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How to Avoid Getting Dragged into Litigation with the Tax Authorities Due to the Transfer Pricing?

Oleh Shpak
Author: Oleh Shpak
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01
June 2018

When it comes to relations between the business and the state, the trust is just as essential as it is in interpersonal relationships. Unfortunately, frequent violations by both parties involved create a major obstacle to building that trust which inevitably leads to fines, litigation, wasted time and money, as well unnecessary stress. Even though it may not be avoided entirely, the negative consequences can still be kept to a minimum. It is important to establish regular cooperation with the lawyers who specialize in transfer pricing and settling various disputes associated with it, as well as learn how to seek professional assistance in particularly complicated cases.


The scope of professional assistance can vary, depending on the claims of the fiscal authorities and degree of readiness of the company which is about to get penalized. In particular, this may include a sufficient response to the information inquiries from the State Fiscal Service i.e. proper preparation of an executive summary validating the amount of controlled transactions in question. It is essential for all amounts of transactions to be determined in strict compliance with the requirements of the Tax Code of Ukraine. Similar approach is also applied when preparing responses to the Fiscal Service’s requests relating to the difference between the amount of payments which have been made and transaction amount indicated in the report.

Another situation where businessmen may require assistance is recognizing transactions as controlled, specifically if there are disputes relating to recognition of the parties involved in a transaction as affiliated parties, or if the amount of transactions or corporate income over the fiscal year raise questions. In cases where there is an uncertainty in particular matters, the taxpayer needs to weigh up the risks and check regulatory acts. If this still fails to clear up the uncertainty, there is an option of having an individual tax consultation with the State Fiscal Service. Whatever the case may be, it will make sense to prepare all of the required documentation and reports beforehand in order to avoid facing more problems with penalties and courts later on.

To illustrate the above, we can highlight three recent cases where we had assisted our customers. In the first two instances, AIM provided information services, namely prepared an informal comment for the customer in the first case, and an official response to the State Fiscal Service (executive summary) in the second one. Consequently, the tax authorities were satisfied with provided information and the matter was settled.

In the third case, we are providing our assistance to the company who sought our help at the stage of the administrative appeal of the decision passed by the Fiscal Service. Specifically, we are assisting in preparation of objections and complaints. The complaint is currently pending and the case might be referred to the court.


What should a taxpayer do, should he or she receive a Tax Audit Report indicating violations for which the taxpayer gets penalized?

  1. Write an Objection to the Report and ask to be given the opportunity for the company’s employee to attend the consideration of the said Objection. The said request shall be filed within 10 calendar days following receipt of the Report. The objection shall be considered within 7 business days.
  2. Upon receipt of the response to the Objection and decision notice with indication of the imposed fine, the taxpayer needs to file a complaint to the central State Fiscal Service (or any another high-ranking fiscal authority other than the one that provided the Report) within 10 calendar days, as well as the aforementioned notice or a copy thereof to the State Fiscal Service that provided the Report. Complaint review takes up to 20 calendar days.
  3. In the course of these reviews, it will become clear how strong the tax authority’s position here is and what further steps should be taken in terms of legal defense. Based on the case prospects and judicial practice analysis, the taxpayer will then have to decide whether to take this matter to the court.
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