Ukraine progresses with BEPS implementation

In 2013, the Organisation for Economic Co-operation and Development (OECD), jointly with G20 countries, initiated the Base Erosion and Profit Shifting (BEPS) project, the main aim of which was to remove tax planning strategies that exploit gaps and mismatches in tax rules to shift profits to low or no-tax locations with little or no economic activity.

The BEPS project includes 15 Actions that equip governments with the domestic and international instruments required for its implementation. The 15 Actions ensure that profits are taxed where the economic activity generating the profits is performed and where the value is created. In addition, these tools serve to reduce disputes over the application of international tax rules and to standard compliance requirements, giving more confidence to businesses.

Ukraine is making a significant effort to incorporate BEPS into its tax legislation and becoming more involved in the international tax cooperation network. Before the BEPS project was initiated, Ukraine was a party to more than 70 bilateral double tax treaties, the Convention on Mutual Administrative Assistance in Tax Matters and was a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum). As a member of the Global Forum, Ukraine underwent Phase 1 peer review in 2016. Phase 2 peer review is expected in 2018.

Even before the formal initiation of the BEPS project, Ukrainian legislators have been working on harmonising Ukrainian tax legislation with international best practices. The results of their work were fixed in the Tax Code of Ukraine, which was adopted by parliament in 2010. The Tax Code unified all tax norms and regulations that existed at that time, as well as introducing new regulations in the process of its amendment, such as the new transfer pricing rules based on the OECD Guidelines that were introduced in 2013.

The BEPS project not only initiated amendments to Ukrainian tax legislation, but also forced a review of the double tax treaty network. As a result of reviews and renegotiation procedures, the protocols of the existing tax treaties with Cyprus, Luxembourg, the UK, Turkiye and the Netherlands were signed. The protocols addressed issues related to information exchange procedures; in particular, increasing exchange capabilities, as well as increasing the applicable tax on dividends, interests and royalties, and improving the legal background for mutual administrative assistance in levying taxes.

From 1 January 2017, Ukraine became a member of the Inclusive Framework on BEPS implementation. By joining this framework, Ukraine confirmed its commitment to implementing the following four minimum standards: (i) countering harmful tax practices more effectively, taking into account transparency and substance (Action 5); (ii) preventing the granting of treaty benefits in inappropriate circumstances (Action 6); (iii) transfer pricing documentation and country-by-country (CbC) reporting (Action 13); and (iv) making dispute resolution mechanisms more effective (Action 14).

The most recent example confirming Ukraine’s commitment to implementing the BEPS project is signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI Convention) on 23 July 2018. As soon as Ukraine ratifies the MLI Convention, its provisions will become effective and replace the respective double tax treaties in force between Ukraine and those jurisdictions that would sign and ratify the MLI Convention by then.

In order to implement the four minimum standards, Ukraine has to amend its Tax Code. Currently, parliament is considering several draft laws.

One of the draft laws was recently presented to the legal community for discussion, and it includes provisions on the implementation of Action 6, Action 13 and Action 14. Regarding the implementation of Action 13, the draft law offers to introduce a three-tiered transfer pricing documentation approach of a Master File, Local File and a CbC report, and provides timelines for its preparation and submission to tax authorities.

The draft law should introduce a new article to the Tax Code to provide more details on application of the Mutual Agreement Procedure (MAP) by Ukrainian taxpayers. Currently the MAP is available under many effective tax treaties of Ukraine; however, it is rarely used.

In addition, more than seven draft laws on the introduction of the controlled foreign corporations (CFC) rules have been registered with parliament. Upon their adoption, Ukrainian nationals will have to report and to pay tax for the profits received from their controlled corporations.

In the coming years, the government will continue its work on the implementation of the BEPS project. As a further possible step, Ukraine could become a member of the Model Competent Authority Agreement (MCAA), which would allow using the automatic exchange of information (AEOI), according to the international standard adopted by the Global Forum.

The ongoing implementation of the BEPS project will help Ukrainian tax legislation to introduce more developed tax rules in line with the best tax practices of the OECD member states. Furthermore, Ukraine is expected to become more transparent in its tax reforms and in combating tax avoidance.