Ukraine’s progress in the fight against the tax base erosion

Paulus Mayauskas Head of the Customs and Tax Administration of the Ministry of Finance of Lithuania, EU4PFM International Key Expert on tax reform.

An invisible work that later demonstrates visible results is the development and implementation of a regulatory framework that harmonizes Ukrainian legislation with European legislation.

In particular, in the direction of the tax base erosion and withdrawal of profits from taxation.

According to the statistics of Ukraine’s foreign economic activity, raw materials account for a significant share of Ukrainian exports, therefore, it is important for Ukraine today to pay special attention to the development, improvement, and practical implementation of transfer pricing rules in this area. Their main goal is to prevent the artificial transfer of profits to jurisdictions with low or zero taxation, and, as a result, to ensure the fair taxation of transactions with raw materials.

Back in 2017, the Organization for Economic Development and Cooperation made changes to the relevant Transfer Pricing Guide for multinational companies and tax administrations. Improved TCO rules for commodity transactions are reflected in the BEPS Action Plan.

Ukraine does not stand aside from these processes and implements global standards aimed at counteracting the tax base erosion and the withdrawal of profits from taxation.

In particular, the Law of Ukraine of January 16, 2020, № 466 – IX “On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Elimination of Technical and Logical Discrepancies in Tax Legislation” improved the rules on compliance with the conditions of controlled transactions with raw materials under the arm’s length principle.

The EU4PFM project, funded by the European Union, supports Ukraine’s initiatives on this difficult path and provides methodological and technical support in the practical phase of implementation of these changes to ensure effective and transparent regulation of the entire process of working with controlled operations.

Together with experts from the State Tax Service, the Ministry of Finance, the OECD, GIZ, a lot of efforts of EU4PFM Project experts were made to develop:

– The list of raw materials for which unrelated persons use quotation prices as a reference for setting the price of uncontrolled transactions;

– Recommended list of sources of information for obtaining quoted prices.

Now is the time to present the draft Procedure, which is the most comprehensive document for the systematic and practical implementation of changes aimed at improving the rules of transfer pricing with raw materials.

The draft Procedure is developed based on the OECD Best Practice Guidelines, which are generally accepted recommendatory and methodological materials in the field of tax regulation of transfer pricing in international practice.

We hope that the implementation of this Procedure will ensure transparency, equality of taxpayers, and fair competition for business – the principles of taxation that are important in the EU.

The EU4PFM project is ready to continue to support the improvement of transfer pricing rules, providing methodological and technical support, fully aware of the importance, need, and complexity of building an effective environment for cooperation between the State Tax Service and big business.

Let’s implement change together!