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Introduction
Five lessons for international businesses
An additional tax assessment, a defective invoice, or a problem elsewhere in a supply chain does not, by itself, establish tax fraud. Across the European Union, the United States, and Ukraine, authorities must prove the relevant taxpayer’s conduct and the required state of mind. International groups therefore need entity-specific evidence that is consistent across jurisdictions.
Lesson One. Tax Adjustments Are Not Automatically Tax Fraud
The legal consequences of a tax error depend on the rule being applied. Additional tax, interest, or a civil penalty may follow without proof of a criminal offense. Fraud-based or criminal liability requires the authority to establish the elements specified by the relevant law, including the required knowledge or intent.
United States
Federal tax evasion under 26 U.S.C. section 7201 requires a tax deficiency, an affirmative act intended to evade assessment or payment, and willfulness. In Cheek v. United States, 498 U.S. 192, 201-02 (1991), the U.S. Supreme Court explained that willfulness in the federal criminal tax context means a voluntary and intentional violation of a known legal duty. A good-faith misunderstanding of that duty can therefore negate willfulness, even if the belief is objectively unreasonable, although the factfinder may consider unreasonableness when deciding whether the asserted belief is genuine. An underpayment or reporting error alone does not satisfy section 7201.
Ukraine
Article 212 of the Criminal Code of Ukraine likewise addresses intentional tax evasion. In its resolution of 18 January 2022 in Case No. 711/1481/20, the Criminal Cassation Court within the Supreme Court held that nonpayment or underpayment alone is not enough. The prosecution had to prove direct intent, including that the defendants understood the duty to pay a particular amount and consciously failed to perform it through conduct aimed at evasion. On the facts, the prosecution did not disprove the defense’s account of good-faith conduct or prove intent beyond a reasonable doubt.
For an international group, the first response to a fraud allegation should be to separate the underlying tax adjustment from the alleged dishonest conduct. Management should identify the legal test, the entity and people said to have acted, the evidence said to prove knowledge or intent, and whether the matter is administrative, civil, or criminal.
Lesson Two. Misconduct Elsewhere Does Not Establish Company Liability
Tax authorities often examine suppliers, customers, affiliates, and intermediaries involved in the same chain. A counterparty’s misconduct may justify closer review. It does not remove the need to examine the taxpayer’s own transaction, records, decisions, and legal duties.
Global Ink Trade makes that point directly for EU VAT. In a carousel-fraud case, an authority cannot deny the deduction merely because the transaction appears in a circular invoicing chain. It must adduce sufficient evidence of the fraud and of the taxable person’s own fraudulent conduct or knowledge. The authority need not identify every operator in the scheme, but it must establish the relevant taxpayer’s connection to it.
The Grand Chamber of the Supreme Court of Ukraine adopted a comparable individualized approach in its judgment of 7 July 2022 in Case No. 160/3364/19. A conviction of a counterparty’s officer for fictitious entrepreneurship, or an order releasing that person from criminal liability because the limitation period had expired, was not prejudicial in the taxpayer’s administrative case unless the criminal court had established specific acts or omissions by that taxpayer. The taxpayer still had to prove that its own transaction was genuine, but the counterparty finding could not decide that question by itself.
The same practical discipline matters in the United States. The government must prove the charged taxpayer’s affirmative act and willfulness under section 7201. A finding against another participant may supply evidence or investigative leads, but it does not substitute for proof of the relevant entity’s conduct and state of mind.
Each group company should therefore maintain evidence of its own commercial role, decision-makers, contractual obligations, pricing, payments, and delivery of goods or services. That evidence should be intelligible without assuming an affiliate’s or counterparty’s records tell the same story.
Lesson Three. Due Diligence Must Be Proportionate to the Risk
The scope of appropriate diligence depends on the governing law, the transaction, the industry, and identifiable warning signs. EU law does not permit tax authorities to transfer their investigative work wholesale to ordinary businesses. At the same time, a company cannot ignore risks apparent from its own transaction or from responsibilities it has voluntarily assumed.
In Global Ink Trade, the CJEU confirmed that an authority may assess whether a taxable person took measures that could reasonably be required to avoid participating in fraud. It also held that a general circular may not require complex and far-reaching supplier checks, particularly checks on whether a supplier filed returns or paid VAT, because those are, in principle, tasks for the tax authority.
