“Forward KT Limited” submitted a report on controlled transactions for 2013 to the tax authority on 13 May 2015. The tax authority found that Forward KT Limited had failed to submit the report within the filing deadline of 1 October 2014. In an appeal “Forward KT Limited” claimed that within the meaning of Article 39 24 of the Tax Code of Ukraine, transactions where one party is a non-resident registered in a country where the income tax rate is 5 percentage points or more lower than in Ukraine, provided that the amount of such transactions exceeds UAH 50 million during a calendar year, are considered controlled. The Republic of Cyprus was included in the list of such countries from 25 December 2013, and the total amount of transactions with a non-resident for the period from 25 December 2013 to 31 December 2013 was only UAH 25.5 million. The Administrative Court dismissed the claim in a ruling later upheld by the Administrative Court of Appeal. The lower courts concluded that transactions with the non-resident party for the period from 1 September 2013 to 31 December 2013 were controlled within the meaning of the Tax Code of Ukraine, and therefore the report on these transactions should have been submitted to the tax authority by 1 October 2014. “Forward KT Limited” then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal and upheld the challenged court decisions. Excerpts “(…)The courts of the previous instances found that the total amount of transactions between the plaintiff and the non-resident counterparty for the period from 23 October 2013 to 31 December 2013 was UAH 82,466,456.12. Given that the plaintiff’s counterparty is registered in a country included in the list of countries where the corporate income tax rate is 5 per cent or more lower than in Ukraine and the total amount of transactions for the relevant calendar year is more than UAH 50 million, the courts of previous instances concluded that the business transactions of the plaintiff and Ktonel Holdings Limited are controlled within the meaning of Article 39 of the Tax Code of Ukraine. In its turn, the plaintiff argues that in this case only those transactions that took place between 25 December 2013 and 31 December 2013, i.e. from the date of adoption of the Cabinet of Ministers of Ukraine Resolution No. 1042-р dated 25 December 2013, should be taken into account. According to the plaintiff, the amount of the transaction for the said period is UAH 25,495,054.92, i.e. the transactions are not controlled. Sub-clause 39.2.1.4. of clause 39.2 of Article 39 of the Tax Code of Ukraine stipulates that the transactions referred to in sub-clauses 39.2.1.1 and 39.2.1.2 of this Article are recognised as controlled provided that the total amount of the taxpayer’s transactions with each counterparty equals or exceeds UAH 50 million (excluding value added tax) for the relevant calendar year. The court agrees with the conclusion of the courts of previous instances that if the total amount of transactions between the taxpayer and a non-resident whose place of registration is a country included in the List exceeds or equals UAH 50 million in the period from 01.09.2013 to 31.12.2013, such transactions are controlled.” (…) “The court agrees with the argument of the court of first instance that the actions of the plaintiff in preparing and submitting to the controlling authority the report on controlled transactions for 2013 on business transactions with Ktonel Holdings Limited refute the plaintiff’s claim that there are no signs of a controlled transaction, since by its actions the plaintiff has actually acknowledged the fact that it has an obligation to submit such a report. In view of the foregoing, the court agrees with the conclusion of the courts of first instance and appeal that the plaintiff’s business transactions with Ktonel Holdings Limited for the period from 1 September 2013 to 31 December 2013 are controlled within the meaning of the Tax Code of Ukraine, and the report on these transactions should have been submitted to the controlling authority by 1 October 2014. The arguments of the cassation appeal have not been confirmed and are refuted by the case file and do not give grounds to believe that the courts of first instance and appellate courts violated the substantive and procedural law in making the contested decision. Pursuant to Article 350(1) of the Code of Administrative Procedure of Ukraine, the cassation court shall dismiss the cassation appeal and leave the court decisions unchanged if it finds that the courts of first instance and appellate courts did not misapply substantive law or violate procedural law in making court decisions or performing procedural actions. The Supreme Court, having reviewed the decision of the court of first instance and the decision of the court of appeal within the arguments and requirements of the cassation appeal and based on the established factual circumstances of the case, having verified the correct application of substantive and procedural law by the courts, sees no grounds to satisfy the cassation appeal”. Click here for English translation Click here for other translation ...

Another time limit that must be considered is the three-year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three-year period begins to run from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention, which can be the time when the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action” or “act of taxation”, or an earlier date as discussed at paragraphs 21-24 of the Commentary on Article 25. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers”. In this regard, it should be noted that element 1.1 of the Action 14 minimum standard includes a recommendation that countries include in their tax treaties paragraphs 1 through 3 of Article 25, as interpreted in the Commentary ...

