We won a dispute for UMMC: a ruling to appoint a transfer pricing audit was declared unlawful

The Commercial Court for the City of Moscow has ruled that a decision of the Russian Federal Tax Service (the “FTS”) to appoint a transfer pricing audit was unlawful.

BACKGROUND

In December 2024, the Central Directorate of the FTS appointed with respect to Ural Mining and Metallurgical Company (“UMMC”) a special transfer pricing tax audit concerning controlled transactions, which was to be carried out under the exclusive powers of the FTS’s Central Directorate. The purpose of the audit was to oversee whether the applied prices are of market level for several major transactions. There was a risk of additional tax being assessed if the prices did not correspond to the market level. 

The company considered that the tax authority had no right to appoint an audit of transactions made in 2021, i.e., when two years had passed since the notification of controlled transactions was submitted. However, the problem was that, by the time the audit was appointed, the law had changed, with the two-year limitation period no longer applying. Instead, the deadline for appointing the audit had been extended.

TASK

The task was to provide justification in court that the new regulation did not extend to this audit, with the tax authority having missed the deadline to conduct it. Therefore, the audit had been appointed unlawfully.

WHAT WE DID

The lawyers from Pepeliaev Group provided comprehensive support in the case. This included refining the company’s initial position, preparing procedural documents, obtaining an legal opinion from a leading university in support of the company’s stance, and representing the company in court.

In the court proceedings, we argued that, from the time when the notifications of controlled transactions were filed (the beginning of the two-year period) until the audit was appointed, an ongoing legal relationship had evolved and the new regulation could not be applied to it. A new law cannot deprive a taxpayer of legal guarantees and undermine its legitimate expectations in terms of when the deadline for appointing an audit ends. The first-instance court agreed with the company's position and invalidated the decision by the Central Directorate of the FTS to appoint the audit.

RESULT

The significance of this court ruling lies not only in reducing tax risks for the company. The judicial decision is equally important for setting a precedent for court and administrative decisions regarding tax authorities violating deadlines and regarding due procedure in tax matters.

It is worth noting that this is the first case where a decision of the FTS has been successfully challenged on this ground. Also, it is only the third time (after cases involving Vimpelcom, which were also handled by lawyers from Pepeliaev Group) that a non-regulatory decision of the FTS’s Central Directorate concerning transfer pricing audits has been declared unlawful.

Furthermore, this precedent casts doubt on all remaining audits appointed by the FTS in 2021 and 2022 with respect to other taxpayers.