Ukraine im­pov­er­ished by abuses in trans­fer pric­ing

Kyiv Post - - Business Focus - BY I GOR KOSSOV [email protected]

Tax eva­sion has helped to im­pov­er­ish Ukraine and en­rich the coun­try’s elite. But it’s get­ting more dif­fi­cult, say tax ex­perts.

In­creas­ing global adop­tion of rules gov­ern­ing Base Ero­sion and Profit Shift­ing, or BEPS, is mak­ing many ag­gres­sive tax avoid­ance schemes more com­pli­cated and less ef­fec­tive. Still, sig­nif­i­cant gaps re­main.

Ukraine is among the many coun­tries that are try­ing to bet­ter reg­u­late the main av­enues of tax avoid­ance: deals among com­monly-owned com­pa­nies, also known as trans­fer pric­ing.

Ag­gres­sive use of trans­fer pric­ing has been a ma­jor tool in pump­ing prof­its out of Ukraine and into low­tax ju­ris­dic­tions. This al­lowed some com­pa­nies to avoid bil­lions of dol­lars in taxes. In­ter­na­tional co­op­er­a­tion is help­ing to stop some of these prac­tices.

How­ever, some or­ga­ni­za­tions warn that large com­pa­nies stay ahead of the new rules by us­ing tech­niques that aren’t yet reg­u­lated. These in­clude the use of in­tan­gi­ble as­sets such as roy­al­ties on in­tel­lec­tual prop­erty to move value across na­tional bound­aries and avoid tax­a­tion. This is es­pe­cially true among com­pa­nies with dig­i­tal plat­forms and ser­vices.

“BEPS made mar­ginal progress to at­tack the low-hang­ing fruit,” Tom­maso Fac­cio, head of the sec­re­tar­iat at the In­de­pen­dent Com­mis­sion for the Re­form of In­ter­na­tional Cor­po­rate Tax­a­tion, told the Kyiv Post. How­ever, it “failed to deal with the ma­jor is­sue of tax avoid­ance by multi­na­tion­als which is the use of trans­fer pric­ing.”

The Or­ga­ni­za­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment, which cre­ated the 15-point BEPS In­clu­sive Frame­work for coun­tries to fol­low, has rec­og­nized these lim­i­ta­tions and is de­bat­ing ways to up­date the frame­work. In the mean­time, some coun­tries are go­ing ahead with their own so­lu­tions.

Achieve­ments

The BEPS In­clu­sive Frame­work isn’t a law but con­tains a se­ries of guide­lines. Coun­tries that don’t adopt a min­i­mal num­ber of BEPS ac­tions risk be­ing black­listed by com­pli­ant coun­tries, who may im­pose stricter tax regimes on com­pa­nies with af­fil­i­ates in non-com­pli­ant ju­ris­dic­tions.

Ukraine had pre­vi­ously com­mit­ted it­self to adopt­ing four of the OECD’s 15 rec­om­mended BEPS ac­tions. But these didn’t in­clude ac­tions num­ber 8 through 10, which con­cerned trans­fer pric­ing.

Then, later, the Min­istry of Fi­nance rec­om­mended that Ukraine adopt these as well. In Jan­uary, Ukraine up­dated its tax leg­is­la­tion, which now con­tains el­e­ments of ac­tions 8–10, ac­cord­ing to Mykola Mishin, a trans­fer pric­ing ex­pert with the global au­dit firm KPMG.

One such el­e­ment is the “sub­stance over form” prin­ci­ple. This gives Ukrainian tax au­thor­i­ties the dis­cre­tion to tax deals based on what they de­ter­mine to be the trans­ac­tion’s true na­ture, rather than what has been re­ported by the com­pany.

For ex­am­ple, “if a com­pany acted as a pur­chaser but signed an agency agree­ment… tax au­thor­i­ties may treat it as a pur­chaser of goods and not as an agent,” Vadim Medvedev, a part­ner with the Avel­lum law firm, told the Kyiv Post.

Yuriy Net­skiy, head of tax at the Ukrainian branch of au­dit firm Mazars, said that the coun­try has up­dated its trans­fer pric­ing laws reg­u­larly since they were in­tro­duced in 2013, plug­ging gaps and mak­ing the laws fairer for com­pli­ant com­pa­nies. With only six years of ex­pe­ri­ence, Ukraine’s trans­fer pric­ing laws are not as so­phis­ti­cated as those of more devel­oped coun­tries, but lo­cal ex­per­tise is grow­ing.

Mul­ti­ple ex­perts told the Kyiv Post that Ukraine, much like other de­vel­op­ing coun­tries, has lim­ited re­sources to de­vote to trans­fer pric­ing mon­i­tor­ing and en­force­ment, which can get so com­pli­cated that Medvedev likens it to “rocket sci­ence.”

Still, it helps that BEPS reg­u­la­tion is a global phe­nom­e­non. Mishin says that he has seen other coun­tries pro­vid­ing Ukraine with in­for­ma­tion that will help lo­cal tax au­thor­i­ties make in­formed de­ci­sions on how trans­ac­tions should be priced for the pur­pose of tax­a­tion.

Short­com­ings

Mul­ti­ple ex­perts spoke of the weak­ness of the BEPS In­clu­sive Frame­work in reg­u­lat­ing ag­gres­sive trans­fer pric­ing and other profit shift­ing. In March, In­ter­na­tional Mone­tary Fund chief Chris­tine La­garde wrote an op-ed in the Fi­nan­cial Times, where she as­serted that de­vel­op­ing coun­tries are es­pe­cially ex­posed to profit shift­ing.

Coun­tries that are not mem­bers of the OECD — an in­ter­na­tional or­ga­ni­za­tion largely made up of high-in­come states — col­lec­tively lose about $200 bil­lion in rev­enue per year due to com­pa­nies shift­ing prof­its to tax havens, she said. La­garde added that, de­spite re­cent ef­forts to com­bat this prob­lem, vul­ner­a­bil­i­ties re­main.

“The cost (to) multi­na­tion­als to do tax avoid­ance has slightly in­creased. But it has not changed dra­mat­i­cally,” said Fac­cio.

He added that, while com­pa­nies now have to do more to prove they have a phys­i­cal pres­ence and sub­stan­tial busi­ness trans­ac­tions in a low-tax coun­try, they can still do it quite eas­ily.

Ukraine is no ex­cep­tion. Last year, Ukraine’s Econ­omy Min­istry stated that more than 80 per­cent of Ukrainian ex­ports are in­di­rect, done through in­ter­me­di­aries. A study by Fac­cio and fel­low re­searchers es­ti­mated that iron ore ex­porters alone po­ten­tially shifted $520 mil­lion in tax­able prof­its out of Ukraine be­tween 2015 and 2017.

“Im­ple­ment­ing ba­sic trans­parency rules makes this process of shift­ing prof­its less easy for the com­pa­nies, more com­pli­cated, but it can­not stop this process in case some­body would like to ben­e­fit from such un­fair ac­tions,” said Net­skiy.

In the past, ag­gres­sive trans­fer pric­ing could have been as sim­ple as sell­ing goods to your over­seas

The State Fis­cal Ser­vice build­ing in Kyiv, pho­tographed in Au­gust, 2018. The ser­vice's tax au­thor­i­ties have been try­ing to crack down on ag­gres­sive trans­fer pric­ing prac­tices by com­pa­nies. (UNIAN)

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