The European Court of Human Rights considered a different setting in ELINOIL A.E. and EKO AVEE v. Greece, applications Nos. 2030/15, 11663/19, 24406/19, 30303/19, 30349/19 and 30351/19, decision of 4 November 2025. The applicant companies were licensed petroleum businesses claiming tax exemptions in a heavily regulated market. The Court declared the applications inadmissible and accepted that the companies could reasonably have been expected to carry out checks within their capacity. The presumption remained rebuttable, and the companies had not shown that the required measures were impossible. The decision supports risk-based diligence in that specific regulatory setting; it does not impose one uniform investigation duty on every business.
In U.S. and Ukrainian criminal matters, a well-kept diligence record can also be important evidence concerning willfulness or direct intent. Professional advice, internal review, a legitimate commercial purpose, and a timely response to warning signs may help explain the company’s conduct. None of those records cures a fictitious transaction, and the company must still prove that the goods, services, and payments were genuine.
A concise counterparty and transaction file should ordinarily record:
- the counterparty’s identity, registration, ownership information where relevant, and authorized representatives
- the commercial purpose, pricing, contracts, invoices, payments, and delivery evidence
- the warning signs identified, the people who reviewed them, and how they were resolved
- any enhanced checks performed and the reason those checks were proportionate to the risk
Lesson Four. Civil Administrative and Criminal Proceedings Need Separate Analysis
The same facts may lead to a tax assessment, a civil fraud penalty, a customs measure, a director-liability claim, or criminal prosecution. Those proceedings answer different questions, use different burdens of proof, and may provide different safeguards. Treating one outcome as conclusive in another proceeding can create serious error.
Malatesta v. Greece, application No. 28631/18, judgment of 9 December 2025, illustrates the point. Greek customs authorities imposed a substantial smuggling fine based on conduct for which the applicant had been finally acquitted in criminal proceedings. The ECtHR held that the two sets of proceedings were criminal in nature for Convention purposes and concerned the same offense. Because the administrative courts failed to give the final acquittal its required effect, the Court found violations of Article 4 of Protocol No. 7, which protects against double jeopardy, and Article 6 paragraph 2, which protects the presumption of innocence.
U.S. federal practice also separates criminal and civil tax exposure. The Internal Revenue Manual notes that a civil tax deficiency may include technical, controversial, or non-fraudulent adjustments that are excluded from the criminal computation, and that evidence insufficient for a criminal case may still support a civil one. In Ukraine, a tax assessment likewise does not by itself prove criminal liability under Article 212, which requires direct intent.
A cross-border business should identify the nature and procedural stage of every matter, preserve the relevant documents, and avoid letting an explanation prepared for one track create an unintended inconsistency in another. Legal review becomes particularly important when an audit begins to use terms such as concealment, knowledge, coordination, or intentional conduct.
Lesson Five. Consistency Across Borders Reduces the Risk of Escalation
A multinational group may face different tax treatment of the same transaction without any jurisdiction being wrong. EU authorities may focus on VAT deductions and the substance of an EU entity. U.S. federal issues may include transfer pricing, withholding, payroll, information reporting, a U.S. trade or business, or a permanent establishment under a treaty. State authorities may separately examine income-tax nexus, sales and use taxes, and the location of employees or customers. Ukraine may examine corporate income tax, VAT, withholding, transfer pricing, payroll, controlled foreign company reporting, and the place where management is exercised.
Those risks run in both directions. An EU or U.S. group may operate in Ukraine through a subsidiary, permanent establishment, distributor, contractor, or local team. A Ukrainian group may enter Europe or the United States through subsidiaries, branches, warehouses, platforms, distributors, employees, or founders. For technology businesses, the location of key personnel, contract negotiation, intellectual property use, development services, management functions, customers, and sales activity may create obligations outside the country of incorporation.
Consistency does not mean forcing every entity to use identical tax treatment. It means that contracts, transfer-pricing files, invoices, customs records, tax filings, and management explanations should describe the same underlying facts. A rejected service fee or transfer-pricing adjustment may produce double taxation; conflicting records can also make an ordinary dispute look like concealment.
