Tax risks of business entities in the field of transfer pricing and ways to prevent and minimise them

Abstract

Introduction. The introduction of the transfer pricing fiscal regulation system in Ukraine restricts business entities to use it for tax minimisation purposes, which leads to a reduction in fiscal revenues, outflow of profits to low-tax jurisdictions, distortion of competition and a general slowdown in macroeconomic development. At the same time, compliance with complex tax and regulatory procedures for transfer pricing negatively affects the financial performance of companies and hinders their development. The dilemma of finding compromise solutions that balance the fiscal interests of the state and business goals lies 

in the clear identification of these tax risks at the micro level and the identification of ways to reduce them.

Purpose. The purpose of the article is to identify and systematise the main tax risks for domestic business entities because of compliance with the procedures of transfer pricing fiscal regulation, and develop measures to prevent and minimise these risks.

Methods. A systematic approach is applied to the study of tax risks associated with a business entity’s compliance with tax and regulatory requirements in the field of transfer pricing. The methods of analysis and synthesis, induction and deduction, verbal and discursive reasoning, processing and graphical display of statistical data, argumentation, logical explanation, etc. were used to identify, systematise and group these risks at the micro level and to substantiate proposals for preventing and minimising their negative consequences.

Results. Using the data of an international sociological survey, the article confirms that the fundamental determinant of tax risks of business entities when applying transfer pricing is the significant complexity of fiscal and regulatory procedures. The author identifies and explains the content of three groups of these risks: increase in financial costs for compliance with tax and regulatory requirements; additional income tax based on the results of audits or independent adjustment of taxable profit; significant financial sanctions for failure to submit, late submission of transfer pricing reports to regulatory authorities, incomplete or inaccurate information in them. The article provides a set of measures to reduce the probability of occurrence and neutralise the negative effects of tax risks of business entities in the field of transfer pricing.

Discussion. Transfer pricing generates significant tax risks for business entities associated with the implementation of complex tax and regulatory procedures. Preventive protection and mitigation of these risks require the introduction of effective systems of specialised management accounting and control, optimisation of document flow processes and development of internal transfer pricing standards, and, if necessary, outsourcing of transfer pricing tax reports. The priority area for further research is the development of the theoretical, conceptual, scientific and applied foundations of a balanced transfer pricing policy and the introduction of an effective system of internal control of this process.