UAH exchange rate in the Report on Controlled Transactions

What exchange rate should be reflected in column 19.1 of the section "Information on Controlled Transactions" of the annex to the Report on Controlled Transactions, if part of the transaction is reflected in the accounting at the exchange rate on the date of prepayment, and the other part at the exchange rate on the date of shipment?

Subparagraph 39.4.2 of the Tax Code stipulates that taxpayers who conducted controlled transactions (hereinafter referred to as "CTs") in the reporting year are required to submit a CT Report by October 1 of the year following the reporting year.

The form of the Report on Controlled Transactions and the Procedure for its preparation were approved by the Order of the Ministry of Finance No. 8 dated January 18, 2016 (hereinafter - Procedure No. 8).

Paragraph 23 of Sec. IV "Procedure for Filling in the Appendix to the Report" of Procedure No. 8 stipulates that column 19 shall indicate the currency code in accordance with the Classifier of Foreign Currencies and Bank Metals approved by Resolution of the Board of the NBU dated February 4, 1998 No. 34 (as amended by Resolution of the Board of the NBU dated April 19, 2016 No. 269).

If the hryvnia is used as the currency of the contract (agreement) , code 980 is indicated.

Thus, column 19.1 indicates the official exchange rate of the hryvnia to a foreign currency as of the date of the transaction in the accounting records.

According to sub-clause 39.2.1.4 of the TCU, a business transaction for the purposes of transfer pricing is all types of transactions, contracts or agreements, documented or unconfirmed, which may affect the object of taxation by corporate income tax of the taxpayer (for residents of Diia City - taxpayers on special conditions - the financial result before taxation determined in the financial statements in accordance with national accounting regulations (standards) or international financial reporting standards

a) transactions with goods, such as raw materials, finished goods, etc;

b) transactions for the purchase (sale) of services;

c) transactions with intangible assets, such as royalties, licenses, fees for the use of patents, trademarks, know-how, etc., as well as with any other intellectual property;

d) financial transactions, including leasing, participation in investments, loans, guarantee fees, etc;

e) transactions on purchase or sale of corporate rights, shares or other investments, purchase or sale of long-term tangible and intangible assets;

e) transactions (including internal settlements) between a non-resident and its permanent establishment in Ukraine;

f) transactions as a result of which the amount of income and/or financial result of the taxpayer is reduced as a result of full or partial, irrevocable or temporary transfer of functions together with tangible and/or intangible assets (or without them), benefits, risks and opportunities to another taxpayer (other person) in cases where such transfer would not have been made without compensation in relations between unrelated parties, regardless of whether such transactions are reflected in the accounting records.

According to paragraph 1, item 5 of the National Accounting Regulation (Standard) 15 "Income", approved by the Order of the Ministry of Finance dated 29.11.1999 No. 290 (hereinafter - NAR 15), income is recognized when an asset is increased or a liability is decreased, which results in an increase in equity (except for an increase in equity due to contributions from the company's participants), provided that the income can be reliably measured.

Paragraph 1 of clause 21 of NP(C)BU 15 stipulates that income is recognized in accounting in the amount of the fair value of assets received or to be received.

In order to calculate the amount of income denominated in foreign currency, one should be guided by the National Accounting Regulation (Standard) 21 "Effect of Changes in Foreign Exchange Rates", approved by the Order of the Ministry of Finance of Ukraine No. 193 dated 10.08.2000 (hereinafter - NAR 21).

Upon initial recognition, all transactions in foreign currencies should be recorded in the reporting currency by translating the amount in foreign currency using the exchange rate at the date of the transaction (date of recognition of assets, liabilities, equity, income and expenses).

In accordance with paragraph 5 of the National Accounting Regulation (Standard) 16 "Expenses", approved by the Order of the Ministry of Finance dated 31.12.1999 No. 318 (hereinafter - NAR 16), expenses are recognized in the accounting records simultaneously with the decrease in assets or increase in liabilities.

Paragraph 6 of NUAS 16 stipulates that expenses of the reporting period are recognized as either a decrease in assets or an increase in liabilities that leads to a decrease in the company's equity (except for a decrease in equity as a result of its withdrawal or distribution by the owners), provided that these expenses can be reliably measured.

Art. 1 of the Law of Ukraine No. 996-XIV "On Accounting and Financial Reporting in Ukraine" dated 16.07.1999 defines the concept of an asset as resources controlled by an enterprise as a result of past events, the use of which is expected to result in economic benefits in the future.

According to clause 7 of NUAS 16, expenses are recognized as expenses of a certain period simultaneously with the recognition of income for which they were incurred. Expenses that cannot be directly related to the income of a certain period are recognized as expenses of the reporting period in which they were incurred.

Paragraph 2 of clause 6 of NP(S)BU 21 stipulates that the amount of advance (prepayment) in foreign currency received from other persons as payments for the supply of finished goods, other assets, performance of works and services, when included in the income of the reporting period, is translated into the reporting currency using the exchange rate at the beginning of the day of the date of receipt of the advance. If advance payments in foreign currency are received from the buyer in installments and non-monetary assets (works, services) are shipped to the buyer in installments, revenue from the sale of assets (works, services) is recognized at the amount of advance payments using exchange rates based on the sequence of receipt of advance payments.

Thus, it is the transactions on increase or decrease of assets that have an impact on the object of corporate income taxation, and therefore, in accordance with subpara. 39.2.1.4 of the TCU, they are controlled. A prepayment transaction does not affect the object of corporate income tax.

Taking into account the above, it is the transactions on increase or decrease of assets that have an impact on the object of corporate income taxation, which are controlled in accordance with subpara. 39.2.1.4 of the TCU. A transaction of prepayment/receipt of an advance payment does not affect the object of corporate income tax.

Thus, in column 19.1 of the section "Information on Controlled Transactions" of the appendix to the Controlled Transactions Report, the official exchange rate of the hryvnia to a foreign currency as of the date of accounting for the transaction of work performed is indicated.

In this case, if the first event is a prepayment, the supplier does not recognize income from such a transaction at the time of its receipt. Debt to a non-resident counterparty is not subject to restatement as of the balance sheet date, as it is a non-monetary item.

Such income will be recognized at the time of signing the certificate of completion and transferring the results of the work to the customer, but at the official exchange rate of the National Bank of Ukraine to the foreign currency on the date of receipt of the prepayment. It should be noted that when several advances are received, income is determined using the exchange rate effective on the date of receipt of each advance.

Therefore, if payment for goods (works, services) is made in several installments, we recommend that in column 19.1 of the section "Information on controlled transactions" of the appendix to the Controlled Transactions Report, you indicate the average (estimated) exchange rate for the relevant controlled transaction.

For example: an advance payment of USD 100 was received. USD at the rate of UAH 40 per USD 1. US DOLLARS. Work has been completed (signed acceptance certificate) in the amount of USD 300. USD 300 at the rate of UAH 41 per USD 1 on the date of shipment. US DOLLARS. Income is recognized in the amount of UAH 12200 (4000 (100x40) + 8200 (200x41)).

The average (estimated) exchange rate is UAH 40.67 per USD 1. USD (12200/300).