Thursday, June 15, 2017

Novelty No 2 - Focus on Pretrial Proceeding

Co-authored by Anton Havryk
This article continues a series of publications on the most striking changes in the new version of the Code of Administrative Procedure of Ukraine for the purposes of tax litigation.
What follows is the overview of the second most significant (of course, in our opinion) change attributable to shifting emphasis on pretrial proceeding.
The overview of the first most significant change is available here.

It is not a secret that as of today a pretrial proceeding is something along the line of "profanation". During the pretrial proceeding the judges do not bother themselves to  conduct any serious preparatory measures to streamline the further trial. Pretrial hearings are rarely appointed. Consequently, the real work on the case begins at trial. The whole procedure is  thus much delayed and not effective.

The Bill proposes changing the situation radically by adhering to the principle that sounds like common sense: “thorough preparation is key to success”.

All the main procedural actions  are to be conducted before trial. In particular, it is envisaged that the following must be done at the stage of pretrial proceeding:  


  • A pretrial hearing is to be mandatory held (unless the case is subject to a  simplified procedure).

  • Motions and petitions of the litigants are to be resolved, including those related to appointing expert examinations, calling witnesses or collecting evidence. The court will not examine the motions and petitions of litigants at trial.

  • A plaintiff is to modify or adjust the statement of the complaint.  Changing subject or bases of the complaint, and even  increasing or  decreasing the size of the claims will not be allowed at trial.

  • Motions for the judge's recusal are to be resolved.  

  • The exchange of pleadings between litigants is to be carried out.

Hence, the overwhelming majority of procedural actions will be performed at the pretrial stage. What is left to the court at trial is to hear brief oral statements of the parties, examine evidence, conduct court debates, and render a judgement.

* Photo from https://www.allconnect.com

Tuesday, June 13, 2017

New Code of Administrative Procedure: Top 16 Novelties for Tax Litigation - NOVELTY No 1 - “E-Court”

Co-authored by  Anton Havryk

At this moment, there is a great effort directed at reforming the judicial system of Ukraine in connection with the creation of the new Supreme Court. One of the key stages of the reform is the adoption of the new versions of procedural codes (the Bill of the President of Ukraine No 6232 - http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=61415).

We are delighted to offer a series of publications on the brightest novelties of the Code of Administrative Procedure of Ukraine in the context of tax litigation.

Novelty No  1 - “E-Court”

A gradual transition to the so-called "E-Court" is planned. The philosophy behind the concept the  "E-Court" includes:  
  • Filing procedural documents by participants in litigation, including statements of claims, in an electronic format (signed by digital signatures);

  • Serving procedural documents on participants in litigation in an electronic format;

  • Transiting to the electronic format of a case file. Case files will be circulated among courts of different instances in an electronic format.

For the purposes of the introduction of "E-court", the following is provided at the first stage:  

  • Attorneys-at-law (advocates), governmental entities, public and municipal utilities must register their official email addresses in the single information system of the judiciary. The registration remains voluntary for other participants in litigation. After the registration, all court documents will go to the official email addresses of participant in litigation only.  Participants in litigation may also obtain procedural documents in a hard format copy, but only subject to their special request filed with the court.

  • A 20% discount will be provided for the payment of court fees accompanying the e-submission of procedural documents. In large-scale tax disputes the 20% discount can be  big enough to stimulate participants in litigation to switch to e-submissions of procedural documents.
  

Monday, May 22, 2017

9% Rate of Personal Income Tax on Dividends: Profound Idea or Banal Error

Why is this important?

The introduction of the 9%  rate of  personal income tax on dividends for specific entities was one of the important changes adopted within the scope of the mini tax reform of 2017. In particular, the 9%  rate was provided for dividend distributions made by non-residents, collective investment institutions and non-payers of corporate income tax, including unified tax payers.  

Why is this change important?

The answer is quite simple: the introduction of  9%  rate can facilitate the removal of some income from the shadows.

Firstly, some wealthy members of the Ukrainian society are allegedly ready to receive  legitimate income from their foreign companies in the form of dividend distributions if those are taxed on the 9%  rate, rather than 18 % rate.       

Secondly, some tax evasion schemes utilized by legal entities subject to unified tax of the third group and aimed at avoiding 18 % tax on dividends may lose their sense.  Such taxpayers may extract their profits by means of dividend distributions instead of transferring them based on “fake nature” deals to the individual  entrepreneurs.  The cost of paying dividends will be higher by few percent points than that of the “services” of the individual entrepreneurs. However, owing to the completely legitimate and risk-free nature of the dividend distribution, we can assume that selection will done in favor of the latter.

