New Criminal Proceedings Code of Ukraine: Bail Amount to Decrease

Photo from http://ibarraturismo.com The extremely famous Humanization of Liability for Economic Offences Act 2011 (for more details please see my post of 8 November 2011) being in operation from 17 January 2012 has received mixed estimates from taxpayers. The most of the criticism has been aimed at its provisions stating that: - A fine as a punishment for certain crimes, including large-scale tax evasion, must not be less than the amount of the actual damage caused by the crime (the amount of the tax evasion); - The amount of bail must not be less than the amount of the actual damage caused by the crime (the amount of the tax evasion). The existence of such provisions hampers or even makes it impossible to benefit from the progressive rules of this Act with regard to the replacement of an imprisonment by an fine and the replacement of an arrest (as a preventive measure) by bail. It seems that the government has accepted the criticism, at least in part. The new Criminal Proceedings Code of Ukraine (for more information on this code please see the post of 19 May 2012) has no rules determining that the amount of bail ought not to be less than the actual damage (the amount of the tax evasion). With the entry into force of the new Criminal Proceedings Code of Ukraine the amount of bail will no more tied to the amount of the damage and will be limited to 300 minimum wages (UAH 321.9 thousand for the year 2012).

Criminal Liability for Declared but Non-Discharged Tax

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In practice, there is a question whether the criminal charges can be brought against a company’s officers who have declared tax but have failed to remit it to the budget within the prescribed term.

It appears that the Unified State Register of Court Decisions (an “inexhaustible source of knowledge” to a certain extent) is able to provide an answer even to this question.

Let me look at two analogous cases from the register. These are In re Mirgorod Kombinat Khliboproductiv № 1 (http://reyestr.court.gov.ua/Review/20486739) and In re Tsukrovyi Zavod Maharynetskyi (http://reyestr.court.gov.ua/Review/9105838). The cases were resolved in 2011 by the general courts of first instance.

In the given cases directors were convicted because of the failure to discharge the declared tax liabilities on personal income tax and unified social contribution (pension contribution) in the presence of the financial ability to do so. 

The conduct of the Director of Mirgorod Kombinat Khliboproductiv was classified as neglect of official duty (s. 367 of the Criminal Code of Ukraine), while the conduct of the director of Tsukrovyi Zavod Maharynetskyi was classified as tax evasion/unified social contribution evasion (sections 212 and 212-1 of the Criminal Code of Ukraine).

Can this approach be extended to other taxes and contributions? For example, may the director who has declared corporate income tax due but has not paid it in time be exposed to criminal conviction?

It seems that the answer is rather ‘yes’ than ‘no’. Even though there is no priority for paying corporate income tax liabilities over any other liabilities at law, the prosecuting authorities can identify a crime in the conduct of the director remitting an amount “X” available at the company’s account not to the state budget, but to the supplier providing raw materials needed for the continuation of the company’s business.

In the above cases, the judges did not apparently burden themselves with considering the matter of priority/non-priority of certain payments. If they had opined that the criminal responsibility for the declared but not paid tax is only possible insofar as the legislation lays down the priority of the payment of such tax to the budget over making other payments, the directors of these companies would have been convicted only for the failure to remit unified social contribution (pension contribution), and would not have been convicted for the failure to discharge personal income tax.

Currently, the law sets forth the priority of discharging unified social contribution (pension contribution)*, but does not provide such a priority for personal income tax.

* - para 12 of s. 9 of the Law of Ukraine "On the Collection and Accounting of Unified State Social Contribution" and para 12 of s. 20 of the Law of Ukraine "On Compulsory State Pension Insurance".

New Criminal Proceedings Code of Ukraine and Taxpayers

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The new Criminal Proceedings Code of Ukraine (hereafter – the “CPCU”) was officially published the other day. The new code will take effect in six months after its publication (on 19 November 2012). This article is devoted to outline what taxpayers can specifically expect of the enactment of the new CPCU.

