ABSTRACT
The article provides a compact but instructive overview of
Ukraine's participation in the BEPS agenda. It examines the
Fulfillment of Ukraine's commitment to implement anti-BEPS
Initiatives and watch the way they were done. The
Article also contains brief comments on possible effects of the
introduced changes could have the existing tax practices
exercised by Ukrainian companies and international companies
using the Ukrainian jurisdiction.
INTRODUCTION
2013, Organization for Economic Cooperation and Development,
Base Erosion and Profit Shifting (BEPS) initiated jointly with G20
Project to combat tax planning strategies that are taking advantage of
Loopholes and incongruences in international tax legislation are shifting
Profits in low or non-tax areas with no real economic ones
Activity 1
The BEPS project includes 15 actions, each dealing with
particularly abusive instruments for tax evasion and equips
Governments with tools to combat aggressive tax planning
Tax avoidance systems put in place by taxpayers and their advisors
that put a strain on international fairness and competitiveness
and deprive states of their fair share of tax revenues.
Almost 6 years have passed since the final BEPS reports were published
published and all interested countries were encouraged to
change both their national tax laws and their tax treaties to
take into account the results of the work of the OECD and the G20. Ukraine declared theirs
Commitment to follow the BEPS agenda and implement the proposed ones
Changes 2
The article provides a brief overview of Ukraine's path
to implement the BEPS legislative approximation package
with the best practices in the world.
CONTROLLED FOREIGN COMPANIES
BEPS Action 3 introduces an effective anti-tax mechanism
Avoidance regulations that artificially shift profits to low taxes
Jurisdictions through the use of subsidiaries located there,
known as the Rules for Controlled Foreign Enterprises (CFC).
CFC rules allow governments to withdraw undistributed profits from
non-resident entities in the hands of resident beneficiaries. Such
Measures are aimed at preventing profits from being “hidden”
(mainly passive type) from international groups in jurisdictions
who levy little or no tax on such profits.
Ukrainian CFC rules apply to shareholders resident in Ukraine,
both corporations and natural persons who hold 50% of the shares
Company participation (together 50% for individuals) in certain
qualified non-resident companies (those other than legal
also partnerships, trusts and funds) which require the former
Report and assessment of Ukrainian corporate income tax
earned by its subsidiaries.
The Ukrainian CFC rules are aimed at mobile passive income
which can easily be postponed to avoid taxation in Ukraine. Simultaneously
Time sees the Ukrainian legislation as the "safe"
Clause & # 39; for a passive income that in certain cases
could be considered active, thus excluding such income
from the scope of the Ukrainian CFC rules. That is, it is
It could reasonably be argued that such provisions would constitute a
Loophole that reserves opportunities for abusive techniques
in the artificial avoidance of the application of the CFC rules.
The Ukrainian CFC rules do not apply if the total annual income of everyone
CFCs under the control of a Ukrainian resident do not exceed EUR
2 million
Originally planned with effect from January 1, 2020,
Application of the Ukrainian CFC rules has been postponed to January 1st
2022.
Although tax planning agreements with the use of the Ukrainian
Holding companies are quite unusual, CFC rules are becoming drastic
the tax position of Ukrainian nationals, beneficiaries of
Companies based in low-tax countries.
REVISED DEFINITION OF ESTABLISHMENT (PE)
Tax planning techniques to artificially avoid
The permanent establishment status is dealt with in BEPS Action 7
proposes changes to an establishment definition in order to
include activities of taxpayers by various
Exceptions to avoid taxable presence in a source country.
More precisely, new changes make for special ones
"Substance-over-form" rule for combating abuse, which is restrictive
Practices in which international companies intentionally fragment
their activities in a source state such that each of these activities
isolated as preparatory and supportive
("Anti-Fragmentation Rules"). The new rules also apply
also address the situations where taxpayers are artificially split
long-term contracts so that each of them cannot exceed a period of 12 months
to circumvent the exception applicable to the construction site
works (& # 39; anti-splitting-up & # 39; rules).
The PE definition was expanded to include the so-called
"dependent agent" PE. According to this rule, an agent who is in a
Source state, usually making contracts on behalf of a. concludes
Non-residents or negotiate the terms of such contracts that
retrospectively accepted by a non-resident without anything worth mentioning
Changes are deemed to be the permanent establishment of such
not resident in the source country.
The definition of the permanent establishment in
Ukrainian tax legislation has always complied with OECD standards,
and has been modified accordingly to take the BEPS into account
Agenda 3
All of the proposed changes have been incorporated into its taxation by Ukraine
Act and come into force from May 2020. New rules set a lower PE
Threshold for a non-resident who was previously able to do business
Doing business in Ukraine without creating a taxable presence, with everyone
corresponding tax implications.
