Pseudonullity from Height of Eagle's Flight ~ U-Tax Blog

Thursday, April 26, 2012

Pseudonullity from Height of Eagle's Flight

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Several years have already passed by since the tax authorities embarked on their raid against null transactions or, to be more precise, against the transactions that, in their understanding, which is very difficult to share are null.

Usually, the "battlefield" is as follows. The tax authorities manage to find among the suppliers of a taxpayer some problem, in their view, entities (not available at their registration office, under liquidation, registered in the name of false persons, with no fixed assets, with the small number of employees, etc.). It is concluded that the execution of the supply contracts with such problem contractors has been leveled at attaining unlawful tax benefits (artificial input VAT deduction or expenses). The relevant agreements are rendered null. The tax authorities believe that these agreements violate public order as those directed at the misappropriation of the public property (tax revenues). As a consequence, the taxpayer loses the right to input VAT deduction and/ or expenses.

Typically, these battles find their final resolution in the administrative courts. If the taxpayer can vindicate the real (true) nature of the business transactions and his unawareness of the violations made by the suppliers, it is in principle a good chance for him to come out of the "battle" as a winner. More detailed information on the practice of resolving such disputes can be found in my posts of 15 March 2012, 9 September 2011 and 6 April 2011.

Nevertheless, sometimes there occur unfortunate exceptions when combating "pseudonullity” goes beyond the administrative proceedings by putting the taxpayer under the extremely heavy "tracks of the criminal proceedings tank."

It so happened to the unlucky directors of “VLATA Ltd”, LLC and "Vizavi ", LLC who were convicted in 2010 of para 2 of s. 367 of the Criminal Code of Ukraine (neglect of official duty) for declaring the input VAT deduction based on the  transactions with the problem (in opinion of the tax authorities) contractors. The guilty verdicts were delivered by Justice Anatoliy Orel (Ukrainian “orel” means “eagle” in English) of the Slavutych Court of Kyiv Region.* The verdicts were affirmed in 2011 by the Appellate Court of Kyiv Region. **

Failing to ascertain that there were any dummy (not linked with the real movement of goods and services) transactions involving "VLATA Ltd", LLC and "Vizavi", LLC, the court justified the charges in neglect of official duty  in a manner like this:

...the defendant had not inquired into the real existence of the suppliers, had not personally met their directors, had not checked the lawfulness of the origin of the goods supplied, had not verified the trustworthiness of the contracts and primary accounting documents, VAT invoices included, had not visited for this purpose the offices of the suppliers, had not determined the real identities of the contracting representatives of the suppliers, while he had been able to do so taking account of the information, experience, organizational and technical capacities available to him; instead, he had unreasonably limited his enquiry only to the verification of the suppliers’ VAT registration...

On a good note, the conviction of the directors of the taxpayers who has had the business relations with problem contractors is not a systematic phenomenon nowadays. However, it is better to be prepared for the worst. FOREWARNED IS FOREARMED.

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