Thirdly, applying the reduced rate of personal income tax may promote the legalization of the shadow incomes of small and medium agricultural entrepreneurs. In the vast majority of cases their enterprises are unified  tax payers of the fourth group. We can assume that, if the 9% rate of personal income tax is introduced, the profits of such enterprises will be distributed among their owners by way of dividends,  rather than through various “dark” schemes.          

From what time is it valid?

Determining the time at which the 9%  rate on dividend distribution enters in force is the most interesting point. 

According to the Law of Ukraine of 21 December 2016 No 1797-VIII “On Amendments to the Tax Code of Ukraine on Improving the Investment  Climate in Ukraine” (hereinafter - the “Law on Improving Investment  Climate”)  it was set out that the 9%  rate would take effect after the Law of Ukraine ”On the Service of Financial Investigations” has come into force.   

At first glance, it is a very deep idea.  Is not  it?

At first, instead of the Tax Police the Service of Financial Investigations is created. The Service provides better quality control over the compliance with tax laws. Only after this is accomplished, taxpayers are able to apply the reduced rate of  personal income tax on dividends.

Nonetheless, what was considered to be the  “brilliant” idea proved to be a banal error made in the course of the enactment of  the Law on Improving Investment  Climate.

Eventually, the technical error has been corrected by the Law of Ukraine dated 23 March 2017 No 1989-VIII (hereinafter - the “Law on Clarification”). In particular, this Law repealed the provision of the Law on Improving Investment  Climate under which the introduction of the 9% rate was suspended to the adoption of  the Law of Ukraine ”On the Service of Financial Investigations”.

As a consequence, the 9%  rate of  personal income tax on dividends became applicable starting from 1 January 2017.

How to refund  the tax ?

Although the Law on Clarification introduced 9%  rate of  personal income tax from 1 January 2017, it entered into force from 15 April 2017. The dividends payable for the period from 1 January 2017 to 15 April 2017 were taxed at 18% personal income tax.  
Is it possible to refund the overpaid income tax for the relevant periods and how to do it?

The first thing that, in our opinion, the tax agent* who withheld 18% tax from dividends in the period from 1 January 2017 to 15 April 2017 is supposed to do is to specify the overpaid income tax in the tax return - Form 1DF (ДФ).  

In the column 4a “sum of tax withheld” the tax agent should reflect the sum of the tax at the rate of 9%, and in the column 4 “sum of tax remitted” he should reflect the sum of the tax already paid at the rate of 18%.  After the processing of the tax return the tax authorities must mark the sum of the overpaid tax as refundable and include this information to the integrated card of the taxpayer.        

The question is who has the right to refund the overpaid personal income tax: the tax agent or the taxpayer who received the dividends.

First of all, it is logical that the recipient of the dividends may apply for the refund of the overpaid personal income tax. This right is undoubtedly granted to him as a payer of personal income tax according to section 43 of the Tax Code of Ukraine (the refund of erroneously and/or overpaid taxes). The overpaid personal income tax must be refunded within 20 calendar days after the submission of the relevant application.

The legislation does not expressly entitle the tax agent to refund the overpaid personal  income tax from the state revenues. However, the refund to the tax agents is possible in accordance with the clarification of the State Fiscal Service of Ukraine. This clarification has been posted in the publicly available information and reference database "ZIR" (103.07 category). The clarification emphasizes that the tax agent has a right either to refund the overpaid personal income tax or to carry it forward to offset against the tax obligations of the ensuing periods.    
Co-authored by Anton Havryk 

It is clear that following the refund of the tax from the state revenues the tax agent will have to transfer the amount of the refunded tax to the natural person as part of the dividends belonging to the latter.

Lastly, it comes as no surprise that the tax authorities are not usually prone to refund  overpaid taxes to taxpayers in a voluntary fashion. So,  taxpayers and tax agents who are not content to carry the overpaid tax forward ought to be ready to step into a court battle with the tax authorities.

* A person responsible for withholding and remitting personal income tax under the “Pay-as-You-Earn” system.

