Thursday, March 23, 2017

Blocking VAT Invoices: Ukrainian Approach

One of the most controversial innovations brought by the mini tax reform of 2017 is the mechanism of blocking the registration of VAT invoices. This will work from 1 April 2017 in a test mode and from 1 July 2017 in a full mode.

What for?

The system of blocked VAT-accounts introduced in 2015 was quite a serious blow to the lucrative business of those providing fraudulent encashments services in Ukraine.

However, the representatives of the “industry” turned out to be smart enough to find a “weak spot” in the system of blocked VAT-accounts and began to exploit it actively.

Despite its advancement, the system of blocked VAT-accounts is absolutely powerless against abuses involving supplies to non-taxable persons.

For example, a non-bona fide taxable person  buys on the domestic market or imports a batch of smartphones. Then it resells them to non-taxable third parties and obtain cash or even bank transfer payments in the amount sufficient for recovering the VAT incurred on the purchase of the smartphones. As a matter of fact, the non-bona fide taxable person does not declare output VAT arising from the supply of the smartphones and does not register a VAT invoice.

Consequently, the non-bona fide taxable person retains the input VAT deduction that can be "sold" to those interested in saving on remitting due VAT to the tax authorities. The buyer receives a "set of documents" attesting his entitlement to the input VAT deduction.

Nonetheless, there is a small issue for the parties to the trickery. In most cases, the buyer of the input VAT deduction is not interested in the goods actually sold by the non-bona fide taxable person (in our example - smartphones). So, the "set of documents" for the buyer is produced for the sale of something else: for example, much-favoured "consulting and information services".

In view of the fact that the implementation of the scheme entails the "transformation" of one product to another (in our example, smartphones are transformed into services), the scheme has received the popular name "twist". The very such "twists" are exactly what the blocking mechanism is called to counteract.

How will this work?

The blocking mechanism is as follows:

1) In case of the detection of a "twist", the tax authorities send a document  to the taxable person on the suspension of the registration of the tax invoice.

2) The taxable person has the right to submit to the tax authorities his written explanation (with the attachment of the supportive documents) in order to confirm the lawfulness of the registration of the tax invoice.

3) The explanation of the taxable person is considered by a special commission of the State Fiscal Service of Ukraine within 5 business days from the date of the receipt. Based on the results of the consideration, the commission takes a decision on the registration/refusal to register the tax invoice.

4) The taxable person has the right to appeal from the decision of the commission under the administrative and /or judicial procedure.

Conclusions and reservations

The mechanism for blocking the registration of tax invoices is absolutely necessary to counter VAT fraud. At the same time, the blocking mechanism entails significant risks for bona fide taxable persons. The latter risk to fall into disgrace of taxmen endowed with new broad powers.

By and large, much depends on how well statutory instruments determining grounds for suspending / canceling the registration of tax invoices are worked out. The adoption of such instrument is entrusted to the Cabinet of Ministers of Ukraine and the Ministry of Finance of Ukraine.

It is crucially important that grounds for suspending / canceling the registration of tax invoices are formulated with utmost precision and with due regard for the sound balance of interests of the tax authorities and bona fide taxable persons. Given the complexity of the issue and the high dependence of the decisions on the specific circumstances of the case, the task is not simple even for the authentic tax luminaries.

Let us hope for the best!


* Photo from youtube.com

Friday, December 9, 2016

Beneficial Owner: Hunt for Phoenix

Co-authored by Vadym Avdieiev
 At one of international taxation events we heard from a colleague from Avellum law firm, Mr. Vadim Medvedev, about the very interesting case of Phoenix Capital LLC* related to the application of the concept of beneficial owner. We could not help, but examine the case in more details and share our findings with our dear readers.

So, what makes the case so special?

First of all, the case is memorable for featuring an unusual approach to a determination of beneficial owner. The case did not revolve around so familiar to us quotations of Article 103 of the Tax Code of Ukraine providing that agents cannot count as beneficial owners of an income.

The taxmen and courts went much further. They investigated into the ultimate beneficial owner of Ukrainian “Phoenix” that had paid the income to a Cyprus-based company named Okland Holdings Limited. They established that the ultimate beneficial owner of both of those companies had been the same person – a mysterious “PERSON_1” under the terminology of the Unified State Register of Court Rulings.