Extended PE newly introduced in the Ukrainian context
Definition will prove particularly useful in capturing platitudes
Practices of Ukrainian companies operating in their
Corporate structures of non-resident companies based in low-tax countries
Jurisdictions (mainly based in Cyprus) with nominal directors.
Such businesses are effectively run by Ukrainian people who
usually actively participate in such non-residents
operational activity of the company. Former permanent establishment
Definition seemed rather weak to counteract such abuses
Practices methods exercises.
There are currently a significant number of tax treaties signed by Ukraine
is a party that provides for an expanded PE definition. Nevertheless
the Ukrainian legal definition of permanent establishment
For residents of states that
have not changed their tax treaties with Ukraine accordingly. The
said the lack of relevant provisions in double taxation treaties
can be cited as a restrictive application of the extended Ukrainian PE
Definition for the residents of such states.
TRANSFER PRICES
Considerable efforts were made by the OECD and G20 working groups
Dedicated to transfer pricing (TP) and led to the introduction of
Action 8-10, which introduces a new approach to transfer pricing
Recruitment and Evaluation and Action Plan 13, the new one
Transfer pricing and reporting obligations.
New legislative changes have been enacted in tax law in Ukraine
which the Ukrainian transfer pricing rules to the global
Tendencies.
In particular, the Ukrainian TP rules were modified with the
Substance-over-form principle, according to which the actual
Behavior of the parties to a transaction is
4 When assessing whether the remuneration is below
the foreign trade agreement is customary in the market, not just a necessity
contractual provisions, but assets used, functions performed and
Account must be taken of the risks assumed by each party to a transaction
Account.
Should the actual behavior of the parties deviate from
formalized in a contract, contractual distribution of functions and
Risks are negligible. 5
The question of the arm's length principle
implemented in transactions that exploit
special attention was paid to intangibles. In view of
the ease with which international companies can speculate
highly mobile income from the use of intangible assets, and
An accurate assessment of each individual activity is required in order to
to achieve an appropriate remuneration that is attributable to the parties
involved.
To cope with such challenges, develop, improve,
Maintenance, protection and recovery concept (DEMPE) was
introduced, with each party in the group being rewarded
based on the respective functions performed (together with the
associated assets and risks assumed) in relation to the
intangible in question 6
In the Ukrainian context, the DEMPE analysis can prove that
especially useful in assigning winnings to permanent ones
Subsidiaries of international companies that deal with software
Development activities, as their structures often include IT
Engineers in Ukraine.
In terms of TP reporting, Ukraine has the three tier
Transfer pricing reporting in accordance with Action Plan 13. In addition to 13.
local file, the Ukrainian company members of international corporations
must also submit Masterfile and Country-by-Country (CbC)
report as soon as the relevant consolidated group revenues reach the
EUR 50 million thresholds set at the level proposed by the OECD
or 750 EUR for Masterfile and CbC.7
The first reporting year for Masterfile and CbC report is
2021.
MULTILATERAL INSTRUMENT (MLI)
Ukraine ratified the multilateral agreement in February 2019
Implementation of tax-related measures to prevent BEPS (MLI). MLI
is an international treaty that provides a universal mechanism to
the contract-related anti-abuse rules automatically into the
existing double taxation agreements between the contracts
States without the need to renegotiate the relevant provisions
on a bilateral basis.
When joining the MLI, a contracting state acts as its own
Contract position and opts for the MLI provisions that will have an impact
the relevant double taxation agreements with other contracting states.
Most MLI rules are free to choose, but there are two
Provisions that represent the so-called "minimum standard"
which is subject to application. All double taxation treaties
that are to be changed by the MLI includes the client
Purpose test (PPT) and mutual agreement procedure (MAP).
The PPT deals with abusive techniques of contract buying and is
with the aim of preventing the benefits of double taxation agreements from being granted
(thereby exemption from taxation or reduced taxation) in
Situations in which the granting of such advantages was not intended. The map,
again deals with situations where there is inappropriate taxation
went to the detriment of the taxpayer, so they
the appropriate procedure to remedy such abuse.
Main purpose test (PPT)
According to the PPT, a state party may submit requests
Benefits according to the relevant double taxation treaties, if all of them are taken into account
the relevant facts and circumstances, it might be reasonable
found that one of the primary purposes of the underlying asset
Agreement or transaction was obtained, either directly or
indirectly such a contractual advantage.
That said, there must be an international agreement or transaction
generally be considered non-fulfilling the primary purpose test
if it were reasonable to conclude that the conclusion of such
Agreement / transaction cannot be justified by real
economic purpose, but is rather driven by tax considerations
aim to achieve the contractual benefits that would otherwise not be possible
be available.
Together with the PPT introduced in the double taxation treaty
MLI mechanism, Ukraine has included it in its domestic tax as well
Legislation as a specific anti-circumvention rule. Such domestic
Provision could potentially be used to curb contract abuse
Cases involving Entities residing in countries that
have not changed their tax treaty with Ukraine to the
PPT.
