Challenge
The tax authority challenged the client’s approach to determining whether its controlled transactions complied with the arm’s length principle and reduced the negative corporate income tax base by more than UAH 150 million.
On the one hand, the tax authority agreed with the transfer pricing method selected by the client, the profitability indicator, and the overall approach to analyzing whether the controlled transactions complied with the arm’s length principle. At the same time, the tax authority questioned the list of comparable companies used to establish the profitability range and performed its own selection, which resulted in a significant adjustment to the client’s tax position.
The dispute was financially significant and precedent-setting, as its outcome could have affected the future application of transfer pricing rules to the client’s transactions.
Solution
PwC’s team successfully defended the client’s interests in the dispute with the tax authority over the application of transfer pricing rules and secured a final ruling from the Supreme Court in the client’s favor.
As part of the project, the team developed a comprehensive defense strategy based on a detailed analysis of the provisions of the Tax Code of Ukraine, OECD guidelines, and relevant court practice.
PwC demonstrated that the tax authority:
without sufficient legal justification, rejected most of the comparable companies used by the client in its arm’s length analysis without proper legal justification;
created its own sample of comparable companies using criteria not provided for by tax legislation;
used a different source of information for the analysis than the one used by the client in preparing its transfer pricing documentation;
violated the procedure for initiating and conducting the tax audit.
Outcome
The courts at all levels, including the Supreme Court, supported the client’s position and upheld the claim in full. The tax assessment notice reducing the negative corporate income tax base by more than UAH 150 million was canceled.
As a result of the successful defense, the client:
preserved the right to use its tax losses in full;
prevented the creation of an unfavorable tax history;
protected the validity of the transfer pricing approach it had applied.
This outcome confirmed the importance of high-quality transfer pricing documentation and effective litigation support for taxpayers in complex, precedent-setting disputes.
