Saturday, March 30, 2019

Jurisprudence of New Supreme Court on Tax Litigation with International Component

On 26 March 2019, I was pleased to conduct a LIGA-ZAKON webinar on the topic of  the jurisprudence of the new Supreme Court in tax disputes with an international component.

In particular, the webinar was devoted to the two most common categories of tax disputes with an international element:

- disputes concerning the application of the concept of  beneficial owner; and

- disputes on transfer pricing issues.

Below is a very brief summary of the findings of the seminar:

As to beneficial owner

- It is pleasant that the new Supreme Court keeps abreast with a global trend. In general, it adheres to the "broad economic approach" couched   in 2014 in the well-known case of Donbassaero (http://reyestr.court.gov.ua/Review/38106136).

- All the cases found by us at the level of the new Supreme Court have been resolved in favor of the taxpayers (for example: http://www.reyestr.court.gov.ua/Review/77312120, http://www.reyestr.court.gov.ua/Review/77197100     and http://www.reyestr.court.gov.ua/Review/75879124).

- Interestingly, in the latter case the taxpayer leveraged a report of the Cypriot Office of  Deloitte as evidence. According to the findings incorporated in the report, the Cypriot recipient of income in the form of interest was the beneficial owner of the income. It was not even guessed before that the "Big Four" could  provide such services.

- The reason for such a "crazy" success of taxpayers in the new Supreme Court is really simple. So far, tax officials, at least at the level of those cases that have already been considered by the new Supreme Court, have not managed to collect information attesting that the foreign recipient of income is limited in its right to determine the further economic fate of the income.

- Undoubtedly, at the level of the lower courts there have been some examples where taxmen managed to demonstrate proper "perseverance and diligence" and carried out exchanges of information with the tax authorities of other countries. However, to the satisfaction of taxpayers and to the great regret of tax officials, in many cases, the courts do not take into account the results of such exchanges of tax information pointing out to the limitation of a foreign recipient of income in the right to determine its further economic fate.

- The courts consider the above evidence as inadmissible for formal reasons, the main of which is, as a rule, the lack of legalization (apostilation) of a document issued by the foreign tax authorities on the results of the exchange of tax information.  A classic example of such a "fatal" case for taxmen, decided by the court of appeal, is available at this link: http://www.reyestr.court.gov.ua/Review/72641240.

As to transfer pricing

- There is already the first case concerning the essence of transfer pricing considered by the new Supreme Court (http://www.reyestr.court.gov.ua/Review/80418267).

- Honestly, there is nothing phenomenal in this case. In the past, there have been many similar cases when, before the introduction of the transfer pricing rules, the rules of the usual prices were applied.

- In this case both the taxpayer and the tax authorities (in the course of the tax inspection) used the "first method" (the method of comparable uncontrolled price) to the transactions on the exportation of grains. The new Supreme Court resolved the case in favor of the taxpayer by a reference to the fact that the tax authorities failed to prove  that the prices had been understated by the taxpayer. The new Supreme Court "blamed" the tax authorities for not taking into account all the conditions for the comparability of the concerned export transactions and referring to only one source of information (the official site of the Agrarian Exchange).

- Oddly enough, but  the new Supreme Court appeared to be a great fan of  British LLP and a huge hater of Swiss companies=). Under very controversial circumstances, it recognizes transactions with British LLPs (for periods before the amendments to the Tax Code of Ukraine was brought according to which the attribution of transaction with British LLPs to controllable  one is no more in doubt), uncontrollable (http://www.reyestr.court.gov.ua/Review/80418267      and http://www.reyestr.court.gov.ua/Review/8060725).

-  In the meanwhile, on approximately the same level of controversy attached to the issue as to whether to treat as controllable transactions with Swiss companies in 2015 (in September 2015 Switzerland was removed from the list of low tax jurisdictions), the new Supreme Court does not express similar “altruistic” sentiments (http://www.reyestr.court.gov.ua/Review/76906000).

- The new Supreme Court holds that transactions with Swiss companies carried out before September 2015 are subject to control. This is despite the fact that the taxpayer  managed to submit evidence that in the canton, at the place of the registration of its Swiss counterparty, the rate of corporation tax had not been in fact 5 percentage points lower than that of Ukrainian corporate income tax.


Tuesday, February 26, 2019

New Supreme Court’s Jurisprudence in Disputes Concerning Procedural Aspects of Tax Inspections

On 20 February 2019 I was pleased to conduct a LIGA-ZAKON webinar on the topic of  tax inspections in 2019.

