Thursday, June 21, 2012

Tax Evasion: Its Majesty Intention

One of the key issues surrounding the qualification of tax crimes is an issue of intention. Intention (mens rea) is the attribute of tax evasion (s. 212 of the Criminal Code of Ukraine). If the tax has not been paid without the intention to do so, there is no criminal liability under s.212 of the Tax Code of Ukraine. However, given the existing practice the person who has failed to pay tax unintentionally (for instance, due to the poor knowledge of tax laws or their incorrect application) may incur criminal responsibility under s. 367 of the Tax Code of Ukraine (neglect of official duty).

There naturally arises a question as to how to determine that an intention aimed at tax evasion is in place? Undoubtedly, the main guidance here is para 3 of the Resolution of the Plenum of the Supreme Court of Ukraine dated 8 October 2004 No  15 "On Some Issues of Application of Tax Evasion Legislation" (hereinafter - "Resolution No 15"). This paragraph comprises  the non-exhaustive list of circumstances that may indicate the intention aimed at tax evasion, including:

• the absence of tax accounting records or keeping them at variance with the established procedure;
• distortions in accounting or reporting records;
• failure to register cash received for services rendered;
• maintaining dual (official and unofficial) accounting;
• the use of bank accounts not disclosed to the tax authorities;
• overstated cost of sales.

This very list is cited at almost all conferences, seminars and similar events dedicated to
tax evasion matters.

Unfortunately, the aforesaid circumstances are not formulated clearly enough to be safe in saying that there has been/has not been the intention aimed at tax evasion in a particular situation. I decided to try to go beyond the list and look at "live" criminal cases from the Unified State Register of Judgments.

Some examples from this register are outlined below.

Circumstances indicating the intention directed at tax evasion
In re Vinspetsodyag,
Zamostyanskiy District Court of Vinnytsia
To substantiate the intention aimed at tax evasion, the court, namely, referred to the following circumstances from the Resolution No 15: (i) the keeping of tax accounting record in defiance of the established procedure; (ii) distortions in accounting and reporting records.

In the court’s opinion, the tax accounting violations were evidenced by the declaration of deductable expenses/input VAT deduction related to the transactions with fictitious companies.

The distortions in the accounting/reporting documentation, according to the court, were confirmed by the expert report pursuant to which the accounting was conducted improperly (confusions in line numbers and irregularities in the cash book).

Chornuhynskiy District Court of  Poltava Region
The director’s failure to file annual corporate income tax return as well as three monthly VAT returns was regarded as an indicative of an intention leveled at tax evasion.
In re one private entreproneur, 2011,
Andrushivskiy District Court of Zhytomyr Region
The private entrepreneur exceeded the revenue threshold allowed for the simplified system of taxation and failed to shift to the general system of taxation.

As you can see, even the rather modest sampling features how inventive courts and prosecuting authorities can be while deciding on the presence of the intention aimed at tax evasion.