizers to non-resident companies. The impossibility of using the method
of comparative uncontrolled price, as well as the feasibility of using the
net profit method for natural gas import operations.
|
|
Sverodonetsk ob'єdnannya AZOT, 2018
|
Recognition
of illegal and cancellation of the tax notice-decision.
|
In
favor of the taxpayer
|
-
|
|
Kernel-Trade, 2016
|
The
facts of concluding additional agreements to the forward contract reclassify
it into a regular contract of sale.
|
Sent for new consideration
|
The
legislation defines a special procedure for establishing the compliance of
prices with the principle of "outstretched arm" for transactions
carried out under forward contracts.
|
|
SIS GROUP, 2017
|
Export
prices of wheat, corn, barley and rapeseed, made in 2013-2014.
|
In
favor of the taxpayer
|
For
the first time in Ukraine, a final decision was made without referral for
reconsideration and it was recognized: - the expediency of the analysis of
the comparison at the time of signing the contract indicators of quantity of
goods, delivery times, payment terms, distribution of responsibilities and
other conditions that directly affect the formation of the contract price
(including available markups or discounts, marketing policy); objectivity of
research of all possible sources of information; - determination of the date
of the controlled transaction and the date of transfer of ownership.
|
|
Meat processing complex LTD, 2018
|
Incorrect
comparison of commercial and financial conditions of transactions, incorrect
application of the method of determining the price of controlled
transactions, which led to the unfoundedness of the conclusion in the
inspection report.
|
In
favor of the taxpayer
|
Objectivity
in determining the date of conclusion of contracts for controlled
transactions.
|
|
Rivne-AZOT, 2017
|
Completeness
of accrual and payment of taxes during the implementation of controlled
operations on natural gas imports from Ostchem Holding Limited (Republic of
Cyprus) and the export of mineral fertilizers to NF Trading AG (Swiss
Confederation).
|
In
favor of the taxpayer
|
The
total amount of tax notices-decisions that are being appealed exceeds UAH 1.5
billion.
|
Source: own generalization
based on published statements
Having
considered the detailed characteristics of these court cases, we note that most
of the issues of completeness of accrual and payment of taxes in the conduct of
controlled transactions for export transactions to non-resident companies are
justified. The objectivity of the definition and a clear review of the schedule
of contracts for controlled transactions should be key during the inspections
by the tax authorities of Ukraine.
Table 6: The main differences in the
methodology of transfer pricing abroad and in Ukraine
|
Foreign experience
|
Domestic practice
|
Implications for domestic business
|
|
Tax authorities require only a report on controlled transactions (in
some countries - documents proving the fairness of the price)
|
Along with the report on controlled transactions and analytical
materials to confirm the transfer prices, businesses are required to submit
all primary documents related to the performed operations
|
Increased administrative costs of business; shadowing of the economy
due to the growing burden on business; bureaucratization and growth of the
informal economy
|
|
Transfer pricing is aimed exclusively at regulating and controlling
transnational transactions with related parties
|
Fiscal regulation covers transactions with all companies (including
unrelated ones) located in countries where the income tax rate is 5
percentage points or more lower than in Ukraine (in particular, Bulgaria,
Georgia, the Republic of Cyprus, Moldova, Montenegro and etc.)
|
Tighter regulation of transfer pricing than in most countries of the
world; buying goods from a foreign trading company-unrelated person, the Ukrainian
company is forced to prove the fairness of the price, which in practice is
often impossible
|
|
Transfer regulation covers the price relevant at the time of the
contract
|
In the case of comparing the price of a forward contract for any
product on the date of conclusion of such a contract with the price at the
time of delivery, the domestic enterprise may incur additional costs for the
payment of taxes
|
There is a threat for companies that work with forward contracts (in
particular, for grain traders), because when signing such contracts is based
on the price set for similar contracts in the market on the date of signing
the contract, not on the date of actual delivery. On the date of shipment of
goods, the price may fluctuate in any direction
|
Source:
own generalization
It
should be noted that today in Ukraine the formation of the transfer pricing
mechanism is extremely blurred. Procedures for substantiation and reflection of
transfer prices in financial statements are complicated, there are no clearly established
rules for avoiding double taxation and resolving tax disputes, there are
significant expenditures of time and resources for effective implementation of
the transfer pricing mechanism.
The
current transfer pricing procedure in the value chains of industrial
enterprises is the sale of products and services or the payment of liabilities
through related companies that are in "low-tax" jurisdictions at
discounted prices.
4.
CONCLUSIONS
Based
on the result of the research conducted, it can be concluded that:
1) Foreign experience of transfer
pricing tax control, in particular the US experience shows that can be
controlled not only the price of the transaction, but also a wide range of
facilities, including income, profits, losses, expenses, the amount of the tax
credit, etc., which may be converted, according to the law on transfer pricing.
2) The international standards of tax
control of transfer pricing, in contrast to the principles of monitoring
Ukrainian tax authorities are focused on the economic substance of the
transaction rather than its form through the implementation of functional
analysis. As international experience shows, are only controlled transactions
concluded between related parties, in contrast to the Ukrainian practice of tax
control of transfer pricing. Another distinctive feature of the international
experience of tax control is the fact that in most of the countries require
taxpayers to provide additional information or special calculation prices
controlled transactions. In most foreign countries is not strictly defined and
regulated by the hierarchy of the use of various methods of tax control of
compliance used by taxpayers market price level.
3) In foreign countries, the tax
control of transfer pricing is focused on the content of the transaction rather
than its form. The interdependence of the objects of the transaction is
determined based on actual rather than the formal relationship between the
parties. The use of the international experience of tax control for the
realities of Ukrainian reality will lead to greater effectiveness of control
activities for the prices used by taxpayers.
4) Most civilized countries
implementing the tax control over transfer pricing based on Transfer Pricing
Guidelines of the Organization for Economic Cooperation and Development for
multinational corporations and tax administrations. These recommendations in
turn formed on the basis of the US Internal Revenue Code provisions, as it is
in the US for the first time there was legislation on transfer pricing.
5) The main distinguishing feature of
the Recommendations of the OECD transfer pricing is to establish a level
playing field, both for the tax authorities and taxpayers, not just in a
particular country, but also in all countries, tax legislation which is based on
the provisions of this Recommendation.
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IMPROVING
TRANSFER PRICING IN UKRAINE USING AMERICAN EXPERIENCE