Below is a very brief description of the new Supreme Court’s jurisprudence in disputes concerning procedural aspects of tax inspections. 

It should be noted that in general the new Supreme Court adheres to the same fundamental principles that existed at the level of the court jurisprudence before:

- If an admittance procedure is provided for a tax inspection (for example, documentary on-site inspections or factual inspections), the taxpayer is entitled to refer to procedural violations by the tax authorities only when he refuses admittance of the taxmen to the conduct of the inspection and appeals from the tax authorities’ order on appointing the inspection. If the taxmen were admitted to carry out the inspection, the court does not take into account the taxpayer's reference to the procedural issues. In this case, the court has regard to the only validity/invalidity of the contested tax assessments themselves. An example of such court jurisprudence is the resolution of 13 March 2018 in case No. 804/1113/16 (http://www.reyestr.court.gov.ua/Review/72745230).

- If an admittance procedure is not provided for a tax inspection (for example, offsite documentary inspections), the courts must take into account procedural violations. They may cancel a contested tax assessment based only on the existence of procedural violations committed by the tax authorities during the appointment or conduct of the inspection. An example of such court jurisprudence is the resolution of 7 February 2018 in case No. 821/1562/16 (http://www.reyestr.court.gov.ua/Review/72324146).

Among other significant judgements of the new Supreme Court in the area of ​​procedural aspects of tax inspections the following are worthwhile to mention:

- The ruling of the Grand Chamber dated 23 May 2018 in case No. 237/1459/17 (http://www.reyestr.court.gov.ua/Review/74475877). According to this ruling, an investigating judge’s ruling on the appointment of an inspection, although it is not clearly defined by the Criminal Procedure Code of Ukraine, may be challenged to the court of appeal.

- The resolution of the Administrative Court of Cassation of 28 August 2018 in case No. 804/19780/14 (http://reyestr.court.gov.ua/Review/76139166). According to this resolution, so as to attest the existence of a "dispute over a right" in cases concerned with the confirmation of the validity of asset freezing applied by the tax authorities, it is not enough to challenge the only order of the tax authorities on appointing the tax inspection. It is also necessary to challenge the decision of the tax authorities on imposing the asset freezing. 



Thursday, August 23, 2018

TOP-3 Judgements of New Supreme Court in Tax Disputes

The new Supreme Court is working and tax disputes are no exception here.

Over  the first half of 2018, the new Supreme Court managed to consider 6,900 tax disputes.

Undoubtedly, among such an array of cases there are a lot of important and interesting positions of the new Supreme Court, which just need to be known in order not to lose face while representing a taxpayer before court.

Below is just the "top of the iceberg" which is  TOP-3 most important, in our opinion, judgements of the new Supreme Court rendered from the beginning of 2018.

No 1: the ruling of the investigating judge on the appointment of an inspection is subject to appeal

For a long time, there has been a debate as to whether an investigating judge has the right to appoint a tax inspection at the request of law enforcement agencies, and whether it is possible to challenge a ruling of the investigating judge on the appointment of such an inspection.

The Grand Chamber of the Supreme Court (ruling dated 23 May  2018 in case No. 237/1459/17) made a clear conclusion that it is possible to appeal from rulings of investigating judges on the appointment of inspections.

The Great Chamber did not give a straight answer to the question on whether such inspection were lawful. Actually, this question was not placed before the Grand Chamber. However, the Grand Chamber hinted that such a ruling of the investigating judge is not provided for by the  criminal-procedural legislation. Such a hint in itself indicates the illegality of the investigating judge's ruling on the appointment of an inspection.

Formally, the ruling of the Grand Chamber concerns the appeal of the appointment of a labor inspection, not that of  tax rules. However, this in no way reduces its importance to tax litigation. According to the analysis of the data of the Unified State Register of Court Judgements, the legal position of the Grand Chamber has been already successfully used many times  by the court of appeal to reverse the ruling of the investigating judges on the appointment of tax inspections.

No 2: sham entrepreneurship  of a counterparty

Again, this is practically the "eternal" issue for tax litigation. If the corporate officers of a counterparty have been convicted of sham  entrepreneurship (section 205 of the Criminal Code of Ukraine), is it possible for the taxpayer to retain his input VAT and deductible expenditure on the purchase of goods or services from this counterparty.

In the past, some administrative courts supported a rather rigorous taxpayer-unfavourable approach. According to this approach, the sham entrepreneurship of a counterparty excludes the right of the taxpayer to enjoy input VAT / deductible expenditure in relation to the transactions with this counterparty under any conditions.