The evidence confirming the simultaneous ownership over those two companies was the information provided by Ukrainian bank “Pivdencombank” on the existence of  the indirect control of “PERSON_1” over Ukrainian “Phoenix” through a chain of non-resident companies. Moreover, surprisingly though, such “incriminating” evidence was also the letter of the Head of the Representative Office of Okland Holdings Limited referring to the same “PERSON_1” as the beneficial owner of this Cypriot company.

Unfortunately, we have been unsuccessful in finding information on how exactly the taxmen managed to obtain those “unique” pieces of evidence. Most likely, they were gathered during a criminal proceeding initiated against the management of Phoenix Capital LLC. The criminal proceeding is, as always, a “sealed book”. From a small fraction of information publicly available we have not managed to find answers to our questions.

If anyone of our readers is more familiar with the case of “Phoenix”, we would highly appreciate your comments regarding how the taxmen managed to “persuade” the bank and the representative of the Cyprus company to disclose such valuable information.

* There is a fair number of court judgments in the case rendered by courts of different instances. However, in our opinion, the details of the case are best covered in the Resolution of the District Administrative Court of Kyiv dated 4 March 2013 (http://www.reyestr.court.gov.ua/Review/29724246)

** The photo is from http://www.qygjxz.com 


Friday, August 12, 2016

Major Tax Amendments 2016

The following is a brief overview of the amendments to tax legislation effective from the beginning of 2016.

Corporate Income Tax

- Returning to the quarterly taxable period is made. The annual taxable period is now only possible for certain agricultural producers and taxpayers whose previous year revenue did not exceed UAH 20 mln.

- Monthly advance payments are abolished. The tax is to be remitted after filing relevant tax returns. However, there is still one advance payment to be discharged in 2016. In particular, by the end of the fourth quarter the taxpayer will have to remit an advance payment amounting to 2/9 of its tax liabilities calculated for the three quarters of 2016 (one can see some analogy here to a 11 month taxable period existing a few years ago).

Personal Income Tax

- A flat rate of 18% replaces the progressive rate of 15/20% being previously in existence;

- The procedure for remitting advance payments by individual entrepreneurs subject to the general system of taxation is changed. The basis for their calculation is now the preceding quarter, rather than the preceding year. Moreover, an advance payment is no more needed for the fourth quarter.

Single social contribution (SSC)

- 3.6% SSC imposed on employees is abolished.

- The rate of SSC levied on employers is significantly reduced from 36.76 - 49.7% to 22%.

- The maximum amount of income chargeable to SSC increases from 17 to 25 living wages (UAH 36 250 as of August 2016).

VAT

- The absence of a taxable person at his registered office does not make up a ground for his involuntary VAT deregistration anymore.

- The rules on the determination of the tax base for self-produced goods/services are changed. While in past it had to be not lower than their cost, at present it must not be below the applicable usual (market) prices.

- The rules on taxing the sale of mortgaged and pledged property by banks and other financial institutions are clarified. In regardless of whether such property is acquired from taxable or non-taxable persons, it is taxed under the "margin" scheme. What is taxed is the surplus between the selling price of the property and the value at which the property has been earlier received by a bank or another financial institution into their ownership in consequence of the enforcement of the debt.

- A fine for mistakes made in VAT invoices is introduced (previously there was only a fine for the delayed registration of VAT invoices).

- A VAT exemption for the exportation of the majority of grain and industrial crops is removed. The latter made impossible VAT refund on such transactions in the past thereby lowering prices at which export trading companies were buying grain and industrial crops from domestic players.

- VAT refund mechanism is changed to a large extent. While formerly there were two VAT refund procedures, general and automatic (accelerated), for now there is only one refund procedure in place. Under the new rules, VAT refund is provided based on the results of a desk audit. Documentary audits are also possible, but only in two cases expressly provided for in the Tax Code of Ukraine. In particular, documentary audits are possible with regard to:

1) The amounts of VAT refund previously unconfirmed by documentary checks for taxable periods prior to 1 July 2015 (the beginning of the full-mode operation of the system of blocked VAT-accounts) and

2) The amounts of VAT refund arising from prior to 1 January 2016 purchases of goods/services from taxable persons subject to the special VAT treatment of agricultural producers.

