Ukraine: State Tax Service intensifies TP control

In 2021, the State Tax Service of Ukraine notably intensified control over TP matters.

Thus, according to the Tax Code of Ukraine, TP control consists of three stages.

The first stage is the monitoring of controlled transactions. At this stage, the State Tax Service of Ukraine studies tax and TP reporting as well as customs information for identifying TP risks. The Tax Service has the right to file requests to taxpayers for obtaining information, explanations and data on the TP matters.

Many Ukrainian taxpayers received requests where the State Tax Service of Ukraine asked specific questions on the controlled transactions and TP methodology applied by the taxpayer to ensure that the transactions were at arm’s length. The requests usually cover the period for several years, for example from 2015 to 2019, and require extensive work to collect the data.

Given the scope of information and data, the requests were especially problematic for those taxpayers who did not prepare TP documentations or when TP documentation covered only part of controlled transactions.

At the monitoring stage, the State Tax Service of Ukraine decides whether to take further steps for TP control. Therefore, it is recommended to provide confident answers evidencing that the taxpayer has conducted proper TP analysis, which confirm that the transactions are at arm’s length. Such responses may help to avoid further stages of TP control.

The second stage is the request for submission of TP documentation, which should be annually prepared and kept by taxpayers conducting controlled transactions. Such requests are filed by the central office of the State Tax Service of Ukraine. The Tax Code stipulates that the taxpayer shall submit TP documentation within 30 calendar days following the request. Special COVID-19 related rules on suspension of the statutory terms for answering the requests of the State Tax Service of Ukraine do not cover requests for TP documentations.

Receipt of such a request means that the State Tax Service of Ukraine already suspects that TP matters of the taxpayer require special attention. Often, after studying the TP documentation, taxpayers receive the second request, where the State Tax Service of Ukraine describes the points with which it disagrees and requests additional substantiation that conditions of the transaction were at arm’s length.

The third stage is the TP audit. TP audit is the final step in TP control and is usually initiated if the State Tax Service of Ukraine is confident that it has arguments to challenge the taxpayer’s approach to TP.

In February 2021, the government lifted the moratorium on TP audits. The moratorium was introduced in 2020 for most types of tax audits as part of COVID-19 related tax measures. Consequently, the focus of tax control shifted to TP.

The Tax Office reports that as of July 2021 it has renewed 18 TP audits and has started 27 new TP audits. It has finished 10 TP audits resulting in material TP adjustments for taxpayers. Such statistics evidence a notable increase in the pace of TP control.

In conclusion, as the TP audits temporarily remain one of the principal instruments of control over corporate profits taxation in Ukraine, the State Tax Service of Ukraine is accelerating the development of its capability in this field. This raises the level of the risks associated with TP in Ukraine.

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