Other administrative courts maintained a more taxpayer-favorable "liberal" approach. According to the approach  sham entrepreneurship charges brought against the corporate officers of a counterparty, should not deprive the taxpayer of the right to input VAT and deductible expenditure, if the taxpayer can prove that the underlying transaction has in fact occurred.

The turning point was the end of 2015, when the former Supreme Court of Ukraine in its ruling of  1 December  2015 in the case No  826/15034/14 actually "legitimized" the unfavorable approach.

After the creation of the new Supreme Court, there were some examples of support by the Administrative Court of Cassation of both approaches (for example, the ruling of 27 February 2018 in the case No. 813/3594/17 for the first approach and the ruling of 27 February 2018 in the case No. 813/ 1766/17 for the second approach).

Finally, the Administrative Court of Cassation dared to trouble the Grand Chamber with this "ambiguous" issue.

Attention  here! The Grand Chamber (the ruling of 26 March 2018 in the case No. 826/19939/16) has abandoned the consideration of this issue, noting that it does not make up  "the existence of an exclusive legal problem" and "in each particular case the court must carry out a legal assessment of the actual circumstances of the case ".

Some optimists see in the words of the Grand Chamber that "in each particular case the court must carry out a legal assessment of the actual circumstances of the case " its  support to the position that the taxpayer can keep input VAT and deductible expenditure provided that the true nature of the transaction with the “sham” counterparty has been  confirmed.

No 3: right remedy for recovery of overdue VAT refund

This is an issue of a real "intellectual battle" happening between the former  High Administrative Court of Ukraine and the former Supreme Court of Ukraine. The High Administrative Court of Ukraine was the supporter of a more effective remedy “collection of the overdue VAT refund from the state revenues”  (for example, the ruling of 4 February 2016 in the case No. 806/2256/15).

The Supreme Court of Ukraine adhered to a more moderate position regarding the exclusive role of the tax authorities in providing VAT refund and insisted on the obliging the tax authorities to handing over a document initiating VAT refund to the body of the state treasury (for example, the ruling of 16 September 2015 in the case No. 2а / 0570 / 17001/2012).

In case No  826/7380/15, the Administrative Court of Cassation sided with the High Administrative Court of Ukraine and preliminary recognized “the collection of the overdue VAT refund from the state revenues” as the correct remedy.

Since this position of the Administrative Court of Cassation is at odds with the position of the former  Supreme Court of Ukraine, the Administrative Court of Cassation by its ruling of  26 June 2018 referred the case to the consideration of the Grand Chamber.

As of the day of writing, the Grand Chamber has not yet rendered its judgement on this issue. Hopefully, the Grand Chamber will have enough common sense to agree with the Administrative Court of Cassation’s stance on the correct remedy.

Photo from http://yvu.com.ua

Wednesday, August 15, 2018

4 Problematic Issues of Unified Tax in the Life of Ukrainian Farmers

Unified tax of the 4th group (formerly known as  fixed agricultural tax) is for compelling reasons selected to be paid by the overwhelming majority of Ukrainian farmers.

Below, we have summarized those major issues that arise while paying this tax.

Problem No 1 - uncertainty for the future

The base of taxation is the official appraisal of land.  In 2018, a new all-Ukrainian official appraisal of agricultural land is being carried out  (in accordance with the resolution of the Cabinet of Ministers of Ukraine dated 7 February  2018 No. 105).

If the new official appraisal of land turns out to be significantly higher than it is of today, some farmers cannot see any economical sense in keeping paying  the unified tax. They may consider switching instead to the general system of taxation, including corporate profit tax.

However, let us not rush to conclusions. We are waiting for the results of the new official appraisal of agricultural lands.

Problem 2 - the impossibility of confirming the status of a unified tax payer in the presence of a meager tax debt

If your company for certain magical reasons is identified as one having a tax debt in a funny amount of several hryvnias as of 1 January, it is very likely that the tax authorities will not confirm your status of a unified tax payer for the new year.

Fortunately, there is court jurisprudence on this issue available in favor of taxpayers. Courts can uphold the following taxpayers’ arguments:

- the presence of a small amount  tax debt does not constitute a ground for the refusal to confirm the status of the unified tax payer (for example, the ruling of the High Administrative Court of Ukraine dated  6 September 2016 in the case No. 821/354/16);

- The existence of a tax debt may be a ground for the refusal to vest a farmer with the initial status of a unified  tax payer, but it cannot be a reason for not confirming his already existent this status (the resolution of the Supreme Court of 8 May 2018 in the case No. 816/1088/17).

