Main requirements for application of the transfer pricing methods for raw materials

State Tax Service of Ukraine reminds that list of raw materials approved by Resolution of the Cabinet of Ministers of Ukraine № 1221 as of 09.12.2020 "On approval of list of raw materials and recognition as having lost validity of Resolution of the Cabinet of Ministers of Ukraine № 616 as of 09.08.2016" entered into force on 01.01.2021.

Therefore, from 01.01.2021, the transfer pricing rules for raw materials introduced by the Law of Ukraine № 446-IX as of 01.16.2020 "On amendments to the Tax Code of Ukraine on improving tax administration, eliminating technical and logical inconsistencies in tax legislation" became fully operational.

Main requirements, according to these rules, for application of the transfer pricing methods for raw products are:

- application of method of the comparative uncontrolled price is mandatory for determining compliance of conditions of controlled operations with raw materials of the "arm’s length" principle (imperative norm);

- application of other transfer pricing methods must be justified by the impossibility of applying the comparative uncontrolled price method;

- expediency of switching to methods of profitability (profit distribution) must be justified according to facts and circumstances of implementation of controlled operations;

- in case of non-application of the comparative uncontrolled price method, the taxpayer must disclose supply chain to the first unrelated person (person who does not meet criteria defined in Sub-paragraph 39.2.1.1 Paragraph 39.2 Article 39 of the Tax Code of Ukraine, hereinafter – Code ) indicating the profitability level;

- in case of non-disclosure of supply chain, the controlling body has a right to independently determine compliance of prices with the "arm's length" principle using the comparative uncontrolled price method.

In order to prevent controversial situations, avoid litigation and form unified methodological approaches for taxpayers and regulatory bodies regarding determination of compliance with conditions of controlled operations of the "arm's length" principle in relation to raw materials according to norms of the Code, relevant Procedures were developed (Order of the Ministry of Finance of Ukraine № 19 as of 18.01.2022), which entered into force on 01.01.2023.

Application of Procedures aims at methodological settlement of the following issues:

- determination of date of controlled operation (conclusion of contract, transfer of ownership);

- definition of potentially comparable operations (internal and external comparative);

- identification and adjustments to ensure comparability.

It should be emphasized that Procedures provide opportunity to:

taxpayers to make independent adjustments to their tax liabilities based on results of price revisions of controlled operation, minimizing need for audits;

payers and regulatory bodies to determine compliance with the " arm’s length " principle using unified approaches.

It should be noted that the specified Procedures do not establish new regulation, but better reveal purpose and principles of the transfer pricing control, so they can be used as a tool for analyzing controlled operations for previous reporting periods. Main requirements for application of the transfer pricing methods for raw materials and sequence of actions defined in Procedures are contained in the presentation materials.

As follows, application of Procedures in establishing compliance of conditions of controlled operations with regard to raw materials to the "arm's length" principle is carried out taking into account requirements of the law by all taxpayers who conduct export-import operations with raw materials within the scope of controlled operations.