** Photo from www.pinterest.com


Friday, May 12, 2017

Such Wanted Agency

In March 2017 the Cabinet of Ministers of Ukraine approved a bill on the establishment of the Service of Financial Investigations (the “Service”). The main purpose of this bill is to eliminate the Tax Police and optimize the system of law-enforcement agencies dealing with financial crimes.

Currently, there are four law-enforcement agencies in Ukraine counteracting financial crimes:

- the Tax Police;
- the Department of Economic Security of the National Police;
- the Department of Counter-Intelligence Economic Security of the Security Service of Ukraine (the “SSU”);
- The investigative bodies of the State Prosecutor’s Office.

Once the law is adopted, the Service will be richly endowed with all the powers as to detection and pre-trial investigation of crimes in  economic, financial and tax areas. Thus, there will arise “a monster” taking on all the powers on combating crimes in the economic sphere.

The establishment of the Service will mean not only “extermination” of the Tax Police, but also the elimination of the Department of Economic Security of the National Police.  In the meanwhile, the powers of the Department of Counter-Intelligence Economic Security  of the SSU will be considerably narrowed.
Co-authored by Anton Havryk 
 
It is planned that the Service will investigate crimes related to the use of financial resources, tax and the turnover of excisable goods, to name but a few.
Approximately thirty sections of the Criminal Code of Ukraine will fall under the jurisdiction of  the Service,  including such popular ones, as:

- section 191 - misappropriation of property through the abuse of office; 
- section 212 - tax evasion;
- section 222 - financial fraud;
- section 358 - forgery of documents, seals, stamps and forms, sale or use of forged - documents, stamps, seals.

The establishment of the Service can be regarded as a certain kind of lustration process aimed at the Tax Police and other law enforcement agencies concerned with financial crimes. 

The bill provides that the Service will filled by quite a new staff. Persons who have been working at law-enforcement agencies counteracting financial crimes since 2010 onwards will not be admitted to the recruitment process.

In our opinion, the admission criteria are not clearly formulated. 

If, for instance, to talk of once employees of the National Police (former Militia), one may take note of the following. The road to the Service is surely opened  for district inspectors  (sheriffs). On the contrary, this road is  unequivocally closed for former servicemen of the Department of Economic Security of National Police. The latter are considered to be former employees of a law-enforcement agency concerned with financial crimes. 

There is a much more difficult situation with investigating officers and former employees of the once legendary Organised Crime Department of the National Police. Those two categories of the servicemen were only  partially involved in dealing with financial crimes (along with dealing with ordinary crimes). The moot point here is whether they can be allowed to the recruitment process.

The officers of the Service, just as those of National Anti-Corruption Bureau of Ukraine (the “NABU”), will be called detectives. There will be no intelligence and investigating officers as they currently exist in the Tax Police and other law-enforcement agencies responsible for financial crimes.

It is planned that the detectives of the Service will have decent salaries. For example, the usual detective’s salary will be 20 living wages, which is about 32 000 hryvnias. This approach is used following the example of the NABU to reduce the temptation of the Service’s detectives to continue “deep rooted corrupt practices”.

In our opinion, the creation of the Service may be of a great benefit to Ukraine.  At least, the beneficial effect is visible in the concentration of powers to investigate financial crimes in one body. This will lead to the elimination of the duplication of the functions of law-enforcement agencies and may improve the efficiency of investigation.

For example, it is well possible today that the same criminal offences, say, related to taxation, are being investigated by different law-enforcement agencies. If information on a VAT evasion gets to the National Police, the offence may be qualified and investigated under section 191 of the Criminal Code of Ukraine (misappropriation of property through the abuse of office). If the same information gets to the Tax Police, the offence may be qualified and investigated under section 212 of the Criminal Code of Ukraine (tax evasion). The creation of the Service must bring an end to such a wrongful practice.

However, the real and much more significant beneficial effect will take place, if only the reform fully succeeds. Instead of the currently existing law-enforcement agencies with excellent “corruption track records” we will have the new independent agency totally free from corrupt practices.

Photo from http://izvestia.kharkov.ua

Friday, April 28, 2017

"Servicing Appendages" of State Fiscal Service of Ukraine

Co-authored by Anton Havryk 
Foreword  

Apparently, the only lazy did not hear about the deprival of the local  tax offices of their powers to audit taxpayers since 2017. As of now, only the tax authorities of regional (oblast) and central levels can perform tax audits. Such an official clarification  has been provided by the State Fiscal Service of Ukraine in its  letter dated  17 January  2017 "On Carrying out of Tax Audits in 2017".  