Problem 3 - improperly executed lease agreements

To qualify  for the unified tax, it is necessary that the share of agricultural production of the taxpayer is at least 75% of his total production. The tax authorities are trying to maintain that the 75% share of agricultural production must be carried out mandatory on land, the rights to which are properly formalized.

Consequently, if your company’s  land comprises a significant portion of  land plots with no properly formalised rental rights, there is a risk of losing the status of a unified tax payer.

Fortunately, the tax authorities do not do this quite often now. It was much more interesting for them to carry out such inspections at the time when the special VAT regime for agricultural producers was still in force. Then they were trying to deprive farmers of both the  status of the subject of the special VAT regime and the status of a unified tax (fixed agricultural tax) payer at the same time.

There is also taxpayer-favorable  court jurisprudence in this context. The courts share the view that the whole crop of the farmer  must be taken into account for the calculation of the share of agricultural production, irrespective of whether it has been grown on land parcels rights  to which have been properly or improperly executed (for example, the ruling of the High Administrative Court of Ukraine dated 6 September 2016 in case No. 808/7906/13a).

Problem 4 - cultivating hayfields and pastures

It is not uncommon for today that farmers sow grain crops on pastures or hayfields. If you do so, it would be advisable for you to pay for such parcels of land the unified tax as if for  arable land, that is, taking into account the coefficient of 1,756.

Otherwise, there will  is the risk of an additional tax assessment.

A striking example of the additional assessment is the case No. 808/2649/17, in which courts, including the Supreme Court, found for  the tax authorities. In this case the tax authorities, having analyzed the taxpayer’s form SG-29 (СГ-29),  managed to ascertain that the taxpayer had used its hayfields as arable land. As a result, the taxpayer was charged the additional unified tax, taking into account the specified coefficient of 1.756. Moreover, a 25% fine  was imposed on the taxpayer for the underreporting of the unified tax.

* - Photo from http://www.1zoom.me

Friday, August 3, 2018

Tax Component of Bankruptcy

Co-authored by Anton Havryk

Unfortunately, the Tax Code of Ukraine (hereinafter - the “Tax Code”) and the Law of Ukraine "On Renewal of the Debtor’s Solvency or Declaring Its Bankruptcy” (hereinafter - “Bankruptcy Law”) is not a well-tuned duet. There are many practical problems, when it comes to tax aspects of insolvency.

Below is the description of  three most common issues.

I. Initiation of bankruptcy procedure upon an application of the tax authorities

This question is in the first place relevant for taxmen themselves. The transfer of a tax debt from the category "not collected" to the category “being collected in the bankruptcy procedure” reduces the total taxpayers’ tax debt. This, in its turn, has a positive effect on the performance indices of the tax authorities.  

The problem exists, first and foremost, because the Bankruptcy Law (paragraph 2 of section 11) requires submitting a resolution on opening an enforcement proceeding as a prerequisite for the initiation of a bankruptcy procedure. There is also a requirement of the Bankruptcy Law that a three-month time-limit must elapse before the initiation of a bankruptcy proceeding is made starting from the date of the submission of the execution order for its enforcement.

As generally known, the procedure for collecting a tax debt does not entail the receipt of an execution order. For the sake of a tax debt to be collected based on the already rendered court judgement, the tax authorities address directly the bank of the taxpayer with their own collection order.  No resort to to the State Enforcement Service is needed on the part of the tax authorities.

Very fortunately for the tax authorities, courts do them a big favour by holding that in the case of the initiation of  a bankruptcy proceeding at the instance of the tax authorities the submission of a resolution on opening an enforcement proceeding is not  not mandatory.

The resolution of the High Economic Court of Ukraine (hereinafter - the “HECU”) of 17 February 2015 in case No 925/1941/14 is a striking example of such tax authorities-favorable court jurisprudence.  

II.  VAT on selling a bankrupt’s assets in a liquidation procedure

To date, the situation surrounding the VAT treatment on selling assets in a liquidation procedure continues to be controversial.

In particular, the HECU in its resolution dated 16 May 2012 in case No 25/112/10 ruled that during the sale of a bankrupt's assets in the liquidation procedure, the bankrupt incurs no output VAT.

Note that paragraph 1 (4) of section  38 of the Bankruptcy Law expressly provides that from the date of the adoption by the economic court of a ruling on declaring bankruptcy and opening of a liquidation procedure, the bankrupt does not incur any additional obligations (including taxes), except for the costs directly related to the implementation of the liquidation procedure.

At the same  time, the tax authorities support quite an opposite view. They treat the sale of of a bankrupt’s assets in the liquidation procedure as a VAT taxable transaction.