The biggest blow to taxpayers, in my opinion, is the deprivation of the possibility to challenge a decision on instituting criminal proceedings in court. The institution of criminal proceedings stage is displaced by the entry of the information on a crime into the Unified Register of Pre-trial Investigations. Although the new CPCU does not preclude the judicial review of the decisions of the pre-trial investigators/prosecutors on making entry into the aforesaid register (the analogue of the decision on instituting criminal proceedings), the corresponding type of complaints are not included in the list of the complaints to be dealt with by a court at the pre-trial investigation stage (s. 303 of the CPCU).

Thus, the court may consider the complaint only after the pre-trial investigation is completed. But the hearing of the complaint at this late stage eliminates any reasonability behind lodging the complaint at all and makes taxpayers virtually defenceless in face of the arbitrarily initiated criminal proceedings.

It should be noted that the adoption of the new CPCU has turned out to be the highly successful continuation of the reform launched by the Tax Code of Ukraine and levelled at the denudation of the taxpayers of the right to oppose the unlawfulness of the institution of the criminal proceedings through the court. The Tax Code of Ukraine has significantly narrowed the possibilities for the judicial review of decisions on instituting criminal proceedings in view of its provision (para 58.4), whereby in the event of the institution of a criminal case the tax assessment ought not to be issued until the final resolution of the case and the delivery of the guilty verdict.

Because of these changes the taxpayers lost their possibility to appeal the tax assessments to administrative courts and later to use the judgments of the administrative courts on abolishing such tax assessments as an argument in favour of the illegality of the institution of the criminal proceedings. The CPCU goes much further by saying complete and the absolute "no" to any attempt on the part of a taxpayer to resist the criminal investigation through a court appeal.

Another no less remarkable aspect of the new CPCU is confining the jurisdiction of the tax police over certain tax-related crimes. In particular, the following crimes will fall outside the jurisdiction of the tax police since the effective date of the new CPCU: s. 191 (misappropriation of property through abuse of office), s. 366 (forgery in office) and s. 367 (neglect of official duty) of the Criminal Code of Ukraine (hereinafter – the “CCU”). The first section, in practice, is often used for qualifying activities aimed at obtaining illegal VAT refund (the unlawful receipt of VAT refund is viewed as a theft of public funds). The second section is almost always utilized in conjunction with s. 212 (tax evasion) of the CCU, given the fact that tax evasion in most cases is not possible without including false information into the tax returns (e.g. understating income or overstating expenses). Finally, the third section is employed in cases where there is an unintentional failure to pay tax (by virtue of an error, unawareness of tax laws technicalities, etc.).

In the confinement of the jurisdiction of the tax police over certain tax-related crimes one can identify something positive for taxpayers. It can be assumed that, not wanting to give the "lucrative" piece of its work to the ordinary police, the tax police will categorise the cases of illegal VAT refund as tax evasion (s. 212 of the CCU) rather than misappropriation of property through abuse of office (s.191 of the CCU). S. 212 of the CCU, in contrast to s. 191 of the CCU does not entail imprisonment (imprisonment in a tax evasion case is only possible when the fine adjudged has not been paid in time). It can also be supposed that tax evasion will not receive the additional qualification under s. 366 (forgery in office) of the CCU. By the way, the latter, just as s. 191 of the CCU, stipulates imprisonment.

When it comes to the exclusion of s. 367 (neglect of official duty) of the CCU from the jurisdiction of the tax police, it will most likely trigger no changes. In practice, the tax police usually do not utilise this section for the qualification of tax crimes. Even in cases of complete absence of evidence indicating the existence of intent aimed at tax evasion, the tax police in the pursuit of good performance figures institute criminal proceedings under s. 212 (tax evasion) of the CCU. Only during the trial stage the court sees the groundless of the qualification under s. 212 of the CCU and changes it to s. 367 of the CCU.