Taxpayers independently adjusted the price of controlled operation and amount of tax liabilities by 29.9 billion UAH during 2015 – nine months of 2022

Due to the systematic and consistent work of the State Tax Service and its territorial bodies, a reasoned and constructive dialogue was established with taxpayers, who, without waiting for the start of audits adjust the price of controlled operation and, as a result, independently increase their corporate income tax liability.

More than 990 taxpayers (or 20% of the total number reporting on controlled operation) submitted 2200 corporate income tax declarations (clarifications) during 2015 – nine months of 2022 and independently increased financial result before taxation by 29.9 billion UAH for tax declarations, terms of which do not correspond to the "arm's length" principle and/or a reasonable economic reason (business purpose). As a result of these adjustments, an increase in the corporate income tax liabilities by more than 2.6 billion UAH and a decrease in the negative value of taxable object by more than 10 billion UAH that were declared.

Despite the moratorium on documented audits, in connection with quarantine restrictions related to the COVID-19 and the marital law in Ukraine, taxpayers during 2020 – nine months of 2022 made an independent self-adjustment of financial result before taxation by 15 .3 billion UAH or 51% of the total amount of adjustments (income tax was increased by 1.6 billion UAH and the negative value of taxable object was reduced by 3.9 billion UAH), including by more than 4.3 billion UAH during 2022.

These results indicate that the tax control over transfer pricing contributes to increasing the taxpayers’ tax culture and voluntary corporate income tax payment.

In addition, given that taxpayers today are comprehensively aware of methods, approaches and areas of analysis used by the controlling authority selecting risky controlled operations, they have an opportunity to make fewer mistakes than at the beginning of introduction of the transfer pricing rules in Ukraine.

And only in those cases when taxpayers do not pay attention to argumentations regarding the existing transfer pricing risks, cases are formed by the controlling authority ready to conduct control and audit measures after the abolition of moratorium on auditing compliance of the controlled operation conditions with the "arm's length" principle.

Therefore, the State Tax Service recommends that taxpayers review conducted controlled operations for compliance with the "arm's length" principle and take advantage of an opportunity to make independent self-adjustments according to Sub-paragraph 39.5.4 Paragraph 39.5 Article 39 and Paragraph 50.1 Article 50 of the Tax Code of Ukraine (hereinafter – Code).

In case that the taxpayer applies conditions that do not correspond to the "arm's length" principle and/or a reasonable economic reason (business purpose) during the controlled operation, the taxpayer has a right to independently adjust the price of controlled operation and amount of tax liabilities, if this does not lead to a decrease in the amount of tax payable to the budget (Sub-paragraph 39.5.4 Paragraph 39.5 Article 39 of the Code).

Herewith, tax liabilities in the self-adjustment case are calculated according to the minimum cost of the price range (profitability), which corresponds to the "arm's length" principle for export and up to the maximum cost of the price range (profitability) for import.

It should be noted that if conditions of the controlled operation, which do not correspond to the "arm's length" principle, will be established by the controlling authority (provided that the taxpayer has not exercised own self-adjustment right), then the calculation of tax liabilities is carried out according to the price (profitability index), which is equal to the median cost of such range. 

In the case of self-correction of mistakes contained in previously submitted tax declaration by the taxpayer, changes are made according to norms of Article 50 of the Code.

Taxpayer who independently discovers the understating of tax liability of past tax periods is obliged, with the exception of cases established by Paragraph 50.2 Article 50 of the Code, in particular, to send a clarifying declaration, pay the underpayment amount and a fine of 3% of such amount by the date of its submission. This fine is not applicable in case of submitting a clarifying declaration for the previous tax (reporting) year for the self-adjustment purpose according to Article 39 of the Code not later than October 1 of year following the reporting year.

Also, the taxpayer has a right to reflect the underpayment amount as a part of declaration submitted for the tax period following period in which the understatement of tax liability was detected, increased by the amount of a fine of 5% of such amount, with a corresponding increase in the total monetary corporate income tax obligations amount (Paragraph 50.1 Article 50 of the Code).

As follows, in case of independent self-adjustment, fines are applicable smaller than in the case of determining the understated tax liability amount by the controlling authority according to Article 123 of the Code.

In addition, please note that in case of the taxpayer’s self-adjustment, according to Sub-paragraph 39.5.4 Paragraph 39.5 Article 39 of the Code, the Transfer pricing annex "Independent self-adjustment of the price of controlled operation and amount of the taxpayer's tax liabilities" must be mandatory submitted to the corporate income tax declaration (clarifying).

Therefore, the law provides for mitigating the taxpayer’s liability in case of self-calculation of the understatement tax liability amount from the income tax in case of non-compliance with conditions of the controlled operation of the "arm's length" principle and making appropriate adjustments before the start of the transfer pricing audit (Sub-paragraph 39.5.4 Paragraph 39.5 Article 39 of the Code), as well as application of a fine for its understatement (Paragraph 50.1 Article 50 of the Code).