REDUCING THE RISK OF BEING AUDITED BY REPORTING ON CONTROLLED TRANSACTIONS

October, 2017

October 2, 2017 was the deadline for companies to submit their respective reports on controlled transactions carried out in 2016.  In the lead up preparation period, questions arose for the majority of taxpayers, including “How should the report be completed so as to reduce the possibility of an audit by the state fiscal services?”  To answer this question, it is necessary to analyze exactly what data in the report may give rise to additional questions on the part of the fiscal authorities.

Recently, the clarification “About reporting campaigns on controlled transactions” (State Fiscal Service of Ukraine Letter no. 22283 / 7 / 99-99-12-03-07-17, dated August 18, 2017) was published on the site of the State Fiscal Service of Ukraine.  According to this clarification, the methodology for audits regarding controlled transactions, which have been reported on, consists of three stages:

  1. Determining the amount of the company’s annual income for the period under review, using its corporate profit tax declaration, the profit and loss account, and the VAT return.
  2. Establishing the range of non-resident counterparties, using customs declarations, data on an increased financial result in the amount of accrued interest on loans from non-residents and on 30% of the cost of the goods (or works or services) purchased from non-residents registered in low tax jurisdictions, as well as the profit and loss account.
  3. Establishing a place of registration of a counterparty non-resident and determining its relationship with the taxpayer, using relevant logos, information on their relationship, information about the management bodies available on the websites of both the taxpayer and contractor, the logos on letterhead documents, signatures of persons on the documents, and information for determining their connectedness via Internet sites.

Such actions on the part of the fiscal services may lead to discovering unrecorded transactions, which is punishable by a fine in the amount of one percent of the amount of the controlled transactions not declared in the report on controlled transactions, but it cannot be more than 300 times the living wage for able-bodied persons, established by law as of January 1 of the tax (reporting) year for all undeclared controlled transactions. The failure to report controlled transactions, shall be punished by a fine of 300 minimum subsistence level for able-bodied persons, established by law as of January 1 of the tax (reporting) year. Thus, the failure to report or to reflect it as separate transactions entails a big risk for the taxpayer, so the report is still better to apply and to reflect all transactions.  If you have little time to prepare the report, but you have many transactions, use the grouping transaction.  This method of completion will reduce the amount of time that is spent on preparing the report, as it eliminates the need to fill the rooms and the contract date, the brand name, manufacturer and transaction of the subject unit price in the contract currency.  Using groups, carefully check the amount of controlled transactions and do not forget to put down 1 in the graph with information on groupings opposed to grouped transactions being an indicator that the transactions have been grouped.

However, the failure to reflect transactions in a report or the failure to report controlled transactions have negative consequences for the taxpayer.  It is also important to accurately reflect the pertinent information in the report if you do not want to receive a request from the regulatory authorities for transfer pricing documentation, or even for them to review your controlled transactions. In particular, while filling out the report, there are things that are important such as correctly reflecting the code for the means of compliance with the conditions of the “arm’s length” principle for a controlled transaction.  An indication of an inappropriate code in the report (i.e. an indication in the report of the net profit method as the most appropriate method for transactions for interest on a loan) may lead to suspicion on the part of the State Fiscal Service, which will lead the authorities to request to see the documentation and to conduct an audit.

Also, it is important to pay attention to accuracy when filling out the information regarding the non-resident counterparty – namely the name and code of the party, its location, and data on counterparties through which the company is indirectly owned, including the company name, the country of incorporation, and the entity’s respective legal and taxation codes.  All of the above data should be realistically accurate since, if they do not comply with the supervisory authority, further questions may arise, which may ultimately lead to an audit being carried out.

Thus, in preparing the report on controlled transactions, you first need to pay attention to the following points:

  1. Before preparing the report on controlled transactions, it is necessary to analyze all non-residents and verify the jurisdiction in which they are registered due to the fact that not registering a transaction will lead to fines and particular unwanted attention on the part of the fiscal services in future.
  2. The number and monetary value of the controlled transactions because, in the case that there is a discrepancy in the data of the State Fiscal Service, this may give cause for them to request such documentation and verification.
  3. In the case that you have only a limited amount of time to prepare the report, pay special attention to group transactions and re-check the monetary value of the controlled transactions before submitting the report, as well as the availability of units in the graph with Information on groups rather than grouped transactions.
  4. Make sure to properly reflect the code for the means of compliance with the conditions of the “arm’s length” principle for each controlled transaction.
  5. Be sure to properly reflect information about a non-resident counterparty in the report and in the “Bulletin of controlled transactions” (including the name and code of the party and their location), as the discrepancy between information sources that are available to the supervisory authority may attract unwelcome attention from the fiscal services.
  6. In the section of the report “Information on related persons”, if the parties to the controlled transactions are related in accordance with codes 501, 502 and 509, you should specify all the counterparties who are indirect owners, their country of incorporation, and the legal (tax) code of each person.

The above recommendations provide the opportunity to reduce the risks associated with the submission of a report on controlled transactions.

Author: Nazariy Bobersky

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2017-11-01T09:01:23+00:00 01.11.17|Taxation and accounting|