Problems of filing reporting on controlled transactions in 2016

According to the requirements of the Tax Code of Ukraine taxpayers, whose amount of controlled transactions with one counterparty exceeds 5 million USD (excluding VAT), are required to present the report on controlled operations for reporting calendar year to central executive body that implements the state tax and the customs policy, before May, 1 of the year following the reporting by electronic means electronically in compliance with the law on electronic document and digital signature.

However, in practice there are difficulties with the implementation of these provisions through incorrect work by means of electronic communication that serves report (MeDOK), namely technical failure in receiving the report and send Pay receipts №2, which leads to the imposition of fines by adopting tax notices for untimely submission report of the controlled transaction.

The mentioned situation occurred repeatedly while presenting the reports by taxpayers over the past year, as confirmed by judicial practice, namely in cases №: 826/24295/15, 86/13813/15, 2a22325 / 10/0570, 816/87/15-A, 810/4758/14 2a-7873/11/1470 and others.

As follows from court practice, most of taxpayers, who are required to submit a report on controlled operations in time, sent an electronic report on controlled operations in compliance with the terms and procedure established for its submission, which was confirmed by obtaining Pay receipts №1 (Receipt about obtaining tax documents in electronic form) , but due to an error in the work of servers of the State Fiscal Service of Ukraine in Pay receipts №2 (receipt of receiving tax documents in electronic form) was noted error and there was not accepted the report after the deadline for filing reports and by the State Fiscal Service of Ukraine it was recognized submission of violation of established terms of Tax Code of Ukraine, which led to the imposition of fines in the future.

Consequently in this situation there arise two problems:

• Determination of the time when reporting is considered filed in the State Fiscal Service of Ukraine;
• Resolving the problem by adoption of reporting that was the rejection by a malfunction in the servers.

Regarding the determining the time when the tax report is considered received by the State Fiscal Service of Ukraine, then in accordance to point 49.9. of the Tax Code of Ukraine, tax return, in it has been filed electronically, is considered adopted at presence receipt for obtaining the tax return (Pay receipts №1). According p. 49.5 article 49 Tax Code of Ukraine in case of filing tax returns electronically, the taxpayer is required to make such dispatch at the address relevant supervisory authority no later than the last hour of the day, which expires such deadline.According to p. 7.7 Order of the State Fiscal Service of Ukraine «On electronic filing of tax reports» from 10.04.2008 No. 233 (hereinafter – the Order), date and time providing a tax document in electronic form to the authorities by State Tax Service is the date and time fixed in the first check. Tax report in electronic form, obtained by State Tax Service later the time limit prescribed by the legislation for tax reporting, is considered filed with violation term.

Under the provisions of point 7 of Instructions to submitting tax documents in electronic form by telecommunications channels taxpayer and bodies of State Tax Service should follow such a procedure:

• The taxpayer creates tax document in electronic form according to the approved format (standard) using specialized software. After preparing the taxpayer of the tax documents with electronic digital signatures of officials of the taxpayer are imposed to it in electronic form.
• After imposition of electronic signatures taxpayer provides encryption of tax documents in electronic form and sends it to the State Tax Service authorities via telecommunication channels. The second copy of tax documents in electronic form is stored in taxpayer.
• On receipt from taxpayer tax documents in electronic form State Tax Service carries its decoding, verifies digital signatures and compliance of electronic document with the approved format (standard).
• The first receipt is a confirmation to the taxpayer of transferring his tax documents in electronic form to the State Tax Authority by means of telecommunication. This receipt is sent by the State Tax Service to the email address of the taxpayer from which was sent tax returns. The second copy of the first receipt in electronic form is stored in the body of state tax service. If the first receipt is not received at the email address of the taxpayer, the tax document is considered missed.
• 5. Confirmation to the taxpayer that his tax documents are accepted in the database of the State Tax Service is the second receipt in electronic form and text format, in which the requisites are defined of the received tax documents in electronic form, correspondence the tax document in electronic version to confirmed format (standard) of electronic document, verification results of digital signature, tax payer information, date and time of receiving, registration number, tax period, for which the tax accounts is presented, and information about receipt sender.
• 6. If the submitted tax documents have been generated with error, second receipt in electronic form and text format will be sent to the taxpayer about refusal in making tax documents in electronic form stating the reasons.
• 7. The date and time providing of tax documents in electronic form to the tax service is the date and time fixed in the first receipt.

