Controlled operations with raw materials – application of procedures

State Tax Service of Ukraine draws attention to the fact that Procedures for establishing compliance of conditions of controlled operations with regard to raw materials to the "arm's length" principle, approved by Order of the Ministry of Finance of Ukraine № 19 as of 18.01.2022 (hereinafter – Procedures) entered into force from 01.01.2023.

It is important to emphasize that application of these Procedures is applicable to controlled operations with raw materials, list of which was approved by Resolution of the Cabinet of Ministers of Ukraine № 1221 as of 12.09.2020 “On approval of list of raw materials and recognition of Resolution of the Cabinet of Ministers of Ukraine № 616 as of 08.09.2016 as having lost its validity" (includes 103 grouped product positions).

Procedures comply with the OECD Guidelines on transfer pricing for multinational companies and tax administrations, which are generalization of the best modern practices of applying the “arm’s length” principle and the main international recommendatory and methodological document in the transfer pricing regulation. 

During formation of Procedures, specifics of activities of relevant industries, methodology of information formation in publicly available and recognized global sources of information, which, in particular, were included in the recommended (non-exclusive) list of the information sources for obtaining quotation prices, are published on the portal of the State Tax Service (including Argus Media Ltd, FastMarkets, HIS Markit Ltd, Refinitiv Holdings Ltd, S&P Global Platts).

Procedures define steps in a logical and chronological sequence of actions, including:

- priorities of the comparative uncontrolled price method;

- application peculiarities of quoted prices and adjustments in terms of groups of raw materials;

- peculiarities of making adjustments to the comparability of operations with raw products, in particular:

- differences in characteristics of raw materials;

- differences in delivery basis;

- differences in terms of delivery;

- for the trader's reward;

- differences in payments terms;

- currency differences.

In addition to the general Procedure, specialized Procedures have been approved in the context of relevant industries, in particular, operations with:

- export of grain, oil crops and their processing products;

- export of iron ore raw materials;

- import of energy and coking coal;import of petroleum products and liquefied hydrocarbon gases;

- export of cast iron, ferrous metal scrap and ferrous metal products;

- export and import of ferroalloys.

Establishing compliance of conditions of controlled operations with regard to raw materials to the "arm's length" principle should be carried out by the taxpayers and controlling bodies, taking into account requirements of Procedures, starting from 01.01.2023.

It should be noted that the specified Procedures do not establish new regulation, but more qualitatively reveal purpose and principles of control over the transfer pricing.

Therefore, establishing compliance of conditions of controlled operations with regard to raw materials to the "arm's length" principle can actually be carried out by the taxpayers and controlling bodies according to logical and consistent rules specified in Procedures, also in the retrospect.