Instead of Introduction
Major restrictions on the conduct of recurring unscheduled tax audits have
been adopted in the framework
of the so-called tax reform 2015.
The restrictions have been in force from 1 January 2015. They relate to both
on-site and off-site
unscheduled tax audits.
Brief History
It was not a rare occasion in my practice in the past that the tax authorities carried out an unscheduled tax audit
in respect of the issues that had already been covered by a foregoing scheduled
audit (a recurring audit). For instance, subject matter of such recurring tax audits was often
the taxpayer’s dealings with a particular counterparty or particular counterparties.
Was the conduct of the above recurring tax audits lawful? It seems that rather yes, than not.
Formerly, neither the Tax Code of Ukraine, nor
any other piece of the legislation
contained any restrictions on the conduct of recurring tax audits. The tax authorities appointed recurring
audits on general terms and with having no regard to
whether taxable periods subject to such recurring audits had already
been checked within the scope of previous tax audits.
Of course, there are
also those who would deny the lawfulness of recurring
tax audits in the past. To bolster their point of view, they may make reference to para 4 of the "legendary" Presidential Decree "On Some Measures on Deregulation of
Entrepreneurial Activities" (dated 23 July 1998 No 817/98) and para 78.1.12 of the Tax Code of Ukraine.
However, for the
sake of fairness, it pays to say that the aforesaid provisions of the Tax Code
of Ukraine and the Decree govern only a very specific and quite limited in
number type of recurring tax audits. They have exclusively to do with recurring audits conducted by the
tax authorities of a higher level with a view to check the accuracy of the
findings made by the tax authorities of a lower level. In order for such
recurring audits to be appointed, either an internal investigation or criminal
proceedings against the employees of the tax authorities conducting the
preceding tax audit is required. The provisions in question do not regulate a
procedure for the appointment of "classical" recurring tax audits,
i.e. tax audits performed by the same tax authorities that have already
conducted the preceding tax audit.
After the
reform
Since 1 January 2015 the situation has changed radically.
The Tax Code of Ukraine was amended to
provide expressly for a ban on some unscheduled tax audits of a recurring
nature.
The ban is couched in terms of
the grounds for unscheduled tax audits enumerated by
Art. 78 of the Tax Code of Ukraine. The ban covers not all unscheduled tax audits, but only
those of them that are appointed on the
following grounds:
- The failure on the part of a
taxpayer to furnish within 10 business days explanations or documentary evidence at the
written request of the tax authorities sent in connection with
the establishment of facts indicating either the
violation of tax laws by the taxpayer or the unreliability of the data contained in his tax returns
(paras 78.1 .1.,
78.1.4 of the Tax Code of Ukraine);
- Filing a VAT
return involving amounts
of VAT refund/surplus
of input VAT
over output VAT
in excess of UAH 100 thousand (para 78.1.8. of the Tax Code of Ukraine);
- the decision of a court /
prosecutor’s office/ detective on the appointment of a tax
audit in accordance with criminal
procedural law (para 78.1.11. of
the Tax Code of Ukraine).
Of particular importance is the definition “recurring tax audit”. In fact, there is no such term as
"recurring tax audit” in the language of the Tax Code of Ukraine. The Tax Code of Ukraine operates a slightly different notion: "... it is
prohibited to carry out unscheduled tax audits… if the subject matter of such
audits has already been caught during preceding tax audits of the concerned
taxpayer”.
In many cases, it is rather difficult to determine whether
the subject matter of a new tax audit has been already caught by
preceding tax audits.
Let us consider the most typical situation for the sake
of illustration. Suppose your company whose taxable periods from 1 January 2013
to 1 April 2014 have been already audited in the scope of a scheduled tax audit faces the
appointment of a new tax audit. This time an unscheduled tax audit ought to be
carried out. The new tax audit will explore the tax treatment of transactions
between the company and its counterparty, X, LLC, conducted in March through
August 2013. Has the tax treatment of such transactions with X, LLC been
already covered by the preceding scheduled tax audit, given that the report of
this scheduled tax audit has no mention of the counterparty at hand?
In this situation the
taxpayer can naturally argue that given the comprehensive nature of the scheduled tax
audit, it has covered the transactions conducted with X, LLC. The fact that X, LLC
is not directly mentioned in the report
of the scheduled tax audit is immaterial. Accordingly,
there are no grounds for
conducting the new tax audit in respect of dealings with X, LLC.
In contrast, the tax authorities may claim that the scheduled tax audit cannot be regarded as covering
the issues of dealings with X, LLC.
To support this point, the tax authorities may refer to the
absence of the analysis of the relations with X, LLC in
the wording of the report of the scheduled tax audit.
Owing to the ambiguity of the
changes made to the Tax Code of Ukraine,
each of the parties to the above hypothecated
dispute is right to a certain extent. The issue is
highly controversial. It can be easily assumed that this issue will “come
to surface” again and again in series of "court
battles” between taxpayers and
the tax authorities.
There has been
already first court jurisprudence
on this subject matter.
For example, in the case initiated by "Techno-Bud
Service", LLC against an order on the appointment of an unscheduled tax
audit the Chernivtsi Circuit Administrative Court took the side of the
taxpayer. The court found that the dealings with a number of the counterparties
specified in the order on the appointment of the new tax audit have been
already covered by the preceding scheduled tax audit. That is why, in the
judgement of the court, there had been no grounds for the tax authorities to
appoint the new tax audit.
Working for the
future
The tax authorities not worse than taxpayers understand the
ambiguity of the changes brought to the Tax Code
of Ukraine regarding the prohibition on recurring tax
audits.
They are taking proactive measures to minimize the risk of
a successful appeal against the orders on the appointment of recurring tax audits.
The vivid evidence of such an approach of the tax
authorities is the letter of the State Fiscal Service of Ukraine
(SFSU) dated 28 January 2015 No 2463/7/ 99-99-22-02-04-17. In this letter the
SFSU, “in order to prevent the
contraction of the performance of further [recurring] unscheduled tax
audits", urges the local tax authorities to clearly define in
documents related to the appointment and conduct of tax audits the scope of
issues amounting to the subject matter of such tax audits.
In place of conclusion
It is beyond any doubt that a ban on recurring tax
audits makes up a very important change
designed to ease the administrative
burden placed on taxpayers by the
tax authorities. However, as it often
happens, the very progressive change somewhat “suffers" from the lack of
clarity in the legal wording.
It is hoped that court jurisprudence
will do what is called “to dot the i's and cross the t's” in this area.
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