Settlement of Tax Disputes: Finally Starts Working ~ U-Tax Blog

Friday, April 18, 2014

Settlement of Tax Disputes: Finally Starts Working

Co-authored by Andrii Kuleba 
 (Junior Associate of 
Lavrynovych & Partners Law Firm)

Ideally, the resolution of the tax disputes by way of a settlement betweenwarringparties, the tax authority and a taxpayer, could be considered as an effective and prompt method of having such disputes decided. However, it was impossible to implement this method for quite a long period of time.

History of the issue

Resorting to the history of the issue in question, first of all it is worth noting the Law of Ukraine No. 2181-III of 21 December 2000 “On Procedure for Repayment of Tax Obligations to State Revenues and State Specialized Funds” (lost effect following the enactment of the Tax Code of Ukraine). This Law set out the procedure for a settlement of disputes between the tax authorities and taxpayers on the basis of a tax compromise. Simultaneously, there were effective provisions of the Economic Procedural Code of Ukraine (at the time this Code governed the resolution of tax disputes) with respect to the possibility of entering into settlement agreements between parties. However, neither tax compromises were reached, nor settlement agreements in tax disputes were approved by the courts. Most probably, the reason for that lay in the absence of the political will to carry out such “suspicious manipulations”.

Somewhat widespread a settlement of tax disputes became just recently (in 2012-2014). The pressure with respect to the pumping up the state revenues increased so much that the taxmen began to accept a short-term effect achieved by the settlement. Though the state revenues obtains less receipts as a result of the settlement, there is no need to wait years for the final resolution of the dispute. Some kind of “the revolution of consciousness” happened in the minds of “the respectable sirs” of our tax authority.

So how does a settlement work in tax disputes and what lessons can be learnt from the current court practice?

Word of the law

The respective issues are governed by the Administrative Proceeding Code of Ukraine (hereinafterthe AP Code), which directly provides for the possibility to settle the case between the parties to the litigation. According to the AP Code mutual concessions should be at the heart of a settlement. A settlement may only deal with the rights and obligations of the parties to litigation and may not go beyond the subject of the claim.

The procedural consequence of a settlement is the ruling on the closure of the proceedings. Such a ruling should also contain the terms and conditions of the settlement. The AP Code clearly states that it is possible to reach a settlement at any stage of the administrative proceedings, namely: (і) within the preliminary procedure, (іі) during the court hearings in the court of first instance, (ііі) within the first appeal proceedings, (іv) within the second appeal (cassation) proceedings and (v) at the stage of the enforcement of court judgments.

The legislation also embraces the list of requirements to the terms and conditions of a settlement. First, a settlement should not contradict the law. Second, a settlement should not make up a breach of anyone’s rights, freedoms or interests.

That said, the legislative requirements to a settlement are quite standard. If the court finds the terms and conditions of a settlement being incompatible with at least one of the aforementioned requirements, the court will not accept such a settlement (section 51 (4) of the AP Code).

Of particular interest is the fact that the control over the performance of a settlement agreement is carried out by the administrative court which was in charge of its approval. The AP Code unambiguously provides for that in the case of the non-performance of the settlement agreement by one party, the court renews the proceedings upon the application of the other party.

Actual realities

First that can be noted is that sometimes courts use incorrect name of a settlement in their rulings (Ukrainian “мирова угода” (“myrova ugoda”) instead of Ukrainian “примирення сторін” (“prymyrennia storin”)). The rulings of the Odesa Administrative Court of Appeal dated 18 December 2013 in the case No. 814/1270/13-а (challenging a notice of assessment) and of the Zakarpatskyi District Administrative Court dated 14 January 2014 in the case No. 2a-0770/527/12 (challenging a notice of assessment) are good examples of this approach.

Somehow different approach is contained in the ruling of the same Zakarpatskyi District Administrative Court dated 27 September 2013 in the case No. 807/3463/13-а (tax debt collection). In this case parties concluded a settlement agreement, called it мирова угода” (“myrova ugoda”) and filed it with the court for the consideration. The court pointed out that a мирова угода” (“myrova ugoda”) is not stipulated by the AP Code. Nevertheless, the court accepted its terms and conditions and closed the litigation.

Sometimes, despite the requirements of the AP Code, the judges demonstrate laziness” in setting forth the terms and conditions of a settlement agreement in their rulings. An example of such an “inactivity” is the ruling of the District Administrative Court of the City of Kyiv dated 27 April 2012 in the case No. 2а-1999/12/2670 (tax debt collection).

As to the nature of tax disputes in which a settlement is usually attained, there may be two main categories outlined. The first one is tax debt collection claims brought by the tax authorities against taxpayers. The second one is claims of taxpayers against the tax authorities related to the cancellation of notices of assessment.

Does the court always humane?

It should be noted that in the majority of cases the court accepts the terms and conditions of the settlement and closes the proceedings. However, the opposite situations are also possible. Of great interest in this aspect is the ruling of the Donetsk Administrative Court of Appeal dated 1 October 2013 in the case No. 2а/0570/8782/2011 (challenging a notice of assessment). In this case that, by the way, relates to the Ukrainian subsidiary of the world biggest producer of construction materials with the German place of registration – Knauf, the parties submitted to the court the rather “sophisticated” settlement agreement. We can just assume that “pricy” lawyers from a top-tier law firm billed a great deal of hours for drafting such an agreement.

It seems that Knauf was deeply concerned with the risks related to settling the tax dispute. First of all, they worried about a risk of brining criminal charges. The lawyers of the company were afraid that the conclusion of the settlement agreement according to which the company agreed with the additional tax assessment could be considered by the tax police as the confession of guilt for the tax evasion.

Accordingly, the provisions of the settlement agreement were drafted so as to minimize that risk to the greatest possible extent. In particular, it was prescribed by the settlement agreement that Knauf discharges additional tax payments not because it agrees with them, but exclusively based on its pragmatic considerations taking into account numerous further expenditures needed for the continuation of the proceedings. In addition, the settlement agreement contained the prohibition on the criminal prosecution of the executives of the company in connection with its possible interpretation as the recognition of the lawfulness of the additional tax bill.

The Donetsk Administrative Court of Appeal rejected to accept such a trickysettlement agreement maintaining that its terms and conditions did not comply with the statutory requirements.

In lieu of conclusion

It appears that a settlement begins to enter confidently the practice of the resolution of tax disputes. To date, there is some judicial practice on this issue. Hopefully, the scope of the application of this efficient way of the dispute resolution will only expand.

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