The new system provides for the simultaneous existence of two public registers of VAT refund applications (the registers are available on the website of the State Fiscal Service of Ukraine at http://sfs.gov.ua/diyalnist-/vidshkoduvannya-pdchv/povidomlennya-pro-reestri-zayav/240063.html).

Under the amended rules, VAT refund is to be given in the chronological order according to the time at which the VAT refund application has been entered into one of the registers. The most "mysterious" component of the new system is the introduction of two, rather than one, registers of VAT refund applications. This is without specifying any priority for getting the requested VAT refund out of the either particular register.

The first register accommodates VAT refund applications of taxable persons being compliant with certain criteria set out by the Tax Code of Ukraine. The criteria are outwardly very similar to those formerly envisaged for automatic VAT refund. The second register accommodates all other VAT refund applications, i.e. those coming from taxable persons who do not meet the said criteria.

- A clear 15 day time-limit is established for conducting, based on the complaint of the purchaser, the documentary unscheduled audit of the supplier failing to register its VAT invoice or making a mistake in its mandatory details.

- A rule is introduced whereby minor errors in the wording of VAT invoices do not comprise anymore an obstacle for the purchaser to enjoy its input VAT deduction.

- Significant restrictions are introduced for the beneficiaries of the special regime of VAT taxation for agricultural manufactures (indirect subsidy). The beneficiaries are no more able to keep all the due VAT (surplus of output VAT over input VAT), instead of remitting it to the tax revenues. At present, they are only allowed to keep the following parts of the due VAT:

1) 15% - for operations with grain and industrial crops;

2) 80% - for livestock operations;

3) 50% - for other operations.

Unified tax

- The maximum allowed revenue for the third group of taxpayers is lowered from UAH 20 mln to UAH 5 mln.

- The tax rate for the third group of taxpayers is raised from 2% to 3% (for those who pay extra VAT) and from 4% to 5% (for those who are VAT-registered persons).

- For the fourth group taxpayers (agricultural producers), the requirement regarding the proper execution of the lease/ownership rights to the land is abolished.

- Tax rates for the fourth group of taxpayers (agricultural producers) are raised.

Administration

- The procedure for the settlement of tax liabilities against the overpaid tax is improved. Main changes relate to the introduction of an automatic settlement (no application is required on the part of the taxpayer) which is now available for settlements conducted within the scope of the same tax, as well as the possibility to use claimed VAT refund for settling against other taxes liabilities.

Miscellaneous

- An electronic system of administration of excise tax levied on fuel sales is introduced (from 1 March 2016 the system works in a test mode and from 1 April 2016 it works in a full mode).

- An additional tax on real estate in the annual amount of UAH 25,000 is introduced for owners of apartments with floor space over ​​300 square meters and houses with floor space over 500 square meters.

- The scope of transport tax is modified. This now includes cars not older than 5 years not depending on their engine capacity, but depending on their market value. In particular, car whose market value is more than 750 times the minimum statutory salary (about UAH 1 mln as of 2016) are chargeable to transport tax.


Wednesday, December 2, 2015

Mr. Ternovy’s Procedural Trick



At one of tax-related events I had the honor to meet Mr. Ruslan Ternovy, a partner with “Invicta”, Advocacy Union (http://aoinvicta.com.ua).

Ruslan shared, in my opinion,very interesting scheme aimed at delaying the consideration of tax disputes by a court of cassation.

The scheme enables prolonging the cassation proceedings by the period of time between the completion of the appeal consideration in respect of a claim brought against a tax assessment notice and the issuance of the tax demand notice. Since the tax authorities do not often hurry to  send tax demand notices, it is possible to delay the consideration of the case by the court of cassation for several months or even years.

Why may such a delay be sensible for the taxpayer is a good question to answer. The delay may well make sense when your legal position in the case is, to put it mildly, quite modest, and you have almost no chance to win the case at the Highest Administrative Court of Ukraine (hereinafter – the “HACU”).