While it is not possible to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested State, which could accordingly begin to consider the relevant issues with a view to a possible mutual agreement procedure ...

Where a country cannot include the second sentence of paragraph 2 of Article 25 in its tax treaties, element 3.3 of the Action 14 minimum standard states that it should be willing to accept an alternative treaty provision that limits the time during which a Contracting State may make an adjustment pursuant to Article 9(1), in order to avoid late adjustments with respect to which mutual agreement procedure relief will not be available. Such a country would satisfy this element of the minimum standard where the alternative treaty provision was drafted to reflect the time limits for adjustments provided for in that country’s domestic law. That alternative provision, as presented in the Report on BEPS Action 14, reads as follows: [In Article 9]: 3. A Contracting State shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but by reason of the conditions referred to in paragraph 1 have not so accrued, after [bilaterally agreed period] from the end of the taxable year in which the profits would have accrued to the enterprise. The provisions of this paragraph shall not apply in the case of fraud, gross negligence or willful default. Element 3.3 of the Action 14 minimum standard also states that such a country accept a similar alternative provision in Article 7 with respect to adjustments to the profits that are attributable to a permanent establishment ...

The work on Action 14 of the BEPS Action Plan directly addresses the obstacle that domestic law time limits may present to effective mutual agreement procedures. Element 3.3 of the Action 14 minimum standard includes a recommendation that countries should include the second sentence of paragraph 2 of Article 25 in their tax treaties to ensure that domestic law time limits (1) do not prevent the implementation of competent authority mutual agreements and (2) do not thereby frustrate the objective of resolving cases of taxation not in accordance with the Convention ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that any agreement reached by the competent authorities pursuant to the mutual agreement procedure shall be implemented notwithstanding the time limits in the domestic law of the Contracting States. Paragraph 29 of the Commentary on Article 25 recognises that the last sentence of Article 25(2) unequivocally states the obligation to implement such agreements (and notes that impediments to implementation that exist at the time a tax treaty is entered into should generally be built into the terms of the agreement itself). Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may under its domestic law be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or links the implementation of relief to the time limits prescribed by domestic law ...

Nevertheless, the competent authorities should be prepared to enter into discussions under the mutual agreement procedure relating to transfer pricing issues at as early a stage as is compatible with the economical use of their resources ...

In order to minimise the possibility that time limits may prevent the mutual agreement procedure from effectively ensuring relief from or avoidance of double taxation, taxpayers should be permitted to avail themselves of the procedure at the earliest possible stage, which is as soon as an adjustment appears likely. If this were done, the process of consultation could be begun before any irrevocable steps were taken by either tax administration, with the prospect that there would be as few procedural obstacles as possible in the way of achieving a mutually acceptable conclusion to the discussions. However, some competent authorities may not like to be involved at such an early stage because a proposed adjustment may not result in final action or may not trigger a claim for a corresponding adjustment. Consequently, too early an invocation of the mutual agreement process may create unnecessary work ...

The three year time limit raises an issue about determining its starting date, which is addressed at paragraphs 21-24 of the Commentary on Article 25. In particular, paragraph 21 states that the three year time period “should be interpreted in the way most favourable to the taxpayer”. Paragraph 22 contains guidance on the determination of the date of the act of taxation. Paragraph 23 discusses self-assessment cases. Paragraph 24 clarifies that “where it is the combination of decisions or actions taken in both Contracting States resulting in taxation not in accordance with the Convention, it begins to run only from the first notification of the most recent decision or action.” ...

Another time limit that must be considered is the three year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three year period begins to run from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention, which can be the time when the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action” or “act of taxation”, or an earlier date as discussed at paragraphs 21-24 of the Commentary on Article 25. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers” ...

The time limit issue might also be addressed through rules governing primary adjustments rather than corresponding adjustments. The problem of time limits on corresponding adjustments is at times due to the fact that the initial assessments for primary adjustments for a taxable year are not made until many years later. Thus, one proposal favoured by some countries is to incorporate in bilateral treaties a provision that would prohibit the issuance of an initial assessment after the expiration of a specified period. Many countries, however, have objected to this approach. Tax administrations may need a long time to make the necessary investigations to establish an adjustment. It would be difficult for many tax administrations to ignore the need for an adjustment, regardless of when it becomes apparent, provided that they were not prevented by their domestic time limits from making the adjustment. While it is not possible at this stage to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested state so it can begin considering the issue in the context of a prospective mutual agreement procedure ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that an agreement reached pursuant to the mutual agreement procedure be implemented regardless of any time limits in the domestic law of the Contracting States. Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or has no effect on domestic time limits ...