Recently, more and more tax disputes have had a bearing on the issue of the responsibility of VAT payers for the abuses committed by their suppliers in the chain of supply. According to the tax authorities, a VAT payer (buyer of goods) is not entitled to input VAT (“tax credit”) and, accordingly, to VAT refund if some of its suppliers in the chain of supply have not declared their tax obligations or appeared to be fictitious companies (for example, those that are not located at their registered addresses, those that do not have sufficient fixed assets, those that are understaffed, etc.).
The Law of Ukraine "On Value Added Tax" and commencing 1 January 2011 the Tax Code of Ukraine do not provide an explicit answer to the question whether the VAT payer (buyer of goods) is eligible for input VAT (“tax credit”) as well as to VAT refund in such cases.
Fortunately, the above question finds its solution in the practice of the European Court of Human Rights. The practice of this court is recognized as an independent authority and must be applied by the courts of Ukraine (art.17 of the Law of Ukraine "On the Enforcement of Judgments and the Application of the Practice of the European Court of Human Rights").
To date, one can note three judgments of the European Court of Human Rights touching upon the issue in question. These encompass the judgments in Intersplav v Ukraine (2007, application No 803/02), “Bulves" AD v Bulgaria (2009, application No 3991/03), and Business Support Centre v Bulgaria (2010, application No 6689/03).
In the case of Intersplav v Ukraine (para 38 of the judgment), the European Court of Human Rights found for the VAT payer stating that the latter can not be denied the entitlement to VAT refund in the absence of any indication of its direct involvement in VAT abusive practices.
In the case of "Bulves" AD v Bulgaria (para 71 of the judgment), the European Court of Human Rights found that the VAT payer should not be held liable for the abuses committed by its suppliers, if it does not have knowledge of those abuses or the means to obtain such knowledge.
In the case of Business Support Centre v Bulgaria the European Court of Human Rights reaffirmed its conclusions contained in the case of "Bulves" AD v Bulgaria.
Consequently, relying on the practice of the European Court of Human Rights, it is possible to contend that a VAT payer should not be deprived of the entitlement to input VAT (“tax credit”) and VAT refund in the case of the abuse of its suppliers in the chain of supply. The exceptions are the only situations where VAT payer was involved in such abuses, or it had knowledge of those abuses or the means to obtain such knowledge.
To finish with a happy end, it is worth mentioning that the domestic courts have gradually begun to apply the practice of the European Court of Human Rights in relation to VAT disputes. For instance, as at 8 September 2011 there were 47 and 102 court decisions in the Unified State Register of Judgments of Ukraine citing Intersplav v Ukraine and "Bulves" AD v Bulgaria, respectively.
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