Implementation Of BEPS Action Plan In Ukraine – Tax

ABSTRACT

The article supplies for concise but instructive overview of
the Ukraine’s participation within the BEPS agenda. It examines the
achievement of Ukraine’s dedication to implement the anti-BEPS
initiatives, in addition to observes the best way through which it was made. The
article additionally supplies for transient feedback on potential impact the
launched modifications may need on the prevailing tax practices
exercised by Ukrainian enterprises and worldwide companies
utilizing Ukrainian jurisdiction.

INTRODUCTION

In 2013, Organization for Economic Cooperation and Development,
collectively with G20 initiated Base Erosion and Profit Shifting (BEPS)
Project aimed toward tackling tax planning methods that exploit
loopholes and mismatches in worldwide tax laws to shift
income to low or no-tax jurisdictions with no real financial
exercise.1

The BEPS Project includes 15 Actions, every coping with
explicit abusive devices used to keep away from tax and equips
governments with instruments to counteract the aggressive tax planning
schemes put in place by taxpayers and their advisors to keep away from tax
which put a pressure on worldwide equity and competitiveness
and deprive states of their fair proportion of tax revenues.

Almost 6 years have handed because the ultimate BEPS stories had been
printed and all of the nations had been inspired to
modify their each home tax laws and tax treaties to
issue the outcomes of OECD and G20 work. Ukraine declared its
dedication to comply with the BEPS agenda and implement the proposed
modifications.2

The article supplies for transient overview of Ukraine’s path
in the direction of implementation of BEPS bundle to align its laws
with world’s finest practices.

CONTROLLED FOREIGN COMPANIES

BEPS Action 3 introduces a robust mechanism that tackles tax
avoidance preparations that artificially shift income to low-tax
jurisdictions by way of the usage of subsidiaries established therein,
referred to as managed overseas firms (CFC) guidelines.

CFC guidelines enable governments to tax undistributed income of
non-resident entities within the arms of resident beneficiaries. Such
measures are aimed toward stopping ‘concealment’ of income
(primarily passive-sort) of worldwide teams in jurisdictions
that levy little or no tax on such income.

Ukrainian CFC guidelines apply to Ukrainian resident shareholders,
each integrated entities and people, holding 50% of
company curiosity (collectively 50% for people) in sure
certified non-resident entities (which other than company our bodies
additionally embrace partnerships, trusts and funds), requiring the previous
to report and assess Ukrainian company revenue tax on income
earned by their subsidiaries.

The Ukrainian CFC guidelines are aimed toward cellular passive-sort revenue
which is well shifted to flee taxation in Ukraine. At the identical
time, the Ukrainian laws supplies for the ‘protected
clause’ for in nature passive revenue which in sure circumstances
may very well be considered lively which consequently excludes such revenue
from the scope of Ukrainian CFC guidelines utility. That mentioned, it
may very well be fairly argued that such provisions introduce a
loophole which reserves prospects for abusive methods aimed
at synthetic avoiding of CFC guidelines utility.

Ukrainian CFC guidelines don’t apply if complete annual revenue of all
CFCs underneath the management of a Ukrainian resident doesn’t exceed EUR
2 mln.

Initially scheduled to change into efficient on 1 January 2020,
operation of Ukrainian CFC guidelines was postponed to 1 January
2022.

Although tax planning preparations with the usage of Ukrainian
holding firms are fairly unusual, CFC guidelines will drastically
impact tax place of Ukrainian nationals, beneficiaries of
firms established in low-tax jurisdictions.

REVISED PERMANENT ESTABLISHMENT (PE) DEFINITION

Tax planning methods employed to artificially keep away from a
everlasting institution standing are handled in BEPS Action 7
which proposes modifications to a everlasting institution definition to
embody actions of taxpayers that profit from varied
exceptions to keep away from taxable presence in a supply state.

More particularly, new modifications present for particular
‘substance-over-kind’ anti-abuse rule that curtail
practices whereby worldwide companies deliberately fragment
their actions in a supply state in a approach that every such exercise
in isolation can qualify as preparatory and auxiliary
(‘anti-fragmentation guidelines’). In addition, the brand new guidelines
additionally handle the conditions the place taxpayers artificially break up
lengthy-time period contracts to make every of them not exceed 12-month interval
to bypass the exception relevant to the development web site
works (‘anti-splitting-up’ guidelines).

The PE definition was additional prolonged to incorporate the so-known as
‘dependent agent’ PE. Under this rule, an agent appearing in a
supply state, that habitually concludes contracts within the title of a
non-resident or negotiates the phrases of such contracts which are
subsequently accepted by a non-resident with out important
alterations, shall be deemed as constituting a PE of such a
non-resident within the supply state.

The definition of everlasting institution contained within the
Ukrainian tax laws was all the time in keeping with OECD requirements,
and has been accordingly amended to issue the BEPS
agenda.3

All the proposed modifications had been integrated by Ukraine to its tax
legislation and are efficient as of May 2020. New guidelines set a decrease PE
threshold for a non-resident that would beforehand conduct enterprise
exercise in Ukraine with out making a taxable presence, with all
related tax implications.

