Step by step: reforming the tax system by implementing the BEPS Action Plan.

The BEPS project, Base Erosion and Profit Shifting, is an international initiative of the Organization for Economic Co-operation and Development, actively supported by the G20. This project was created to combat aggressive tax planning schemes. Such schemes are used by international companies to artificially withdraw their income from countries with high taxation to countries with low or zero taxation.

Ukraine joined the Extended Cooperation Program within the Organization for Economic Cooperation and Development in 2017. At the same time, the obligation to implement the minimum standard of proposed steps of the BEPS Plan became mandatory.

On 23 May 2020, the Law of Ukraine “On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation” of January 16, 2020 № 466-IX (hereinafter – the Law) entered into force.

This law introduced a number of key changes to the Tax Code of Ukraine regarding the streamlining of functions and definition of regulatory authorities in connection with the reorganization of the SFS, the responsibility of taxpayers and regulatory authorities, tax audit and accounting of taxpayers, etc.

Let’s take a look at the steps of the BEPS Action Plan implemented by the Law.

On 1 January 1 2017 Ukraine joined the Program of Enhanced Cooperation within the Organization for Economic Cooperation and Development, committing itself to implement the minimum standard of the Action Plan to combat the tax base erosion and profits withdrawal from taxation (Base Erosion and Profit). Shifting – BEPS). The implementation of the steps of the BEPS Action Plan is recognized as a prerequisite for the liberalization of currency regulation, which is in line with Ukraine’s obligations under the Association Agreement with the EU.

In fact, the rules were introduced to fulfill the mentioned-above goal:

– control over transfer pricing (Steps 8-10, 13);

– taxation of controlled foreign companies (Step 3);

– limiting the costs of financial transactions with related parties (Step 4);

– prevention of abuse in connection with the application of double taxation agreements (Step 6);

– prevention of avoidance of the status of a permanent establishment and taxation of permanent establishments (Step 7);

– application of the mutual agreement procedure (Step 14).

From 01.01.2021 – to individuals and legal entities that own or control foreign companies.

Thus, individuals or persons who are residents of Ukraine and own or actually control a foreign company will be obliged to pay income tax on such a company.

 The controlling person independently calculates the adjusted profit of each controlled foreign company on the basis of the financial statements of the controlled foreign company and determines the share of adjusted profit subject to taxation in Ukraine in proportion to the share in this controlled foreign company that it owns.

In addition, an individual or a person or a resident of Ukraine is obliged to notify the supervisory authority of:

– any direct or indirect acquisition of a share in a foreign legal entity or the beginning of the actual control over a foreign legal entity;

 – establishment, creation or acquisition of property rights to a share in the assets, income or profit of the entity without the status of a legal entity;

– any alienation of a share in a foreign legal entity or termination of the actual control over a foreign legal entity;

– liquidation or alienation of property rights to a share in the assets, income or profit of the entity without the status of a legal entity.

  • From 23.05.2020 (some norms – from 01.01.2021) – to participants of controlled operations.

Several levels of reporting have been introduced in transfer pricing.

Thus, taxpayers who carried out controlled transactions in the reporting year are required to file a report on controlled transactions and notifications of participation in an international group of companies by October 1 of the year following the reporting year.

Global transfer pricing documentation (master file) is provided by the taxpayer at the request of the central executive body implementing the state tax policy, within 90 calendar days from the date of receipt of the request.

 Taxpayer – a resident of Ukraine, if the total consolidated income of the international group of companies, which includes the taxpayer, exceeds the equivalent of 750 million euros, must submit to central executive institution of implementing state tax policy, a report in terms of international countries groups of companies in electronic form.

  • From 23.05.2020 – to participants of business transactions with non-residents.

For tax purposes, a transaction carried out with non-residents is not considered to have a reasonable economic reason (business purpose), in particular, but not exclusively, if:

  • the main purpose or one of the main objectives of the transaction and / or its result is non-payment (incomplete payment) of the amount of taxes and / or reduction of taxable income of the taxpayer;
  • under comparable conditions, a person would not be willing to buy (sell) such works (services), intangible assets, other items of business transactions, other than goods, from unrelated parties.

From 23.05.2020 (some norms from 01.01.2021) – to dividend payers in favor of non-residents, participants in controlled transactions, persons applying international tax agreements.

The law provides for the Test of the main purpose – the prohibition of the use of benefits (under international tax agreements), if the business purpose of the business transaction was the direct or indirect receipt of such benefits.

In addition, for tax purposes, dividends are also equated to:

 – payment in cash or in kind, made by a legal entity in favor of its founder and / or participant (participants) in connection with the distribution of net profit (its part);

– amounts of income in the form of payments for securities (corporate rights) paid in favor of a non-resident in controlled transactions in excess of the amount that corresponds to the principle of “outstretched hand”;

– the value of goods (works, services), except for securities and derivatives), the amount of understatement of goods (works, services) purchased or sold in controlled transactions with non-residents in excess of the amount that corresponds to the principle of “outstretched hand”.

The law introduces a mutual agreement procedure – if a person believes that as a result of an action or decision of the supervisory authority of Ukraine or the relevant authority of another country he is or will be taxed, which does not comply with the provisions of the international treaty on double taxation, he can, regardless of legal means protection provided by this Code, to submit an application for consideration of the case by mutual agreement.

Moreover, in the Mutual Agreement Procedure, the competent authority of Ukraine shall apply to the competent authority of the state with which the international agreement has been concluded, on the basis of which the application has been submitted.

  • From 23.05.2020 – to permanent representations of non-residents.

For the purpose of taxation, additional criteria for the term “permanent establishment” have been introduced.

The law stipulates that if a controlled foreign company directly or indirectly receives income through a permanent establishment in Ukraine, the adjusted profit of the controlled foreign company is subject to adjustment by reducing the amount of profit received through such a permanent establishment.

At the same time, the amount of profit of the permanent establishment should be determined by the principle of “outstretched hand”.

The business community was ambivalent about the innovations in TCU, as the changes will affect all companies whose existence or activities are related to non-residents.

At the same time, the President of Ukraine proposed to the Cabinet of Ministers to develop draft laws that should detail and improve the provisions of the Law, as some of them have been criticized by experts.

In any case, some provisions of the BEPS Plan are already being implemented or are being prepared for implementation in Ukrainian legislation. Therefore, an objective assessment of the new “rules of the game” of tax planning is a topical issue for all companies cooperating with non-residents of Ukraine. Timely restructuring of business assets and qualified consultation of specialized lawyers today is the key to successful business in the future.