TRANSFER PRICING AS A METHOD OF TAX PLANNING. THE RULE OF BUSINESS PURPOSE

Author
, Graduate student at the Department of Financial Law, Ukraine, Kharkiv

In heading

 Law;

Signed print

 28.03.2024

Issues number

 2024 - 1 (56)

Page

 96-112

Type of articles

 Scientific article

Code UDK

 [347.73:338.51]:[336.226.1:005.51]

ISSN print

 2411-5584

Abstract

 Problem setting. Transfer pricing (after this – TP) is an important tool for counteracting tax optimization, which is used in transactions with foreign companies. Not only in Ukraine, but also in various countries in the world use this instrument.
Recent research and publication analysis. In Ukraine the issue of TP has recently been considered by numerous scientists in their works, but, despite significant work on the specified topic, several aspects currently require a new approach.
Paper objective. The purpose of the article is to analyze the most common methods of tax planning in Ukraine and other countries, which takes into account the effect of TP, and the reactions of regulatory bodies to such methods.
Paper main body.
1. To be lower than the radar. Currently, TCU is used:
a) as a direct requirement - to enterprises with an annual income of UAH 150 million, while the amount of the transaction with a related low-tax non-resident must not be lower than UAH 10 million;
b) as a legal way to avoid surcharges in the form of a 30 % tax difference for transactions with low-tax non-residents - for enterprises that generally reflect tax differences, that is, have an annual income of more than UAH 40 million.
Possible ways to avoid TP rules through:
1) breaking up group companies involved in foreign exchange operations, each of which has an annual income of less than UAH 150 / 40 million;
2) avoidance of transactions with related parties and low-tax jurisdictions/organizational forms;
3) deliberate underestimation of the volume of transactions with a certain counterparty to an amount lower than UAH 10 million.
2. Reference prices. Reference prices may apply when a parent company sells a product to a subsidiary and existing sales operations of the product to unrelated parties in an uncontrolled transaction. At the same time, the prices for the subsidiary company are lower than for independent distributors. In this case, it is possible to compare sales prices in transactions between the parent and subsidiary companies and between the parent company and unrelated parties, if such transactions are comparable.
This allows you to justify transfer prices:
- firstly, it is more reliable, which is a priority compared to others;
- secondly, it is simpler, because the information on comparable transactions is at the disposal of the taxpayer (or his counterparty), and is usually absent from the tax service;
- thirdly, it is cheaper than justification through databases.
3. Notification of forward contracts. A business can justify the transfer price in the range from the time of the conclusion of the contract, not from the time of delivery, if it notifies the tax office within 10 working days of the date of the conclusion of the contract. This method is suitable for companies that sell raw materials (grain, ore, etc.).
4. Interest on loans. Historically, there have been two methods of substantiating the transfer price based on interest for loans from non-residents. The first method uses open free services, such as NBU sites, where data on foreign currency loans are aggregated. The second method uses access to relatively expensive databases such as Refinitiv Gov Search. Due to the search for comparable interest rates with the issue of corporate bonds by the parameters “credit rating”, “term”, “currency”, “instrument”, “date of issue” and using risk adjustments by country, taking into account the high risk of borrowing established for Ukraine by credit agencies, it is possible to justify rates higher than 11 %.
5. Royalties for various objects of intellectual property. TP can be used as a tool for planning the marginality (profitability) of the operations of various enterprises of the group, which are located in different countries, but also perform certain functions within the scope of the group’s activities:
1) production;
2) distribution;
3) innovation centre (owner of rights to intellectual property objects used by other enterprises of the group);
4) financing (loans to other enterprises of the group).
The operations conducted by these enterprises of the group are substantiated using various methods of TP and databases.
At the level of legislative technique, judicial and explanatory practice the state formulates certain mechanisms for combating tax evasion using the tools of TP.
The rule of business purpose can be applied as follows. If the enterprise concludes a forward contract for a long period in favor of a related party at the moment of minimum prices in the market, when the long-term trend indicates a constant increase in prices, then such an operation can be considered as having no “reasonable economic reason (business purpose)”. In this case, the tax service cannot ignore the operation to determine the taxable profit, but will apply the rules of the TP with replacement by an alternative operation and additional taxes.
Conclusion of the research. Analyzing the most common tax planning methods used by different countries, which take into account the influence of TP, can conclude that this process has a significant effect on the economic composition of countries. It is indicative that the supervisory authorities are increasingly following the methods of tax planning and are looking for ways to control such operations. One of the latest is the rule of business purpose for assessing the legality of transactions carried out by taxpayers.
Short abstract for an article
Abstract. It has been proven that TP is an important tool for combating tax optimization, which is used in transactions with foreign companies not only in Ukraine, but also in various countries of the world. The TP’s tools are based on the OECD guidelines and are an integral part of the BEPS plan. TP by its content acts as an antidote to the distortion of tax bases by overstating purchase costs or understating income from the sale of goods/services to foreign jurisdictions or entities that use a low tax burden.
The means of countering tax optimization by involving TP on the part of the state are considered based on the study of judicial practice. It is emphasized that regulatory authorities apply the rule of business purpose to assess the legality of such transactions. The conducted analysis indicates that the practice is ambiguous and depends on the correct sequence of actions of the person applying tax optimization.

Keywords

 taxation, tax optimization, BEPS, income tax, administration, tax evasion.

Reviewer

External reviewer

Article in PDF

 96-112

Bibliography

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Code DOI

 https://doi.org/10.31359/2411-5584-2024-56-1-96

28.03.2024