Within the Ukrainian context, newly launched prolonged PE
definition will show notably helpful to catch commonplace
practices exercised by Ukrainian companies that use of their
company buildings non-resident firms established in low-tax
jurisdictions (primarily, Cypriot-resident) with nominal administrators.
Such firms are successfully managed by Ukrainian people who
habitually take lively participation in such non-resident
firm’s operational exercise. Former everlasting institution
definition appeared relatively weak to counteract such abusive
practices.

As of now, appreciable variety of tax treaties to which Ukraine
is a celebration present for prolonged PE definition. Having mentioned that,
the Ukrainian legislative definition of a everlasting institution
offering may hardly be relevant to residents of states which
didn’t respectively modified their tax treaties with Ukraine. That
mentioned, the absence of the related provisions in double tax treaties
will be invoked as limiting utility of prolonged Ukrainian PE
definition to the residents of such states.

TRANSFER PRICING

Considerable efforts of OECD and G20 working group had been
devoted to switch pricing (TP) and resulted in adoption of
Action 8-10 which introduces new method in the direction of switch pricing
setting and evaluation, and Action Plan 13 that gives for brand new
switch pricing submitting and reporting necessities.

New legislative modifications had been enacted within the tax legislation of Ukraine
that align Ukrainian switch pricing guidelines with the worldwide
traits.

In explicit, the Ukrainian TP guidelines had been strengthened with the
substance-over-kind precept, in accordance with which the precise
conduct of the events to a transaction is to be
examined.4 In assessing whether or not the remuneration underneath
the overseas financial contract is at arm’s size, not simply
contractual provisions however property used, features carried out, and
dangers assumed by every celebration to a transaction shall be taken into
account.

Should the precise conduct of the events differ from which is
formalized in a contract, contractual distribution of features and
dangers is to be disregarded.5

The subject of how the arm’s size precept is to be
carried out in transactions that contain exploitation of
intangibles has been topic to explicit consideration. Considering
the benefit with which worldwide companies can speculate with
extremely cellular revenue generated by means of intangible property, an
correct evaluation of every explicit actions is required to
arrive at correct remuneration to be allotted to the events
concerned.

In order to cope with such problem, Development, Enhancement,
Maintenance, Protection and Exploitation (DEMPE) idea was
launched, whereby every celebration to the group is to be remunerated
primarily based on the actual features carried out (together with the
related property used and dangers assumed) with respect to the
intangible in query.6

Within the Ukrainian context, DEMPE evaluation could show
notably helpful in attributing income to everlasting
institutions of worldwide companies engaged in software program
improvement actions, as their buildings usually contain IT
engineers positioned in Ukraine.

In phrases of TP reporting, Ukraine adopted the three-tiered
switch pricing reporting underneath Action Plan 13. In addition to
native file, the Ukrainian firms-members of worldwide teams
may also need to submit grasp file and nation-by-nation (CbC)
report, as soon as the related consolidated group revenues exceed the
thresholds established on the proposed by OECD stage of EUR 50 mln
and EUR 750 for grasp file and CbC, respectively.7

The first reporting 12 months for grasp file and CbC report will probably be
2021.

MULTILATERAL INSTRUMENT (MLI)

On February 2019, Ukraine ratified the Multilateral Convention
to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). MLI
is a global treaty that gives for common mechanism to
mechanically implement the treaty-associated ani-abuse guidelines to the
present tax treaties already in place between the contracting
states with out the need to renegotiate the related provisions
on bilateral foundation.

In getting into into the MLI, a contracting state negotiates its
treaty place and opts for the MLI provisions that may have an effect on
the related tax treaties with respect to different contracting states.
The majority of MLI guidelines are elective, nevertheless, there are two
provisions that represent the so-known as ‘minimal customary’
which is topic to obligatory utility. All double tax treaties
supposed to be modified by the MLI shall embrace the principal
goal take a look at (PPT) and mutual settlement process (MAP).

The PPT offers with abusive treaty-purchasing methods and is
aimed toward stopping granting the advantages underneath the tax treaties
(leading to exception from taxation or diminished taxation) in
conditions the place granting such advantages was not supposed. The MAP,
in its flip, addresses the conditions the place inappropriate taxation
was to the detriment of the taxpayers, enabling them to provoke
the related process to treatment such mistreatment.

Principal-purpose take a look at (PPT)

Under the PPT, a contracting state could deny purposes of
advantages underneath the related tax treaties if, having thought-about all
the related details and circumstances, it may very well be fairly
established that one of many principal functions of underlying
association or transaction was to acquire, both immediately or
not directly, such treaty profit.

That mentioned, a global association or transaction shall
typically be considered not satisfying the principal goal take a look at
if it might be affordable to conclude that getting into into such
association/ transaction can’t be substantiated by real
financial goal however is relatively pushed by tax concerns that
are aimed toward acquiring the treaty advantages that in any other case wouldn’t
be obtainable.

