"Ukraine's TP Penalties vs Australia's Iron Fist: What India Must Learn Now ??"

A Global Perspective and Lessons for India- Ukraine Strengthens Transfer Pricing Compliance:

As international tax regulations continue to evolve, Ukraine has taken a significant step forward in strengthening its transfer pricing (TP) compliance framework. The State Tax Service of Ukraine recently announced new penalties for transfer pricing reporting violations, effective March 25, 2025, signaling a more robust approach to international tax compliance.

Ukraine's New Penalty Structure- The new framework introduces substantial penalties:

1. Non-submission of international group participation notification: UAH 292,000 (approximately USD 7,300 / INR 6,06,000)
2. Late submission of participation notification: UAH 146,000 (approximately USD 3,650 / INR 3,03,000)
3. Late declaration of controlled transactions: UAH 2,920 (approximately USD 73 / INR 6,060) per day of delay, capped at either UAH 876,000 (USD 21,900 / INR 18,18,000) or 0.5% of undeclared transaction value, whichever is lower

Global Context and Comparative Analysis

• European Union

The EU generally maintains stricter penalties, with countries like Germany imposing fines up to EUR 1 million (INR 8.9 crores) for serious transfer pricing violations. France can levy penalties up to 5% of transferred amounts for documentation failures.

• United States

The IRS approach includes penalties up to 40% of underpayment for gross valuation misstatements, with additional documentation-related penalties ranging from USD 10,000 (INR 8,30,000) to USD 50,000 (INR 41,50,000).

Australia - Highest Penalty Structure Globally

Australia currently maintains one of the most stringent penalty regimes globally for transfer pricing non-compliance:

1. Up to 100% of the tax shortfall amount for intentional disregard of transfer pricing rules
2. Additional penalties of AUD 555,000 (INR 3.7 crores) per instance for significant global entities failing to submit required documentation
3. Doubled penalties for second and subsequent offenses
4. Additional penalties up to AUD 1 million (INR 6.7 crores) for false or misleading statements
5. Possible criminal prosecution for serious violations

India's Current Framework

• India's transfer pricing penalty structure includes:

1. 2% of transaction value for failure to maintain documentation
2. INR 100,000 for failure to furnish documentation
3. 2% of transaction value for failure to report transactions
4. Additional penalties for concealment of income

Lessons for Indian Tax Administration

1. Graduated Penalty Structure- Ukraine's day-based penalty calculation for late submissions offers a more nuanced approach compared to India's fixed penalties. This could encourage faster compliance even after missing initial deadlines.
2. Subsistence Minimum Linkage- Ukraine's linking of penalties to the subsistence minimum (a variable economic indicator) automatically adjusts fines for economic changes. India could consider linking penalties to economic indicators like GDP deflator or wholesale price index.
3. Capping Mechanisms- The dual-cap approach (fixed amount or percentage of transaction value) demonstrates a balance between deterrence and proportionality. India should consider implementing similar caps to ensure penalties don't become disproportionate for larger transactions.

Learning from Australia's Stringent Approach

While Australia's severe penalty regime has proven effective in ensuring compliance, India should consider a balanced approach that combines:

• Scaled penalties based on entity size
• Higher penalties for repeated violations
• Clear distinction between intentional and unintentional non-compliance
• Robust appeal mechanisms to ensure fairness

Recommendations for India

1. Dynamic Penalty Framework- Implement an inflation-adjusted penalty system to maintain deterrent effect while ensuring fairness.
2. Progressive Penalty Structure- Adopt daily-based penalties for continuous defaults while maintaining reasonable caps.
3. Compliance Window- Introduce reduced penalties for voluntary disclosure within specified timeframes.
4. Small Business Considerations- Develop separate penalty thresholds for SMEs to ensure proportionality.

Key Takeaways:

Ukraine's new penalty framework represents a balanced approach to transfer pricing compliance, combining meaningful deterrence with practical limits. While Australia sets the global benchmark for stringent penalties, India's framework could benefit from a hybrid approach that incorporates elements from both systems.

The key takeaway is the need for penalties that are:

1. Proportionate to the violation
2. Adjusted for economic realities
3. Capped to prevent excessive burden
4. Structured to encourage prompt compliance
5. Differentiated based on entity size and violation intent

As global tax authorities continue to strengthen transfer pricing regulations, these refinements could help India maintain its position as a leading voice in international taxation while ensuring better compliance from taxpayers.