By applying Mr. Ternovy’s scheme, you can put off the enforcement of the tax debt for a certain period of time which is a great relief for the taxpayer.

How does the scheme work?

The first thing to be done by the taxpayer for the scheme to apply is to ensure the non-appearance of his representatives at the court hearings held by the court of appeal. This step is essential for the further renewal of a time limit for submitting an appeal to the court of cassation. Without such a renewal the scheme is merely impossible altogether.

After the resolution of the case by the court of appeal not in your favor, you do not obtain the judgment of this court and do not hurry to submit an appeal to the court of cassation.

You would rather expect a tax demand notice to be served on you by the tax authorities.
After the receipt of the tax demand notice you:

1. Bring a legal action aimed at the cancellation of the tax demand notice. Mr. Ternovy suggests discharging an insignificant portion of the tax debt, so as to create certain grounds for the challenge. Thus, the actual amount of the tax debt and the amount of the tax debt specified in the tax demand notice vary. Accordingly, you may try to justify the legal action by the wrong amount of the tax debt indicated in the tax demand notice.

2. Submit an appeal to the court of cassation accompanied by a request to renew an expired time limit for the above appeal. The renewal of the expired deadline can be justified by the failure of the court of appeal to send its judgement to the taxpayer. It is not a rare occasion that the courts of appeals fail to send their judgements to the litigants. However, they must do so in accordance with the requirements of para 4 of Section 205 and para 3 of Section 167 of the Code of Administrative Procedure of Ukraine (hereinafter – the "CAP of Ukraine"). Those rules directly bind the courts of appeals to forward their judgements to litigants whose representatives were not present at the court hearings. That is why, as mentioned above, the non-appearance of the taxpayer’s representatives at the court hearings held by the court of appeal is critical.

The HACU usually renews a time limit for filing an appeal to it in such situations even if the contested judgement of the court of appeal dates back a few years. See, for example, the HACU’s judgement in the case brought by an individual entrepreneur against the Belotserkivska State Tax Inspection (http://www.reyestr.court.gov.ua/Review/38442474). In the present case the HACU renewed the time limit for an appeal to the court of cassation due to the failure of the court of appeal to forward its judgement to the taxpayer over more than 1,5 years after the announcement of its introductory and resolution parts.

3. Following the submission of the appeal to the HACU, you ask the court of first instance to postpone the consideration of the case brought in respect of the tax demand notice in view of the impossibility of the resolution of this case before the resolution of the appeal filed with the HACU (para 1 (3) of Section 156 of the CAP of Ukraine). The court of the first instance postpones the proceedings.

Benefits

Here are some thoughts on the actual outcome of the operation of the scheme. As stated earlier, the application of scheme may delay the enforcement of the tax debt. Let me expand a little bit on this point.

Neither challenging the tax demand notice, nor brining the appeal to the court of cassation creates a direct obstacle to the further enforcement of the tax debt on its own. Yet, those court proceedings can be effectively leveraged by the taxpayer to counteract the tax authorities’ attempts to get the tax debt collected.

This is a statutory procedure that for getting a tax debt collected the tax authorities should obtain a court order allowing them to do so. Due to the existence of the above proceedings, the taxpayer may well request the court to decline to issue the above order on the grounds that there is still an unresolved dispute as to a point of law (para 5 (2) of Section 183-3 of the CAP of  Ukraine).

Faced with the decline to issue the above court order, the tax authorities can resort to the general court procedures and file a legal action seeking a court judgment sanctioning the collection of the tax debt. However, even in this situation the taxpayer is not doomed. He may well ask the court to postpone the consideration of this case before the completion of the case brought against the tax demand notice (para 1 (3) of Section 156 of the CAP of Ukraine).

Instead of conclusion

In sum, the scheme appears to be an extremely interesting and promising course of action. However, I must confess that it seems to be ideally suited just for small troubled taxpayers that are not seriously concerned with a tax lien and other "pleasant" effects of the existence of the tax debt. If you are a large taxpayer involved in far-reaching economic activities, it is best to think a hundred times before implementing the scheme in practice.

* Photo from http://in.kvs.org.ua