Tax Reform from "Servant of the People"

On 14 November 2019 I was delighted  to conduct a LIGA-ZAKON webinar on the topic of the tax reform from "Servant of the People".

During the webinar, the changes that had already been implemented and those that are just planned were considered. The former, in particular, embraced the decriminalization of fake entrepreneurship and raising the thresholds for liability for tax evasion. Among the latter, were the introduction of a single tax account,  tax amnesty, the establishment of the Financial Investigation Bureau and a number of changes related to tax administration under the Bill No. 1210-1.

In the course of the webinar, the most attention was paid to the impact of the decriminalization of fake entrepreneurship on the practice of tax dispute resolution. There are already some early court judgments following the decriminalization. Unfortunately, those judgments often give a diametrically opposite assessment of the decriminalization. Some courts do not have regard to judgments of conviction for fake entrepreneurship committed by officers of the counterparties issued before the decriminalization of fake entrepreneurship actually occurred.  Other courts, on the contrary, do not see any impediment for having regard to such judgments of conviction. 

Of particular concern is also a substitute for fake entrepreneurship found by the tax police. This is a criminal offence set forth by section 201-1 of the Criminal Code of Ukraine (forgery of documents submitted for state registration of legal entities and individual entrepreneurs). Nowadays,  the tax police tries to apply extensively this section to cases that have previously fallen under fake entrepreneurship. It is feared that over time this practice will become widespread and, accordingly, the positive effect of the decriminalization of fake entrepreneurship will be nullified.

Jurisprudence of New Supreme Court on Tax Litigation with International Component

On 26 March 2019, I was pleased to conduct a LIGA-ZAKON webinar on the topic of  the jurisprudence of the new Supreme Court in tax disputes with an international component.

In particular, the webinar was devoted to the two most common categories of tax disputes with an international element:

- disputes concerning the application of the concept of  beneficial owner; and

- disputes on transfer pricing issues.

Below is a very brief summary of the findings of the seminar:

As to beneficial owner

- It is pleasant that the new Supreme Court keeps abreast with a global trend. In general, it adheres to the "broad economic approach" couched   in 2014 in the well-known case of Donbassaero (http://reyestr.court.gov.ua/Review/38106136).

- All the cases found by us at the level of the new Supreme Court have been resolved in favor of the taxpayers (for example: http://www.reyestr.court.gov.ua/Review/77312120, http://www.reyestr.court.gov.ua/Review/77197100     and http://www.reyestr.court.gov.ua/Review/75879124).

- Interestingly, in the latter case the taxpayer leveraged a report of the Cypriot Office of  Deloitte as evidence. According to the findings incorporated in the report, the Cypriot recipient of income in the form of interest was the beneficial owner of the income. It was not even guessed before that the "Big Four" could  provide such services.

- The reason for such a "crazy" success of taxpayers in the new Supreme Court is really simple. So far, tax officials, at least at the level of those cases that have already been considered by the new Supreme Court, have not managed to collect information attesting that the foreign recipient of income is limited in its right to determine the further economic fate of the income.

- Undoubtedly, at the level of the lower courts there have been some examples where taxmen managed to demonstrate proper "perseverance and diligence" and carried out exchanges of information with the tax authorities of other countries. However, to the satisfaction of taxpayers and to the great regret of tax officials, in many cases, the courts do not take into account the results of such exchanges of tax information pointing out to the limitation of a foreign recipient of income in the right to determine its further economic fate.

- The courts consider the above evidence as inadmissible for formal reasons, the main of which is, as a rule, the lack of legalization (apostilation) of a document issued by the foreign tax authorities on the results of the exchange of tax information.  A classic example of such a "fatal" case for taxmen, decided by the court of appeal, is available at this link: http://www.reyestr.court.gov.ua/Review/72641240.

As to transfer pricing

- There is already the first case concerning the essence of transfer pricing considered by the new Supreme Court (http://www.reyestr.court.gov.ua/Review/80418267).

- Honestly, there is nothing phenomenal in this case. In the past, there have been many similar cases when, before the introduction of the transfer pricing rules, the rules of the usual prices were applied.

