Aligning Uzbekistan transfer pricing regulations with international best practice
November 2021 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2021 Issue
Starting from 2016, after the assumption of power by the new president, Uzbekistan entered a period of drastic economic reforms. One of the main reasons for the reforms, including an overhaul of the tax system, is to create an environment for normal operation of effective market mechanisms.
These reforms include: (i) changes to rates for value-added tax (VAT), excise tax, corporate income tax (CIT) and unified social payment (USP); (ii) a ‘risk-based’ bank account suspension procedure; (iii) detailed transfer pricing (TP) regulations; (iv) controlled foreign corporation rules; (v) thin capitalisation rules; (vi) the introduction of a beneficial ownership concept; (vii) consolidated group of taxpayers; (viii) taxation of ‘e-services’ provided by non-residents; and (ix) an amendment to the tax residency definition.
On 2 September 2019, the draft tax code of the Republic of Uzbekistan was released for public discussion. The new tax code was developed by the Ministry of Finance and State Tax Committee of the Republic of Uzbekistan in collaboration with the International Monetary Fund (IMF), the World Bank, as well as international and national experts.
The new tax code introduced elaborate TP provisions, including definitions of related parties, controlled transactions, pricing methods, documentation and reporting requirements and pricing agreements, among others. These new TP provisions, which make reference to the guidance set out in the Organisation for Economic Co-operation and Development (OECD) guidelines, will be effective from 1 January 2022.
In this article, we provide an overview of the new Uzbek TP provisions as well as where these provisions deviate significantly from the OECD guidelines. It should, however, be noted that at the time of writing, no best practice has been established.
Related parties
According to the new tax code, the TP provisions apply to both local transactions between Uzbekistan residents, as well as to cross-border transactions with related parties. For TP purposes, legal entities and individuals are considered to be related in the following cases: (i) if indirect and direct share participation of one legal entity and individual in another legal entity exceeds 20 percent; (ii) where one party has more than a 20 percent direct or indirect participation in each of these entities; (iii) where a legal entity and individual is authorised to appoint a sole executive body, 50 percent of the collective executive body or board of directors of the legal entity; (iv) legal entities in which no less than 50 percent of the collective executive body is appointed by the same individual; (vi) legal entities in which no less than 50 percent of the collective executive body are the same individuals; (vii) where a legal entity and individual is acting as its sole executive body; (viii) legal entities in which the same individual is a sole executive body; (ix) legal entities and individuals where the chain of direct participation in each other exceeds 50 percent; (x) individuals, if one of them is a subordinate employee; or (xi) an individual, his or her spouse, parents (including foster), parents of spouse, children (including adopted), brothers and sisters (with complete and incomplete kinship), brothers and sisters of spouse, guardian and ward.
For determination of the participation share in a legal entity, the shares of an individual, his or her spouse and parents may be jointly considered.
Controlled transactions
Generally, transactions between Uzbek resident related parties are viewed as controlled if the amount of annual turnover between such parties exceeds UZS5bn (approximately US$530,000) per calendar year. Local related-party transactions may also be viewed as controlled if the turnover exceeds a lower threshold of UZS500m (approximately US$47,000) and the following criteria is met: (i) one of the parties uses a special tax regime; (ii) at least one of the parties is exempt from taxation; and (iii) the subject of the controlled transaction is a mineral resource, envisaging ad valorem tax rate.
As for cross-border transactions, controlled transactions include operations between related parties, as well as operations (including those between non-related parties) involving goods traded on global commodity exchanges that fall within commodity groups such as non-ferrous metals, precious metals and stones, natural gas, mineral fertilisers, cotton fibre and yarn, or transactions where one of the parties is registered in a tax haven jurisdiction.
Considering that at the time of writing there are no established best practices regarding related parties and controlled transactions in Uzbekistan, the conservative approach would be to deem any interaction with a related party as a controlled transaction.
TP compliance and documentation
According to the TP provisions, taxpayers should report on their controlled transactions no later than the date of filing of the annual financial reports for the year in which the controlled transactions took place.
Tax authorities may request that taxpayers provide documentation on a particular transaction or group of similar transactions. Such documentation may include a document or set of documents prepared in a free format that contains certain information (e.g., a list of parties involved in the transaction, description of the transaction, applied pricing method, payment terms, functions of parties). The TP provisions do not provide specific guidance on the format of the document, however as a general observation, the format as set out in the 2017 version of the OECD guidelines is likely to be acceptable. Once it receives a request, a taxpayer has 30 calendar days to provide the documentation to the tax authorities.
Tax authorities cannot request TP documentation before 1 June of the year following the calendar year when the controlled transaction took place.
TP methods
The new Uzbekistan tax code outlines the following five methods, similar to those set out in the OECD guidelines and considered to be best international practice, to analyse the arm’s length nature of the controlled transactions: (i) comparable uncontrolled price (CUP) method; (ii) resale price method; (iii) cost plus method; (iv) transactional net margin method; and (v) profit split method.
Even though the TP provisions do not set out a specific hierarchy for use of the methods, the CUP should be a priority when analysing the arm’s length nature of the controlled transactions. If necessary, a combination of two or more methods may be used.
Foreign comparables and benchmarking
General provisions in the Uzbekistan tax code allow for the possibility of selecting foreign comparables if no local ones are available. The use of commercially available databases, such as Amadeus and Orbis, is endorsed when applying profit-based TP methods. Similarly, databases such as Bloomberg and Refinitiv can be used for financial transactions.
No local practice regarding the update of benchmarking studies or the year to be covered by a study is currently available.
Selection of foreign tested party
The Uzbekistan tax authority accepts foreign tested parties. However, a strong preference is made for local tested parties.
Penalties
Liability for underpayment of taxes as a result of applying non-market prices in controllable transactions may result in a penalty of 40 percent of underpaid tax. Moreover, failure to provide a report on controlled transactions (i.e., TP documentation), or submitting a report with incorrect information, may result in a fine of UZS 500,000.
Advance pricing agreement
Taxpayers qualified as ‘large taxpayers’ are eligible to apply to tax authorities for an advance pricing agreement (APA). APAs may be valid for up to three years and extended for an additional two years upon the taxpayer’s request.
Conclusion
Uzbekistan is in the process of taking significant steps to align itself with international best practices regarding TP. During its first year, it is likely that there will be a degree of uncertainty regarding how to approach certain transactions and what the local tax authority will consider best practices. That said, the introduction of clear and transparent TP provisions and the proper enforcement of these provisions are likely to encourage foreign investment and provide a boost to the economy as a whole.
Ben Pietersen is a senior manager at PwC. He can be contacted on +995 (599) 025 840 or by email: ben.pietersen@pwc.com.
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Ben Pietersen
PwC
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Aligning Uzbekistan transfer pricing regulations with international best practice