Paragraph 7.3 of section  7 of the Tax Code is a rather strong argument to bolster their position. Under this paragraph, no tax issue can be governed or changed by a  Law (Act) apart from that amending the Tax Code.

The aforesaid paragraph 4 part 1 of section  38 of the Bankruptcy Law is not incorporated into the Tax Code. Consequently, it cannot be considered as one exempting the transactions in question from VAT.

In practice, liquidators usually do not pay VAT when selling the assets of a bankrupt. However, the specified uncertainty has always been the  "Sword of Damocles" hung over the heads of the liquidators. There is always a risk of bringing the liquidators to criminal liability for tax evasion.

In 2015 there was an attempt to solve this problem on the legislative level. The Bill No  3164 dated 22 September 2015 “On Amendments to Section 184 of the Tax Code of Ukraine” was developed. The amendments  were concerned with subparagraph (d) of paragraph 184.1 of the Tax Code. According to the amendments the VAT deregistration  of a taxable person would have occurred not on the basis of a court order on the liquidation of that taxable person, but on the basis of a court order on the recognition of that taxable person a bankrupt.

However, for unclear reasons the Bill has been withdrawn, and the problem remains.

As of today, the work on eliminating the above discrepancy  continues on the legislative level. At present, the Tax and Customs Law Committee on of the Ukrainian Bar Association is working on a new Bill on amendments to the Tax Code.

III. Inclusion of the tax authorities’ claims to a register of creditors

There are three aspects of the problem.

First, is it possible to include to a register of creditors the tax authorities’ claims if the underlying tax liabilities are not due and payable yet?

Most economic courts take an unambiguous position that the tax authorities’ claims supported by not effective tax liabilities (including disputed notices of tax assessment) must not be  included in a register of creditors. The only tax debt which is either a tax liability agreed upon by the taxpayer himself or established by the court can be included in the register of creditors.  In particular, this position is articulated by the High Economic Court of Ukraine in its following resolutions: dated 20 December 2011 in the case No 5015/118/11; dated 8 October 2013 in case No 914/77/13 and dated 1 July 2015 in the  case No 914/1820/14.  

Second, what to do if the liquidation procedure is already over, but the tax liability has not yet become due and payable?

Sometimes, courts nevertheless include to the register of creditors tax liabilities that are not yet due and payable. However, if the court takes a position that a tax liability must become due and payable before being included in the register of creditors, then the liquidation procedure may end and the tax liability may not get to the register of creditors at all. If this is the case, the tax authorities will be able to write off such a tax liability as a  bad tax debt.

Third, a highly contentious question is how to treat the tax authorities’ claims whose underlying tax liabilities become due and payable after the opening of the bankruptcy proceeding.

In particular, this situation arises where  a notice of tax assessment was issued by the tax authorities before the opening of the bankruptcy proceeding. The taxpayer challenged the notice of assessment within the scope of the administrative or court  procedure. The appeal turned out to be unsuccessful for the taxpayer and the underlying tax liability became due and payable, but after the opening of the bankruptcy proceeding.

The question is whether such claim of the tax authorities should be counted as competitive or current insolvency claims?

On the one hand, it seems that such claims should belong to competitive insolvency claims. This conclusion can be drawn from the fact that the claims had arisen (the relevant notice of tax assessment had been issued) before the opening of the insolvency proceedings.

On the other hand, such claims became due and payable after the opening of the insolvency proceeding. Thus, they seem to be viewed as current insolvency claims.

Unfortunately,  there has not been enough court jurisprudence so far to give comprehensive answers to these difficult questions.
In the meanwhile, to say that there is no court jurisprudence at all is to say nothing.

An extremely interesting piece of court jurisprudence in this  context is the resolution of the HECU of 11 July 2012 in the case No 18/85 on the bankruptcy of  Molochna Rivyera, LLC.

In this case the HECU:

- acknowledged the claims of the tax authorities to pay tax liabilities, which became due and payable  after the opening of a bankruptcy proceeding to be competitive insolvency claims; and

- pointed out to the failure of the tax authorities to comply with a deadline set out for submitting competitive insolvency claims (the tax authorities submitted those claims after the underlying tax liabilities became due and payable in the liquidation procedure, rather than within the prescribed deadline in the administration of property procedure).

In lieu of conclusion

In sum,  bankruptcy  does really have a substantial tax component. Even despite the new, much more progressive wording of the Bankruptcy Law that took effect on  18 January 2013, there are still a great many tax problems in the area of bankruptcy.