- In this case both the taxpayer and the tax authorities (in the course of the tax inspection) used the "first method" (the method of comparable uncontrolled price) to the transactions on the exportation of grains. The new Supreme Court resolved the case in favor of the taxpayer by a reference to the fact that the tax authorities failed to prove  that the prices had been understated by the taxpayer. The new Supreme Court "blamed" the tax authorities for not taking into account all the conditions for the comparability of the concerned export transactions and referring to only one source of information (the official site of the Agrarian Exchange).

- Oddly enough, but  the new Supreme Court appeared to be a great fan of  British LLP and a huge hater of Swiss companies=). Under very controversial circumstances, it recognizes transactions with British LLPs (for periods before the amendments to the Tax Code of Ukraine was brought according to which the attribution of transaction with British LLPs to controllable  one is no more in doubt), uncontrollable (http://www.reyestr.court.gov.ua/Review/80418267      and http://www.reyestr.court.gov.ua/Review/8060725).

-  In the meanwhile, on approximately the same level of controversy attached to the issue as to whether to treat as controllable transactions with Swiss companies in 2015 (in September 2015 Switzerland was removed from the list of low tax jurisdictions), the new Supreme Court does not express similar “altruistic” sentiments (http://www.reyestr.court.gov.ua/Review/76906000).

- The new Supreme Court holds that transactions with Swiss companies carried out before September 2015 are subject to control. This is despite the fact that the taxpayer  managed to submit evidence that in the canton, at the place of the registration of its Swiss counterparty, the rate of corporation tax had not been in fact 5 percentage points lower than that of Ukrainian corporate income tax.

New Supreme Court’s Jurisprudence in Disputes Concerning Procedural Aspects of Tax Inspections

On 20 February 2019 I was pleased to conduct a LIGA-ZAKON webinar on the topic of  tax inspections in 2019.

Below is a very brief description of the new Supreme Court’s jurisprudence in disputes concerning procedural aspects of tax inspections. 

It should be noted that in general the new Supreme Court adheres to the same fundamental principles that existed at the level of the court jurisprudence before:

- If an admittance procedure is provided for a tax inspection (for example, documentary on-site inspections or factual inspections), the taxpayer is entitled to refer to procedural violations by the tax authorities only when he refuses admittance of the taxmen to the conduct of the inspection and appeals from the tax authorities’ order on appointing the inspection. If the taxmen were admitted to carry out the inspection, the court does not take into account the taxpayer's reference to the procedural issues. In this case, the court has regard to the only validity/invalidity of the contested tax assessments themselves. An example of such court jurisprudence is the resolution of 13 March 2018 in case No. 804/1113/16 (http://www.reyestr.court.gov.ua/Review/72745230).

- If an admittance procedure is not provided for a tax inspection (for example, offsite documentary inspections), the courts must take into account procedural violations. They may cancel a contested tax assessment based only on the existence of procedural violations committed by the tax authorities during the appointment or conduct of the inspection. An example of such court jurisprudence is the resolution of 7 February 2018 in case No. 821/1562/16 (http://www.reyestr.court.gov.ua/Review/72324146).

Among other significant judgements of the new Supreme Court in the area of ​​procedural aspects of tax inspections the following are worthwhile to mention:

- The ruling of the Grand Chamber dated 23 May 2018 in case No. 237/1459/17 (http://www.reyestr.court.gov.ua/Review/74475877). According to this ruling, an investigating judge’s ruling on the appointment of an inspection, although it is not clearly defined by the Criminal Procedure Code of Ukraine, may be challenged to the court of appeal.

- The resolution of the Administrative Court of Cassation of 28 August 2018 in case No. 804/19780/14 (http://reyestr.court.gov.ua/Review/76139166). According to this resolution, so as to attest the existence of a "dispute over a right" in cases concerned with the confirmation of the validity of asset freezing applied by the tax authorities, it is not enough to challenge the only order of the tax authorities on appointing the tax inspection. It is also necessary to challenge the decision of the tax authorities on imposing the asset freezing.