Out-of-Court Recovery of Tax Debt: Devil is Not So Fearful as He is Painted ~ U-Tax Blog

Wednesday, April 29, 2015

Out-of-Court Recovery of Tax Debt: Devil is Not So Fearful as He is Painted


One of the hardly noticeable changes brought by the tax reform 2015 was a right vested in the fiscal authorities to recover tax debts in some cases without a court order.

The relevant rules are provided for by para 32 of Chapter XX "Transitional Provisions" of the Tax Code of Ukraine.

This is a temporary measure being in force until 1 July 2015.

A very important point here is that out-of-court recovery is possible in respect of tax debts based on self-assessed tax liabilities only (for example, a taxpayer files its corporate income return, but fails to remit the tax specified in the return to the state revenues).

Another no less important point is that even the recovery of tax debts arising from self-assessed tax liabilities is limited to certain cases. The Tax Code of Ukraine lays down two conditions that must be simultaneously met to make out-of-court recovery possible:

- The amount of the tax debt is more than UAH 5 million;

- There is no debt owed by the fiscal authority to the taxpayer (excessively paid taxes), which can be set off against the tax debt to be collected.

Out-of-court collection of tax debts is carried out on the basis of a decision taken by the head of the local unit of the fiscal authorities. Taxmen can have the debt recovered by means of both cash money and funds held in bank accounts.

In the case of funds held in bank accounts a decision to collect the tax debt is sent to a bank. The bank just withdraws money from the account of the taxpayer. The National Bank of Ukraine has already managed to confirm this possibility (the letter dated 27 January 2015 No 25-110 / 4833).

If cash money is at issue, the decision on debt collection goes directly to the taxpayer. “Severe” taxmen come to the taxpayer’s premises and seize the available cash. The procedure for the seizure of cash money is set out by the legislation (the Cabinet of Ministers’ resolution of 29 December 2010 No 1244). Hopefully, “lawlessness" should not occur.

The recourse to out-of-court collection does not mean that the fiscal authorities are exempt from general procedural constraints related to recovery of tax debts. For instance, before a decision on out-of-court collection is made, the fiscal authorities must fully comply with general procedure requirements, namely they are supposed to forward to the taxpayer a formal request on the repayment of the tax debt and wait 60 calendar days after the sending of such a request.

Below are some comments on the actual purpose of the amendments and their possible impact on taxpayers.

There are some articles in the press intimidating taxpayers with massive seizure of their "sweat earned" money "without any trial". My best advice is to be sceptical of such threatening articles, as they significantly exaggerate the actual state of affairs.  

Not all is that bad, indeed. The change will be felt only by the small number of taxpayers. It will primarily affect taxpayers having serious liquidity problems (so-called pre-bankruptcy entities). The change may also touch upon those whom we "affectionately" call "shams".

An "average" taxpayer should not be affected by the change. For a viable business it is a paranormal situation to be where it records its tax liabilities and then does not have enough funds to discharge them.

What was the rationale behind the change is a good question. Unfortunately, an answer to this question cannot be extracted from an explanatory note to the relevant Bill on amending the Tax Code of Ukraine.

It seems that the change was made to facilitate the recovery of tax debts from distressed companies. The procedure for obtaining a court judgment authorizing the recovery, especially given a possible appellate review, may take up to a year. Over this time, money can just “evaporate” from the bank accounts of the distressed enterprises. The money will go to other creditors or can be taken out by means of “fake nature” transactions. The fiscal authorities will go into bankruptcy proceedings and eventually collect nothing, just because the money has been already gone.

The amendments do improve the chances of the fiscal authorities to emerge victorious from the battle for the assets of a "drowning" taxpayer. This is due to the shortening of debt recovery time and ensuring "surprise effect" in the tax debt collection.

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