If the taxpayer has sent to the state tax service multiple instances of one tax document (in case of correction, failure to receive the first receipt, etc.), the original is considered an electronic document submitted to the state tax service last until the end of the deadline established by the legislation for filing tax reports provided that it was formed properly accepted into the database State Tax Authority and the taxpayer received this second receipt.

So with the above mentioned provisions there follows that if the taxpayer has submitted a report on controlled transactions to the last hour of the day deadline and received a receipt №1 about its report №1, then it is considered to be submitted timely, despite the time of receipt receipts №2, and, the fact that it notes about the error, in case of keeping to the requirements for tax reporting provided in p. 46-49 of Tax Code of Ukraine, the Order the Ministry of Finance of Ukraine «On Approval of the Procedure Forms and reporting on controlled operations» from 18.01.2016 No. 8 Order of the Ministry of income Ukraine «On Approval format (standard) of electronic document on reporting entities and Description of directories published with the format (standard) of electronic document reporting business entities» from 29.11.2013 No.729. Thus, as it is seen from the mentioned judicial practice and the problems faced by taxpayers in 2016 while filing reports on controlled operations by 2015, many reports were missed not because of violations of registration statements, but because of servers’ malfunction of State Fiscal Service.

In order to protect violated rights under the provisions of p. 17.1.7., p. 17.1.8. Art. 17 of Tax Code of Ukraine, taxpayers have ability to appeal decisions, actions (inaction) of controlling bodies (officials) that were provided by regulatory authorities of tax advice; to require from the regulatory authorities the audit data and facts that may be evidence in favor of the taxpayer. The procedure of appealing decisions of regulatory authorities specified in Art. 56 of Tax Code of Ukraine, where it is stated that decisions taken by the supervisory authority may be appealed in an administrative or judicially.

Considering the judicial practice, the decisions of the State Fiscal Service about reporting rejection due to an error in format (standard) report and subsequent notification solution about imposition of fine across violation of terms of filing reports canceled by administrative courts and report is recognized to be submitted in time.

Unfortunately, State Fiscal Service in Ukraine did not take into account the last year's difficulties with the filing of reports and did not improve the serviceability of its servers that caused these same problems with the filing of reports on controlled operations by 2015 this year.

According to Art. 39 of Tax Code of Ukraine, transfer pricing – pricing that is used in controlled operations, namely transactions with related parties - non-residents, non-residents from countries with low tax rates, with exemption from taxation or foreign business transactions for the sale of goods through commission agents - non-residents.

Consequently as it follows from definition of controlled transactions under the Tax Code of Ukraine under the transfer pricing transactions there included only transactions by the taxpayer with non-residents taxpayer that relate to controlled, provided that:

• annual income of the taxpayer from any activity defined by accounting rules, exceeds 50 million (net indirect taxes) for the respective tax (reporting) year;
• the volume of business transactions of the taxpayer with each counterparty, defined by accounting rules, exceeds 5 million (net indirect taxes) for the respective tax (reporting) year.

In most cases it occurs between transnational corporations which units or some subsidiary company is located in Ukraine.

Correct installation of transfer prices is very important both for division, which operates in Ukraine and for the whole organization, to optimize the effectiveness activity of separate divisions of multinational corporations allowing objectively assess the performance of departments and their competitive position in the market.

Correct definition of transactions that fall under the transfer pricing, method of establishment of compliance conditions of controlled operation principle of «arm's length», qualified report on controlled operations and documentation will save the company from significant fines, correctly determine the amount of taxes to be paid to the state budget and adequately displays the transactions between associated companies.