Cross-border information exchange makes reconciliation increasingly important. The State Tax Service of Ukraine reported that the Multilateral Competent Authority Agreement for the Common Reporting Standard became effective for Ukraine on 28 June 2024. For the 2024 reporting year, it received information from and sent information to 71 foreign jurisdictions. Information obtained through domestic reporting, treaty requests, or automatic exchange may trigger scrutiny, but the existence of exchanged information does not itself prove fraud.
Management should be able to answer these questions from contemporaneous records:
- •Which entity performs each key function and bears each material risk
- •Where are contracts negotiated, approved, and signed
- •Do invoices, payments, delivery records, customs data, and tax filings describe the same transaction
- •Could personnel, management, customers, or sales activity create tax obligations in another jurisdiction
- •Can each entity demonstrate its own role if another participant is accused of fraud
What International Businesses Should Do
1. Preserve the record. Secure contracts, invoices, payment records, communications, diligence files, tax filings, and delivery evidence before routine retention processes remove them.
2. Separate the legal issues. Identify which amounts are disputed, which penalties are civil or administrative, and whether any authority is alleging personal or criminal liability.
3. Build an entity-specific chronology. Record who approved the transaction, what each entity performed, what was known at the time, and how warning signs were addressed.
4. Reconcile cross-border explanations. Compare the facts stated in contracts, transfer-pricing materials, customs records, tax filings, and responses to authorities. Correct genuine errors through the appropriate process without rewriting the historical record.
5. Coordinate advice early. A response in one jurisdiction may be reviewed in another. Counsel should coordinate the factual position while respecting the separate law, procedure, and privilege rules that apply in each forum.
Frequently Asked Questions
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No. An assessment may establish that additional tax is due under the applicable civil or administrative rules, but fraud-based or criminal liability requires proof of the elements specified by the governing law. In U.S. federal tax evasion and Ukrainian Article 212 cases, the required state of mind must be proved separately.
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Potentially, but supplier fraud alone is not enough under the EU rule described in Global Ink Trade. The tax authority must establish objective evidence that the taxable person knew or ought to have known that its purchase was connected with fraud. It cannot rely only on the transaction’s place in an invoicing chain.
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There is no single cross-border checklist. The answer depends on the governing law, the business’s regulatory role, the transaction, and identifiable warning signs. EU law does not generally permit authorities to require ordinary purchasers to perform the tax authority’s own complex supplier investigations, while licensed businesses in a heavily regulated market may reasonably be expected to perform more focused checks.
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Tax systems use different proceedings to collect tax, impose civil or administrative penalties, and punish criminal conduct. The relevant questions and proof standards may differ. Businesses should track each proceeding separately and assess whether an outcome in one forum has evidentiary or preclusive effect in another.
Key Takeaways
- A tax adjustment or irregularity does not by itself prove fraud or criminal tax evasion
- Authorities must connect the alleged misconduct to the particular taxpayer rather than rely on guilt by association
- Due diligence should respond to the transaction and its warning signs without transferring the tax authority’s investigative role to the business
- Entity-specific records and consistent cross-border explanations are the strongest practical protection against escalation
How Averites Can Help
If a cross-border tax review has begun to include allegations of concealment, knowledge, or intentional conduct, Averites can assess the exposure and coordinate the response across the relevant jurisdictions.
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References
4. U.S. Supreme Court, Cheek v. United States, 498 U.S. 192 (1991)
5. 26 U.S.C. section 7201 Attempt to evade or defeat tax
6. Internal Revenue Service, Internal Revenue Manual 9.5.3 Criminal Investigation Strategies
7. Internal Revenue Service, Internal Revenue Manual 9.5.13 Civil Considerations
8. Supreme Court of Ukraine, resolution of 18 January 2022 in Case No. 711/1481/20
9. Grand Chamber of the Supreme Court of Ukraine, judgment of 7 July 2022 in Case No. 160/3364/19
11. Criminal Code of Ukraine, Article 212
12. State Tax Service of Ukraine, CRS exchange for the 2024 reporting year, 10 October 2025
This article provides general information and does not constitute legal advice. Tax treatment and procedural safeguards depend on the jurisdiction, the nature of the proceedings, and the specific facts.