The use of PLATTS provisions in the Tax Code to control transfer pricing may pose risks to the Ukrainian economy

The Supreme Court’s ruling in the Poltava Mining case on June 27, 2022, set a precedent for the right of the State Tax Service of Ukraine to use the PLATTS transfer pricing methodology. This may pose risks to the economy, in terms of pressure on the export-oriented mining sector.

This was emphasized by Volodymyr Bevza, Leading Legal Advisor at Metinvest Holding, at the roundtable discussion «Problems of Exporters in Time of War: Regulatory Challenges» organized by GMK Center.

According to him, this decision of the Supreme Court actually allowed the State Tax Service to use PLATTS as the only source of information for any transfer pricing transaction within the mining, fuel and energy sectors of the economy.

«For the steel business and the mining industry in general, the case of Poltava Mining dated June 27, 2022, when the tax authorities managed to convince the court and the court applied a legal opinion that the provisions of subpara. 14.1.269 and 14.1.270 of the Tax Code of Ukraine should be applied to transfer pricing, was decisive. These rules define the term PLATTS and they appeared on January 1, 2015,» explained the legal counsel.

He added that until now, lawyers dealing with transfer pricing have never heard an explanation of whether the rules 14.1.269 and 14.1.270 apply to transfer pricing at all from the State Tax Service of Ukraine, since such rules were adopted in December 2014 exclusively to regulate the taxation of rent from mining.

Volodymyr Bevza clarified that the State Tax Service has started to selectively apply these rules to mining and processing plants and steel enterprises, but not to all.

«And not for everyone, but only for Ferrexpo and Metinvest, and not only for mining and processing plants. This was also the case for Azovstal and Ilyich Iron and Steel Works, Mariupol Steel Repair Plant, and they started applying these rules in the inspection reports, and these steel plants belong to a different sector of the economy. Allegedly, they are used for transfer pricing,» Bevza added.

He emphasized that according to the Big Four audit firms, the practice of using a single source of information in transfer pricing calculations does not exist anywhere in the world. It can be concluded that Ukraine’s experience contradicts international practice (OECD comments and UN recommendations) and discriminates against Ukrainian business. It is worth noting that the recognition of Platts as the only source of information for TP control is not established in Ukrainian legislation and is manipulative on the part of the State Tax Service, as these rules regulate only rent payments.

In addition, PLATTS price quotes themselves are the result of subjective judgment, and it is impossible to control their correctness. According to the expert, the use of one company’s calculations in transfer pricing cases can lead to pressure on business, as it can easily make an enterprise unprofitable. And the use of one single source of information itself contradicts the essence of transfer pricing.

The Roundtable «Problems of Exporters in Time of War: Regulatory Challenges» was attended by representatives of steel exporting companies, experts, business associations and company lawyers. In particular, Ferrexpo, Centravis, Interpipe, ArcelorMittal Kryvyi Rih, the National Association of Mining Industry of Ukraine, the EBA and others joined the discussion.

During the two-hour discussion, the panelists emphasized the importance of raising transfer pricing issues in the public sphere.