Monday, July 29, 2013

Ukrainian Tax Litigation: Recent Trends

Co-author Andriy Kuleba
(junior associate of Lavrynovych and Partners Law Firm)

One of the crucial problems faced by those bringing lawsuits against tax assessments is still the congestion of administrative courts in Ukraine. While at the level of the courts of first instance the mentioned problem is not heavily felt (in most cases tax disputes are resolved within one or two months), at the level of the courts of appeal and the Highest Administrative Court of Ukraine (hereinafter – the “HAC”) the situation is much more difficult. There are so many cases under the consideration of the senior courts that you will normally have to wait for the appointment of your court hearing for at least one year in the court of appeal and for at least two years in the HAC. It is obvious that bona-fide taxpayers are very unsatisfied with such state of affairs.

With respect to the categories of tax disputes, the situation is still practically without changes. The cases related to shams (“fake nature” deals) are leading in the number.

In this context it is worth mentioning new approaches of inspectors of taxes in their struggle against shams or perhaps it is more proper to saypseudoshams. At present, some “taxmen” not only “cancel” input VAT and deductible expenditure of a “guilty” taxpayer, but also compel such a taxpayer to enter into his accounts an additional income for the purposes of the calculation of taxes. They contend that since the taxpayer has actually received goods/services, but the underlying transaction was nothing, but a sham, such goods/services have been obtained by him free of charge and therefore should increase his base of assessment.

It also worth noting the landmark judgment of 14 November 2012 of the panel of justices of the HAC chaired by Justice Bukhtiiarova I. A. (PVK “BUDIVELNYK”, LLC v State Tax Inspection in Obolon District of Kyiv, case No  2а-9864/11/2670). In this judgment the HAC came to the following revolutionary conclusions:

- the tax authorities do not have a right to qualify transactions as shams in their tax audit reports and 
- the presumption of the lawfulness of a transaction is applicable in the tax relations (a transaction based upon which the taxpayer obtains the tax benefit in the form of input VAT or deductible expenditure is not taken into account for the purposes of taxation if only there is a court judgment invalidating the transaction in question).

The aforesaid judgment with regard to the presumption of the lawfulness of a transaction directly contradicts the position of the HAC stated in its well-known letter dated 2 June 2011 No 742/11/13-11. In this letter HAC let us expressly know that the presumption at hand is not applicable in tax relations.

However, despite so different formal approaches even at the level of the HAC, the key role in deciding “sham cases” has been and is still attributed to the determination of the genuine (true) nature of underlying transactions based on primary accounting documents and other evidence submitted to the court. 
If the fake nature of a transaction has found its confirmation during the court hearings, it is very unlikely that such a “magic wand” as a reference to the absence of the judgment in respect of the invalidation of the transaction (the implementation of the presumption of the lawfulness of a transactions) can help you. 
The recently formed Ministry of Revenues and Levies of Ukraine also expressed its opinion on shams in tax relations (letter dated 27 May 2013 No. 3642/6/99-99-19-04-01-15). As usual, the “taxmen” were unprecedentedly clearin their statements, The bodies of the State Tax Service in the discharge of their monitoring and controlling functions can reflect in tax audit reports the indicators of shams, but the additional tax assessment should be exclusively imposed for the breaches of tax rules. What the Ministry was trying to say by these words remains the mystery. As one can see, we have not obtained a clear answer to the question whether the tax authorities are entitled to treat transactions between taxpayers as shams anymore.

Finally, we would like to mention an increase in the number of “transfer pricing” cases. Perhaps, not the least role here was played by the new transfer pricing rules (Article 39 of the Tax Code of Ukraine) which came into force on 1 January 2013.