Taxpayers and the latest tax dispute practice: heading for the West or the Wild West?

Many Ukrainian taxpayers have already noticed how active the tax authorities have become following the near-total cancellation of the moratorium on tax inspections.

This reminded our team of Sergio Leone’s iconic westerns — the “Dollar Trilogy”. Just like there, the tax authority is tempted to add “a few dollars more” during a tax audit, and their whole showdown with taxpayers revolves around that same “fistful of dollars” (hryvnias, in our case).

And this is when the drama begins: figuring out who’s “the Good,” who’s “the Bad,” and who’s “the Ugly”.

The phantom of tax debt before the dawn of the justice

In a Mexican standoff, the winner is whoever draws first, and every second counts. That’s exactly how the tax authorities have been acting lately when recognizing a taxpayer’s debt.

Imagine this: a company receives a tax notice, goes through the appeals process, and decides to take the matter to court.

One would think the Tax Code is on the taxpayer’s side, clearly stating that once a lawsuit is filed, the amount of the challenged liability is considered disputed until the court’s final decision.

However, as we all know, the “good guy” doesn’t always win right away. Armed with the Ministry of Finance’s order, the tax authority follows its own rules. Just ten days after the end of the administrative appeal process, a tax payable entry appears in the taxpayer’s electronic account—like a phantom at your door. And this phantom hasn’t come to show the hidden treasures, but to remind: an unpaid debt may lead to property distraint, court proceedings, and loss of the employee draft reservations.

It turns out that the State Tax Service doesn’t rush to recognize liabilities as challenged solely based on the fact that a lawsuit has been filed—they wait for the court to officially open proceedings. If the court ruling is delayed, then on day 11, the liability automatically turns into tax debt, even if the lawsuit was filed on time.

In this case, the taxpayer becomes the hero who did everything right but still gets “shot” in the form of a tax debt—with all the nasty consequences.

Good eventually wins, but not without a fight. Once the court opens proceedings, the tax debt must be canceled—both under the Tax Code of Ukraine and the Ministry of Finance’s order—because the liability is no longer considered challenged.

The takeaway for businesses: don’t wait for the tax authority to shoot first. After receiving a tax notice or completing the administrative appeal, file a lawsuit within 10 business days (or even sooner) and notify the State Tax Service of your lawsuit, keep gently reminding the court about your case, and always stay alert. That way, you’ll have a better chance of dodging the ghost of tax debt.

They say that gold is buried at the Sad Hill Cemetery

You might’ve long forgotten that tax audit that took place ages ago… probably back in 2015. Even the court ruled in your favor.

But the tax authority remembers. It has enquired with its foreign counterparts abroad about your activities, wishing, so to say, to hear it second-hand. And what if some discrepancies or inaccuracies are found? Maybe even some “buried gold”?

Unfortunately, in these latter days, Ukrainian tax authorities tend to consider receiving such responses from abroad as a sufficient basis for reopening long-closed audits. Especially, given the COVID-war suspension, they can now review your transactions with non-residents for a period of seven, or even ten years (for transfer pricing purposes).

We expect tax authorities to resume such audits even when the response from abroad is little more than a formal acknowledgment.

That being said, it’s important to keep in mind:

1. The Tax Code requires that the foreign tax authority’s response contain information about a breach of legislation by the taxpayer so that the audit may be reopened.
2. This information must relate to the circumstances that were investigated during the prior audit (in our opinion, this may apply not only to the audit subject matter, but also to the audit period).

In other words, such information must qualify as newly discovered facts that existed during the prior audit, but for some reason were not revealed at the time. And any reopened audit must be strictly limited to those matters that have triggered it.

Our recommendation: do not ignore procedural violations by the tax authority—make sure to include them as arguments in your legal filings.

As Clint Eastwood’s character would say: keep your powder dry.

And here comes “For a few dollars more”

In one of the movie’s scenes, Tuco, Eli Wallach’s character, poses a philosophical question: “If you work to live, why kill yourself working?”. During a tax audit of a non-resident, a present-day version of this question might sound like “If you work to research the market, then…” followed by any of the below:

1. Why do you work in Ukraine for so long? How much more time do you need to research this market?
2. What services do you provide to your parent or subsidiary companies?
3. Why do you employ so many people?
4. Why do you pay that high salaries to your employees?
5. Why do you pay that low salaries to your employees?
6. Why do you need such a hefty funding?
7. Do you really need cars on your balance sheet?
8. Why do you need IT specialists?
9. What are these foreign business trips for?

Until recently, the requalification in such audits would usually result in additional corporate income tax accruals on the funding received, plus fines and late payment interest. But lately, tax authorities have been increasingly imposing transfer pricing (TP) penalties and, interestingly, VAT liabilities.

Why VAT? Because even “market research”, mentioned in the audit report, may suddenly be classified as a marketing service, which gives tax authority the ground to expect the taxpayer to pay VAT on such a service—“a few dollars more”, if said another way—and to file relevant tax invoices.[DU5]

Today, these audits dig significantly deeper into these matters than they used to. So even if you assessed the risk of requalification a few years ago, it’s worth revisiting that assessment.

And although the court practice currently sticks to older rules of the game, that may change—especially as tax inspectors grow more “bad and ugly”.

“Tax burden”: unpunished evil may return

This part is about campfire talks with a tax inspector. A business owner hears: “The neighboring ranches pay more tax per hectare than you. That’s not right… Maybe you should adjust your tax return before it’s too late?”.

A business owner might remember that this practice used to be illegal in the olden days, and those who were into it are in the wanted list now. But, as is often the case, if evil isn’t defeated for good—it comes back.

In this story, good and the law are on the taxpayer’s side: no one has the right to demand that you pay more than the law requires. Evil lies in the reality of tax authorities, where informal indicators—“tax burden” or “tax yield”—are still alive.

Technically, the “tax burden” is a conditional metric, which represents the share of taxes paid (directly or indirectly) relative to the volume of business activities. No one can officially force you to make adjustments. But psychological pressure is a real thing. To avoid conflict, many businesses make small “voluntary” concessions—they slightly increase their tax liabilities to avoid triggering a surprise audit or being given a high-risk black spot.

The Wild West is already witnessing tax authorities blocking VAT invoice registration or make additional accruals during tax audits—especially if their requests aren’t treated with due respect.

Instead of analyzing the actual reasons for the lower tax payments or the presence of legal reliefs, a business is often branded as a non-payer.

Just like in the final standoff of The Good, the Bad and the Ugly—everyone’s holding their holsters, waiting. The taxpayer has every right to stand their ground: to refuse voluntary extra payments if they’re confident they’re in the right.

The final word

As in Leone’s westerns, in each of these stories, justice ultimately prevails—as long as you’re persistent in defending it, armed with the law, court practice, and common sense.