Our experts have prepared basic recommendations for you that should be followed if your company receives intra-group services. You can also use such recommendations in tax planning:
1. Not all intra-group services have a ‘business purpose’
According to the approach developed by the OECD, the purchase of certain types of services might not have a business purpose. If this is the case, the company does not have the right to include the cost of such services in expenses for income tax purposes.
For example, the purchase of services that duplicate the functionality of a Ukrainian company's internal departments or services that are needed exclusively for the parent company (e.g. preparing consolidated financial statements, paying board member expenses, etc.) do not have a ‘business purpose’.
2. Proof of ‘business purpose’ in intra-group services
To prove the existence of a business purpose when purchasing intra-group services, Ukrainian companies should pay attention to the following:
- the management of a Ukrainian company must understand the essence of the services, while the employees who use these services must also be aware of how and through which channels such services are provided;
- primary documents issued upon receipt of services should make it possible to easily understand the type of services rendered; their scope, conditions and term of their provision; the circumstances under which the services were provided; etc.;
- intra-group services should affect the economic activity of a Ukrainian company by, for example, increasing sales / profits or, conversely, reducing costs;
- whether, under similar conditions, third parties would also be willing to order these services.
3. Documenting the receipt of intra-group services
In order to avoid the risk of the tax authorities challenging the company's expenses for income tax purposes, accrual of VAT liabilities or non-resident income tax (e.g. in connection with reclassifying payments for services received as payment for engineering services or royalties), the company needs to ensure proper documentation of the received services.
Case law (e.g. the Resolution of the Supreme Court of Ukraine No. К/9901/25039/18 of 11.12.2018) indicates that the receipt of services cannot be considered properly documented in cases where:
- acts of delivery and acceptance of works (services), reports, tax invoices, and payment orders alone are not reliable evidence of the actual implementation of the disputed transactions;
- the submitted acts of delivery and acceptance of works (services) contain only the name of the services provided, and as such it is impossible to estimate the amount of work performed, time spent, information materials used, or to identify the participation of contractors in the provision of works / services;
- reports do not disclose the scope of services provided (specific actions) and do not identify the persons responsible for their provision and receipt.
In order to confirm receipt of intra-group services, KPMG particularly recommends:
- ensuring the availability of properly executed primary documents (contract / act of delivery and acceptance of services), which must contain all the mandatory details required by Ukrainian law;
- keeping all e-mails that are closely related to the provision / receipt of services;
- documenting the results of the provision services in detail, namely to ensure the existence of:
- a list of services with a detailed description of their essence and results of their provision;
- an assessment of the impact on the company's activities, and financial indicators in particular;
- a list of supporting documents (electronic correspondence) in the context of each of the services provided.
In our experience, one of the most effective ways to avoid tax surcharges is to involve a qualified team that will analyse any tax risks and provide recommendations for mitigation.
How can KPMG help to deal with such risks?
Depending on the specifics of your company, KPMG can:
- analyse services received and their documentation in order to identify tax risks;
- provide recommendations to mitigate such tax risks;
- develop document templates to confirm receipt of intra-group services;
- provide recommendations for the accounting of costs to minimise the risk of challenge by the authorities;
- provide advice and support to the company during tax audits by the State Tax Service of Ukraine.
If you are interested in receiving detailed comments and risk assessments of your company, please contact Oksana Olekhova, Partner, Tax & Legal, KPMG in Ukraine, Liliia Taran, Manager, Tax & Legal, Ukraine and Kateryna Hamretska, manager, Tax & Legal KPMG in Ukraine.