This is an undeniable fact widely explored by hardly all specialised media in Ukraine. However, what powers have the local tax offices been additionally deprived of during the minor tax reform of 2017 and how may  this affect the tax litigation in Ukraine?     

Redistribution of functions

Since 1 January 2017 there has been a serious redistribution of powers among  the different levels of the State Fiscal Service of Ukraine. The powers of local tax offices have been narrowed in the most severe manner. The exhaustive list of these powers are now set out in section 19-3 of the Tax Code of Ukraine. New functions of local tax offices are as follows: (і) servicing taxpayers and (іі) doing registration work (registering taxpayers and keeping registers related to taxation).

Local tax offices do not retain any other functions.

As we can see, the narrowing of the powers of local tax offices go far beyond the deprival of the power  to carry out tax audits. Below,  we will discuss what exactly functions the local tax offices have been deprived of and what functions they have kept.  

Acceptance of tax returns

Section 19-3 of the Tax Code of Ukraine does not  specify anything about the acceptance of tax returns. However, the  practice has already been established  under which the local tax offices continue  accepting tax returns of taxpayers. 

It is likely that the acceptance of tax returns is considered as part of servicing taxpayers or part of registration work (namely, registering the objects related to taxation). 

Notices of tax assessment

Local tax offices are no more in charge of  issuing notices of tax assessment. As of now, the only tax authorities of regional (oblast) and central levels can issue such documents.

Notices of tax assessment issued by local tax offices following 1 January 2017 must be revoked. We faced this situation by our own. Some notices of tax assessment issued to our clients by local tax offices after 1 January 2017 have been revoked by the tax authorities of regional (oblast) level. The reason for the revocation was that the local tax offices had  no more  right to issue such documents.

Repayment of tax debt

This is also now exclusively within the powers of tax authorities of regional (oblast) or central level to enforce a tax debt. From our own experience, following 1 January 2017 one of our clients was issued a tax demand. It was signed by the deputy head of the tax authority of regional (oblast) level. The local tax office was indicated in the tax demand as a recipient of the tax demanded only. 

Refund  of erroneously and/or excessively paid taxes

It is unlikely that the refund  of erroneously and/or excessively paid taxes still belongs to the functions of local tax offices related to servicing taxpayers or doing registration work.

It is quite logical that local tax offices are no more in a position to sign documents authorizing the refund of erroneously and/or excessively remitted taxes to taxpayers and to hand over those documents to the State Treasury Service of Ukraine. It can be assumed that tax authorities of regional (oblast) level must sign the above documents and pass them to the State Treasury Service of Ukraine.

However, as of the date of the publication of this article the unofficial position of the State Fiscal Service of Ukraine is that the signing of documents authorizing the refund of erroneously and/or excessively remitted taxes to taxpayers still rests within the powers of local tax offices. What were those arguments used by the State Fiscal Service of Ukraine to bolster this position remains a major  mystery for us.

VAT refund

It is logical that desk and documentary tax audits  in the course of providing VAT refund must be carried out by tax authorities of regional (oblast) level.  

The situation is not clear enough with regard to entering data to the Register of VAT Refund Applications, including data on “approved” VAT refund. However, it is most probably that tax authorities of regional (oblast) level must enter these data to the Register of VAT Refund Applications.

According to section 19-3 of the Tax Code of Ukraine the powers of local tax offices in respect of doing registration work do not extend beyond the registers administered by the bodies of the State Fiscal Service of Ukraine. Yet, in this case the Register of VAT Refund Applications is administered  by the Ministry of Finance of Ukraine, rather than by the State Fiscal Service of Ukraine.  

Influence on tax litigation

Taking account of the redistribution of the functions between the authorities of the State Fiscal Service of Ukraine of different levels, we can provide the following recommendations for the purposes of tax litigation:

- If a tax audit or a notice of tax assessment was carried out/issued following 1 January 2017 by the local tax office, the notices of tax assessment can be well reversed because of the excess of powers on the part of the local tax office.

- If a tax demand or any other contested decision associated with the collection of tax debt was  adopted after 1 January 2017,  those decisions can be well reversed because of the excess of powers on the part of the local tax office.

- In the cases concerned with the refund of erroneously and/or excessively remitted taxes and VAT refund a serious thought should be given to the replacement of defendants from  local tax offices to tax authorities of regional (oblast) level