The principle of an "outstretched hand"
Transfer pricing is the procedure which is related to the definition of profit using the principle of
"outstretched hand". This principle applies in determining the amount of tax on profits received
as a result of a controlled transaction. Controlled transactions, in accordance with Article 39 of
the Tax Code, are economic transactions:
1) in which counterparty is the related non-residents;
2) foreign trade (purchase / sale of goods, services) carried out through non-resident
3) in which the party there is a non-resident, registered or resident of the states which are entered
in the government's "black list";
4) carried out with a non-resident who does not pay corporate income tax, including received
outside the state of registration.
The essence of the principle of "outstretched hand" is that the volume of profits from transactions
between related parties is determined by comparison with identical agreements concluded by
persons who are not connected. According to the PC, the following methods are used for
calculating taxpayers' data: comparative uncontrollable price, resale prices, "expense plus", net
profit, profit sharing. For the application of the method, the expediency of the method chosen in
the particular case is taken into account, the completeness and reliability of the information, the
degree of comparability between controlled and uncontrolled operations. The taxpayer can use
any method that he thinks is best used in this case.
Changes in legislation
Law No. 2455 introduced changes to the transfer pricing and inspection tax legislation related to
1. The threshold of determination of controllability of operations is lowered
The first novelty is the new control objects. Previously, the transactions controlled by the
taxpayer, which received income of at least UAH 50 million for the previous year, were
determined by the controlled ones, but now these transactions amount to more than UAH 10
million for the relevant year. In addition, transactions carried out between permanent
representative offices of non-residents and residents of Ukraine are not controlled in the
understanding of tax legislation in terms of transfer pricing.
2. New criteria of the related of individuals.
Old tax legislation has become in power in determining the the related of individuals. Thus,
related individuals are legal entities in which one and the same individual performs the functions
of an individual management body. For example, if person A is in the position of director in two
LLCs, then the data of LLC is considered related. Also, Article 14 introduces new criteria for
determining the related individuals. Related entities are also business entities that have the same
ultimate owner and legal and natural person in whose ownership the legal entity is located.
3. Determining the threshold for adjustment of prices for goods or services in accordance with
the Tax Code
It is determined that the "threshold" of 10 million is determined not by contractual prices, but by
adjusting prices according to the principle of "outstretched hand". For example, if the prices
indicated in the contract amount to 9 million, but using the above principle, this amount will
exceed 10 million, then the operations will be recognized as controlled.
4. Withdrawal from the government's "black list" of several states
Also, changes have been made in the list of states whose operations are recognized as controlled.
On January 31, 2018, the government adopted a decree of which 5 states were excluded from the
list – Georgia, Hungary, Latvia, Estonia and Malta. In total, the list is 80 states.
5. The list of forms of companies that do not pay corporate tax is approved.
The next novelty is the list of organizational forms of non-residents who do not pay a corporate
tax approved by the government. If a taxpayer purchases goods or services from non-residents in
2018, the organizational form of which is on the list, then he is obliged to adjust the financial
indicator for the reporting period – to increase by 30%. From the value of these goods / services
or confirm the amount of expenses on the principle of "extended hand". In the event of failure to
do so, the taxpayer must confirm the market price of the first demand of fiscal.
6. The application of the differences, in accordance with Article 140 Tax Code, can be verified
In this regard, the legislator specified that the prohibition on tax compliance with the principle of
"extended hand" during the planned documentary verification does not apply to the control over
the compliance of the taxpayer with the requirements for the application of the differences,
which were discussed above.
Another novelty of the law is to provide the fiscal authorities with the opportunity to obtain
information on compliance with the principle of "extended hand" by economic entities by
carrying out counter-checks. That is, taxpayers can specify the data that is necessary for tax
authorities in carrying out the verification and further evaluation of the payer's activity.
8. Adjustment of the amount of profit by the taxpayer
The next innovation is to enable the taxpayer to independently adjust the prices for goods or
services for transactions, if the tax authorities in the course of verification found that the
principle of "extended hand" had not been complied with. The payer may submit settlements-
clarification to the declaration by October 1 of the year, which is the next after the reporting,
without imposing a fine. The self-adjustment limitation applies to those controlled transactions
that are still subject to tax inspections.
9. Clarification of requirements for submission of documentation
The SFS may send an entity requesting submission of documents related to controlled
transactions not earlier than October 1 of the year following the date on which the transactions
were performed. In addition, the data on the documentation submitted is provided. In particular,
it is necessary to specify the data:
– about the person who is the subject of the controlled transaction, and about persons related to
the payer (owning his corporate rights or corporate rights in his ownership);
– description of the organizational and management structures of the taxpayer, with data on the
total number of persons who are employees, as well as on separate departments;
– the financial indicators used in calculating the profitability must be confirmed by the financial
and accounting reporting of the payer or the other party to the transaction.
10. Verification of operations for 2013-2014.
The verification of controlled operations that were carried out during 2013-2014 will be imposed
in accordance with the current legislation, but the methods used at the time of the transaction are
11. Pre-harmonization of pricing has been improved
The law establishes new rules regarding the prior coordination of the definition of prices, in
particular, provides for the possibility for a large taxpayer to enter into an agreement with tax
authorities, according to which:
– his action, may extend throughout the accounting period in which it was concluded, or even in
– the contract may be prolonged for a new term, subject to the conditions of the payer;
– guarantees of the stability of the contract, with the change of legislation or the loss of the status
of a large payer
Also, clarification of the requirements to the order, according to which the preliminary
coordination of pricing is carried out. The procedure is approved by the Cabinet and regulates the
conclusion of the aforementioned agreements.
12. Determination of contract`s value
The contract`s value is the value of the goods sold, which should be displayed under the rules of
accounting before taxation.
The attorneys at law "Bachynskyy, Kolomiets and partners" will assist you in solving issues
related to transfer pricing.]]>
The principle of an "outstretched hand"