Along with the PPT launched to the double-tax treaties by way of
MLI mechanism, Ukraine has additionally integrated it into home tax
laws as a selected anti-avoidance rule. Such home
provision may doubtlessly be invoked in curbing treaty abuse
circumstances with participation of entities-resident in nations which
didn’t modified their tax treaties with Ukraine to incorporate the
PPT.

In mild of the item and goal of the double tax treaties
(additionally embodied within the preamble wording), the latter can’t be
construed as designed to facilitate tax avoidance and evasion. That
mentioned, it shall typically stay doable for a contracting state to
restrict availability of the related tax treaty advantages in sure
abusive state of affairs by making use of its home laws
provisions.

OECD Commentaries on the Articles of the Model Tax Convention
additional affirm that utility of home anti-abuse guidelines to
forestall granting treaty advantages in inappropriate circumstances
wouldn’t be battle with the provisions of the double-tax
treaties limiting the taxation rights of the related state,
even when the related anti-treaty purchasing provision shouldn’t be included
into the related double tax treaty.8

Considering the above, it may very well be fairly claimed that
introduction of the principal goal take a look at in worldwide tax
treaty community together with related home anti-abuse rule will
put an finish to circumstances of flagrant treaty abuse in cross-border
transactions.

MAP

Just like principal-goal take a look at, provisions on mutual settlement
process have additionally been launched to the Ukrainian laws to
resolve tax disputes arising underneath the tax treaties.

Both residents and non-residents who deem that they’ve been
topic to taxation not in accordance with the provisions of the
related DTT can current the related case to the competent
authorities of both contracting state to succeed in passable
resolution.

Having mentioned that, it must be famous that resorts to the MAP are
fairly unusual even all over the world, which makes it notably
tough to estimate how the related process will function in
Ukraine.

OTHER BEPS-RELATED PROVISIONS

Alienation of shares in actual property-wealthy firms. The
beforehand present rule that allowed the supply state to tax
capital features from alienation of shares in immovable property-wealthy
firms was strengthened by 365-day take a look at whereby such income
change into topic to taxation in Ukraine if the shares being disposed
derived their worth, immediately or not directly, from immovable
property positioned in Ukraine at any date through the 365-day interval
previous to such alienation.9 The related mechanism has
additionally been launched that permits to gather the Ukrainian WHT due
in circumstances of each direct and oblique alienation.10

Revised ‘skinny’ capitalization guidelines. Specific
anti-avoidance rule that limits the deductibility of base-eroding
curiosity funds in favour of non-resident recipients in circumstances of
substantial debt financing, which beforehand effected funds to
associated events solely, was amended and, as of 1 January 2021, is
relevant to funds made in favour of all non-residents.
Furthermore, the quantity of curiosity bills allowed as deductible
is decreased from 50% to 30% of EBITDA.11

Introduction of constructive dividends. As of 1 January 2021,
sure funds made in favour of non-residents are handled as
dividend-equal and are, consequently topic to fifteen% Ukrainian
WHT.12

CONCLUSION

Introduction by Ukraine of the world’s finest practices within the
area of fiscal affairs will improve its worldwide standing,
present for greater stage of tax transparency and cooperation.
Adherence to strict requirements aimed toward honest cross-border taxation
has change into inextricably related with the nation’s status
as resistance to hitch anti-BEPS initiatives may very well be fairly
perceived as facilitating tax avoidance and as indicators of
beggar-thy-neighbor insurance policies.

At the nationwide stage it’s anticipated that anti-BEPS measures
will end in greater stage of tax revenues assortment. Most
importantly, new guidelines will present for higher fairness and equality
in financial competitiveness and can align the taxpayers’
place, discouraging big firms from getting into into aggressive
tax planning preparations which end in appreciable tax financial savings,
thus posing much less highly effective enterprises that can’t afford such
advanced buildings at a aggressive drawback.

Footnotes

1. BEPS Actions – Developed within the context of the
OECD/G20 BEPS Project, OECD web site: https://www.oecd.org/tax/beps/beps-actions/

2. On January 1 Ukraine will be a part of the BEPS Action
Plan to sort out Tax Evasion (22 November 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
‘TCU) (because it reads as of May 2020)

4.

5. Article 39.2.2.10 of the TCU (because it reads as of
January 2019)

6. Article 39.2.2.9 of the TCU (because it reads as of
January 2019)

7. Article 39.4.7 and Article 39.4.10 of the
TCU

8. OECD Model Tax Convention on Income and on
Capital: Commentary on Article 1 para 61 and 77 (2017), Models
IBFD

9. Item ‘e’ of Article 141.4.1 of the TCU
(with the related modifications efficient as of July
2020)

10. Art.141.4.2 of the TCU (with the related modifications
efficient as of July 2020), whereby a non-resident that acquires
shares in Ukrainian property-wealthy firm from different non-resident
shall register with the Ukrainian tax authorities previous to such
acquisition, withhold the Ukrainian tax due and remit it to the
state finances.

11. Article 140.1-140.3 of the TCU

12. Art.14.1.49 of the TCU. The related modifications took
impact on 1 January 2021.

The content material of this text is meant to offer a basic
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