Given the purpose and purpose of double taxation treaties
(also included in the wording of the preamble), the latter cannot be
designed to facilitate tax avoidance and evasion. The
In other words, it is basically still possible for a state party
limit the availability of the relevant benefits from the double taxation treaty in certain cases
abusive situation through application of national law
Provisions.
OECD comments on the articles of the model tax treaty
further affirm that the application of national anti-abuse legislation to
to prevent the granting of contractual advantages in unreasonable circumstances
would not conflict with the provisions of double taxation
Agreements that restrict the taxation rights of the state concerned,
even if the corresponding purchase provision contrary to the contract is not included
in the corresponding double taxation agreement. 8
Given the above, it could reasonably be argued that
Introduction of the main purpose test in international tax law
Contract network together with the relevant national anti-abuse regulations
the cases of blatant misuse of contracts in cross-border
Transactions.
MAP
Mutual Agreement Provisions
Procedures were also introduced into Ukrainian legislation in order to
Settlement of tax disputes arising from double taxation agreements.
Both residents and non-residents who believe they are
taxable that does not comply with the provisions of
the responsible DBA can submit the relevant case to the responsible one
Authorities of one of the contracting states satisfactory
Solution.
However, it should be noted that the MAP
quite unusual even around the world, which makes it special
difficult to estimate how the corresponding procedure in
Ukraine.
OTHER BEPS RELATED PROVISIONS
Sale of shares in real estate-rich companies. The
pre-existing rule allowing the source state to tax
Capital gains from the sale of shares in immovable property
Company was empowered through a 365-day test that revealed such gains
become taxable in Ukraine when the shares are sold
their value directly or indirectly from immovable
Ownership in Ukraine at any point during the 365 day period
before such alienation.9 The relevant mechanism has
has also been introduced, which makes it possible to collect the Ukrainian WHT payment
in the case of direct and indirect alienation. 10
Revised rules for "thin" capitalization. Specific
Anti-circumvention rule that limits the deductibility of base eroding
Interest payments in favor of foreign recipients at recipient
extensive debt financing that previously made payments to
related parties only, has been changed and has been in effect since January 1, 2021
applies to payments in favor of all non-residents.
In addition, the amount of deductible interest expenses
is reduced from 50% to 30% of EBITDA. 11
Introduction of constructive dividends. From January 1, 2021,
certain payments in favor of non-residents are treated as
Dividend equivalent and therefore subject to 15% Ukrainian
WHT.12
CONCLUSION
Introducing World Best Practices to Ukraine by Ukraine
Fiscal policy will strengthen its international reputation,
provide a higher level of tax transparency and collaboration.
Adherence to strict standards for fair cross-border taxation
is inextricably linked with the country's prestige
as resistance to joining anti-BEPS initiatives might be reasonable
as a tax avoidance relief and as a sign of
Beggar-thy-neighbor-policy.
At the national level, anti-BEPS measures are expected
will lead to higher tax revenues. Most
It is important that new rules ensure more justice and equality
economic competitiveness and will align taxpayers
Position that prevents large corporations from being aggressive
Tax planning agreements that result in significant tax savings,
creating less powerful companies that cannot afford them
complex structures with a competitive disadvantage.
Footnotes
1. BEPS Actions – Developed in the context of the
OECD / G20 BEPS project, OECD website: https://www.oecd.org/tax/beps/beps-actions/
2. On January 1st, Ukraine will join the BEPS action
Plan to Combat Tax Evasion (November 22, 2016), News The Ministry of
Finance of Ukraine: https://www.mof.gov.ua/en/news/-sichnia-ukraina-pryiednaietsia-do-planu–po-borotbi-z-unyknenniam-vid-opodatkuvannia
3. 3 Article 14.1.193 of the Tax Code of Ukraine (the
& # 39; TCU) (as of May 2020)
4th
5. Article 39.2.2.10 of the TCU (in the version dated
January 2019)
6. Article 39.2.2.9 of the TCU (in the version dated
January 2019)
7. Articles 39.4.7 and 39.4.10 of the
TCU
8. OECD Model Conventions on Income and Others
Capital: Commentary on Section 1 Paragraphs 61 and 77 (2017), models
IBFD
9. Article 141.4.1 number e of the TCU
(with the corresponding changes from July
2020)
10. Art.141.4.2 of the TCU (with the corresponding changes
valid from July 2020), whereby a non-resident who
Shares in a Ukrainian high net worth company from other non-residents
must register with the Ukrainian tax authorities beforehand
Acquisition, withheld the Ukrainian tax and sent to the
State budget.
11. Articles 140.1-140.3 of the TCU
12. Article 14.1.49 of the TCU. The appropriate changes took place
effective from 01.01.2021.
The content of this article is intended to provide a general overview
Guide to the subject. Expert advice should be sought
about your particular circumstances.