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The impact of transfer pricing law on businesses

The main intention underlying the transfer pricing regulation adopted across the world is to control prices in related party transactions to prevent tax evasion by businesses. The regulation was adopted in Russia starting from 2012, with Ukraine expected to follow suit in the near future. The new transfer pricing law is expected to come into effect either in July 2013 or on 1 January 2014.   

The draft law submitted to the Verkhovna Rada differs greatly from its European counterparts. The requirements of the draft law are more stringent; the regulation applies to a wider range of businesses and operations and provides for tougher penalties. After the document was presented to companies’ representatives for the first time, the business community, including Deloitte, provided a number of substantive comments to the document. However, those suggestions were largely ignored, the draft law itself remaining almost unchanged compared to the version that was submitted for consideration.

In this article we will dwell on some of the most problematic issues present in the draft law on transfer pricing, the impact it will have on businesses if it is adopted, as well as the necessary actions businesses ought to take in order to avoid the penalties.    

Administrative section (reporting requirements and penalties) 

If the draft law is adopted all large taxpayers will not only have to submit reports on controlled transactions (i.e. transactions for which they will have to justify prices) and documentation confirming transfer prices, but also to provide primary documents related to those transactions. In reality, this will mean they will have to submit hundreds, and in some cases millions of pages to the tax authorities. If necessary, the tax authorities could request these documents during a tax audit. However, forcing businesses to provide the documents in this manner would result not only in increased burden on businesses, but also in a greater amount of bureaucracy for the tax authorities.   

Best practices 

The best practices of transfer pricing regulations show that the tax authorities require taxpayers to file reports on controlled operations, while in some countries it is only necessary to submit documentation supporting the fairness of the price ("protective file").    

The requirement to submit all primary documentation is entirely unique, and not only to Europe: although the Ukrainian tax authorities used the Russian transfer pricing law as a basis, there is no such requirement in Russia. 

Consequences for businesses

The requirement to painstakingly collect, store and submit all primary documentation would result in a substantial increase in businesses’ administration expenses. If a taxpayer fails to all submit primary documentation, the draft law envisages a fine of 5% of the total amount of the controlled transaction, a considerable amount of money for any business to lose. Overall, the proposed penalties in Ukraine are much tougher than in most countries.

Controlled entities 

In addition to cross-border transactions, Ukraine intends to establish control over transactions carried out within the domestic borders. This regulation will also cover operations conducted with any company (including unrelated companies) located in countries with a profit tax rate at least 5% lower than in Ukraine.     

Best practices

In international practice, transfer pricing is aimed solely at regulating cross-border party transactions, thus being the key to avoiding tax evasion in any particular country. Adopting the current version of draft law would result in the establishment of much tougher control over transfer pricing than in most countries across the globe.     

Consequences for businesses

First of all, it would affect companies that conduct business with international market players, including the world’s major corporations, through trading companies registered and located in Switzerland, particularly in certain cantons where the effective tax rate is under 10%. When purchasing goods from a trading company in Switzerland (an unrelated party registered in a canton), a Ukrainian company may be required to prove the fairness of the price, which may be impossible in practice. 

Forward contracts

On comparing the forward prices for a commodity (such as grain or metals) on the date when a contract is entered into with the price at the moment of delivery, a Ukrainian company may be required to make additional tax payments. 

Best practices

In most countries, the price that is valid at the time a forward contract is entered into falls within the transfer pricing regulations.

Consequences for businesses

This provision offsets the very essence of the forward contract, threatening to adversely affect companies working with forwards, especially as it relates to grain traders. This is explained by the fact that, at the time of signing a forward contract, the forward price is established on the basis of similar contracts existing on the market on the date on which the contract is signed, rather than on the date of actual delivery.


The greatest concern lies within Clause 18 of the transitional provisions of the draft law, which was loosely phrased, leading to repeated misinterpretations. The most pessimistic worst-case scenario for a business is that the Cabinet of Ministers of Ukraine (CMU) will set indicative prices for the majority of export-import commodities. In addition, for the purposes of transfer pricing, it will be possible to apply only a 5% corridor (deviation from previously-agreed prices). We very much hope that the text of this Clause will be clarified, otherwise this may lead to manual price regulation.

Best practices

In essence, there is a prevailing practice of state price adjustment; however, this is not the case in market-oriented economies.

At the same time, the international practice applies a so-called “grace period” in countries where the transfer pricing rules have only recently come into force. The idea behind the “grace period” is that for the first year or two the state allows companies time to adapt to the new rules. This is made possible by reducing the tax burden for businesses, particularly in relation to the remission of penalties, increase in the market price corridor, the higher threshold for controlled operations, etc.  

Consequences for businesses

The adoption of transfer pricing rules in Ukraine is one more step towards Europe's best practice, so it is in the country's direct interests as a whole, both internally and on the world stage. It may also positively affect businesses, giving them the opportunity to create a competitive environment, introducing clear and transparent mechanisms for determining prices in related party transactions, etc. 

It is also important to ensure that the adopted law is based solely on the recommendations of the OECD and best practices. Ukraine doesn’t have to reinvent the wheel; it needs to apply the model that has successfully operated in developed countries for decades. 

It is very important to give businesses an opportunity to adapt to the new rules during the “grace period” because, in and of itself, the entry into force of transfer pricing law, even in its “softer” forms, is still painful for businesses, forcing them to do the following:  

  • perform analysis and monitor transactions that fall within the regulations 
  • develop a pricing analysis methodology and conduct a comparative analysis of the market for the purpose of providing documentation
  • prepare and submit additional financial statements to the tax authorities, etc.

The fulfillment of the norms of the law and preparation of the financial reports will result in a substantial increase in the resources and manpower of companies. 

In contrast, the application of transfer pricing regulation in its current form could have disastrous consequences for many businesses. In addition, the establishment of state price adjustment may result in the absolute lack of competitiveness of Ukrainian business on the global market.

Victoria Chornovol, Head of Tax & Legal Department at Deloitte

Vladimir Yumashev, Director of Tax & Legal Department at Deloitte  


Ruslana Pisotska
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