Aspects, consequences and risks of tax audits on transfer pricing issues

As a result of various events in 2013-2015, namely, the annexation of Crimea, lengthy hostilities for the sovereignty and territorial integrity of Ukraine, the failure of economic reforms, increase in utility tariffs, reduction of GDP, the Ukrainian economy is in dire need of financial resources. The significant impact of external debt, coupled with a reduction in foreign investment, negatively affects the economy of Ukraine.

Against the background of increasing requirements of foreign investors for obtaining external financing, representatives of the legislative and executive authorities have already noted the «prospectivity» of transfer pricing issues (hereinafter – the TP). Therefore, in the near future, additional charges for transfer pricing checks may become an important source of replenishment for the budget, and another problem for the business. Given these circumstances, the issues of payment of taxes and penalties for technical assistance centers become more relevant for the state.

Let’s bear in mind that the Tax Code of Ukraine provides for fines:

– for not submitting a report on controlled transactions in the amount of 300 minimum wages, which for 2015 is 365 thousand UAH;

– for non-declaration of controlled transactions – 1% of their size, but not more than 300 minimum wages (365 thousand UAH);

– for not submitting documentation on controlled transactions – 3% of their size, but not more than 200 minimum wages (243 thousand UAH).

Reporting on controlled transactions is only the «tip of the iceberg» in the process of transfer pricing. The whole process of transfer pricing is time-consuming, responsible, with a large number of analytical procedures regarding a significant amount of information. Errors, lack of complete information, analytical miscalculations can lead to insufficient validity of the model, taken as a basis in the TP documentation. Changing the design of the elements of such a model can lead to significantly different results in pricing. Therefore, only the maximum availability of information from reliable sources, a qualitative functional analysis of the parties of controlled transactions, a justified choice of methods provide an argumentative basis for determining the level of transfer prices, which corresponds to the «arm’s length» principle.

To expand our capabilities and provide effective comprehensive services to our customers, we always strive to keep up with the new requirements of the law and market trends. Therefore, our specialists began to learn from the experience of network partner companies on transfer pricing issues long before the date of the introduction of a transfer pricing system in Ukraine. First of all, this applies to cooperation with partners representing countries in which transfer pricing requirements are implemented earlier than in Ukraine.

As a result, partners, auditors, lawyers of HLB Ukraine have significant experience and confidently rely in their work on existing tax practice in the world and in Ukraine.

Each company that carries out controlled transactions is a large-scale business model with great opportunities. Therefore, such companies are becoming a special object of monitoring by the tax authorities, and this requires the immediate implementation of an effective model for monitoring the TP issues.

HLB Ukraine has significant experience in the development of internal rules of the TP using domestic and world tax practice. Our high-level specialists develop policies and strategies, act as risk experts, and contribute in every way to the prevention of violations and distortions in the TP, minimizing the risks.

In addition, we hold conferences, seminars, and develop optimal documentation for TP, taking into account the individual characteristics of the subject of controlled transactions, the functions performed, the risks assumed, the assets involved by the parties to the controlled transactions.

Under the leadership of the Managing Partner, a TP department was created in HLB Ukraine, which in 2014-2016 successfully completed more than 25 TP projects.

The company HLB Ukraine, in preparing TP documentation and reports on controlled transactions, uses the IT databases existing in Ukraine and the world, software products that allow to identify and conduct a qualitative economic analysis of comparable transactions. The results of the work are provided in the developed documentation, including text descriptions, schemes, diagrams, conclusions.

Functional and financial-economic analysis of the parties and controlled transactions is carried out using logical methods to prepare a reasoned justification for the choice of methods, the use of information sources and the final conclusions.

It should be noted that the approaches to the work of the SFS bodies have not undergone major changes. The main emphasis, as before, they put on the implementation of the fiscal function. Often we have to meet materials of inspections of tax specialists with unreasonable conclusions, conclusions made on the basis of a dubious evidence base or without it at all. We will have to observe such processes until personal responsibility for unreasonable additional charges is introduced in our country.

At the moment, everyone has to work in existing realities. The work of our economic experts and lawyers in the existing economic environment is based on the development of a reasonable and well-reasoned position that allows us to protect the interests of the client, and refutation of the unfounded conclusions of the fiscal authorities.

We find solutions to complex and controversial issues on which, it would seem, there are no acceptable answers, based on our experience. If it is necessary to obtain additional arguments, we resort to the involvement of both internal and external experts on economic issues, marketers, product experts from the Bureau of Forensics, experts who are certified by the Ministry of Justice of Ukraine.

Along with the TP, HLB Ukraine conducts effective tax planning for multinational companies and corporations, both for internal purposes and individually for M&A; when buying a company, we conduct financial, tax, legal and technical Due Diligence.

In order to provide new customers with the opportunity to evaluate the benefits of working with our company, since 2010 HLB Ukraine has introduced the practice of providing free verbal consultations in our office to all legal entities, the representatives of which have submitted a registration application form.

HLB Ukraine guarantees qualified support for future tax audits of controlled transactions conducted by the SFS. In response to the emerging risks, we are able to quickly respond and professionally provide a service related to the search for optimal solutions for taxpayers in TP matters. A group of experienced TP specialists, experts and appraisers will provide a fair documentary basis for the justification of transfer prices, which will allow you to effectively manage risks in controlled transactions.

Valerii Bondar
Managing Partner of HLB Ukraine

Stepan Shef
Deputy General Director on Tax Issues

May 4, 2016

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