Abolishment of Moratorium on Tax Audits

I had the pleasure of speaking at the meeting of the Committee on Tax and Customs Law of the Ukrainian Bar Association on the topic of canceling the moratorium on tax audits.

The current situation is such that starting from 8 December 2023 the moratorium on tax audits practically has not been in existence.

Tax authorities were given back almost all the possibilities for conducting tax audits that they had had before the introduction of the "coronavirus” moratorium on tax audits in March 2020. The latter gradually grew into a "military" moratorium on tax audits.

From 8 December 2023 onwards only some minor manifestations of the previously famous moratorium remains to exist, which concern:

- Restrictions on conducting tax audits of individual entrepreneurs of the first and second groups until 1 December 2024;

- Restrictions on conducting tax audits of taxpayers whose tax addresses are temporarily occupied territories, places of military actions or possible places of military actions; and

- Limitation of the scope of scheduled documentary tax audits to certain categories of taxpayers listed in the law until 31 December 2024. At the same time, such categories listed in the law cover a very significant share of taxpayers who may be subject to scheduled tax audits.

Since one of the grounds for conducting a scheduled tax audit is nowadays a low burden of corporate income tax, in order to understand the risks of undergoing the scheduled audit, it is worthwhile for taxpayers to familiarize themselves with the data on the tax burden in the relevant industries. Such data are available on the official website of the State Tax Service of Ukraine at the following link: https://tax.gov.ua/diyalnist-/rezalt/736958.html?fbclid=IwAR2yMavFMtihmn4GI9-ADt5nIjqWtePindAEZBjBmubox75_eebJljF9Rgg

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. 

"Servicing Appendages" of State Fiscal Service of Ukraine

Co-authored by Anton Havryk 

Foreword  

Apparently, the only lazy did not hear about the deprival of the local  tax offices of their powers to audit taxpayers since 2017. As of now, only the tax authorities of regional (oblast) and central levels can perform tax audits. Such an official clarification  has been provided by the State Fiscal Service of Ukraine in its  letter dated  17 January  2017 "On Carrying out of Tax Audits in 2017".  

This is an undeniable fact widely explored by hardly all specialised media in Ukraine. However, what powers have the local tax offices been additionally deprived of during the minor tax reform of 2017 and how may  this affect the tax litigation in Ukraine?     

Redistribution of functions

Since 1 January 2017 there has been a serious redistribution of powers among  the different levels of the State Fiscal Service of Ukraine. The powers of local tax offices have been narrowed in the most severe manner. The exhaustive list of these powers are now set out in section 19-3 of the Tax Code of Ukraine. New functions of local tax offices are as follows: (і) servicing taxpayers and (іі) doing registration work (registering taxpayers and keeping registers related to taxation).

Local tax offices do not retain any other functions.

As we can see, the narrowing of the powers of local tax offices go far beyond the deprival of the power  to carry out tax audits. Below,  we will discuss what exactly functions the local tax offices have been deprived of and what functions they have kept.  

Acceptance of tax returns

Section 19-3 of the Tax Code of Ukraine does not  specify anything about the acceptance of tax returns. However, the  practice has already been established  under which the local tax offices continue  accepting tax returns of taxpayers. 

It is likely that the acceptance of tax returns is considered as part of servicing taxpayers or part of registration work (namely, registering the objects related to taxation). 

Notices of tax assessment

Local tax offices are no more in charge of  issuing notices of tax assessment. As of now, the only tax authorities of regional (oblast) and central levels can issue such documents.

Notices of tax assessment issued by local tax offices following 1 January 2017 must be revoked. We faced this situation by our own. Some notices of tax assessment issued to our clients by local tax offices after 1 January 2017 have been revoked by the tax authorities of regional (oblast) level. The reason for the revocation was that the local tax offices had  no more  right to issue such documents.

Repayment of tax debt

This is also now exclusively within the powers of tax authorities of regional (oblast) or central level to enforce a tax debt. From our own experience, following 1 January 2017 one of our clients was issued a tax demand. It was signed by the deputy head of the tax authority of regional (oblast) level. The local tax office was indicated in the tax demand as a recipient of the tax demanded only. 

Refund  of erroneously and/or excessively paid taxes

It is unlikely that the refund  of erroneously and/or excessively paid taxes still belongs to the functions of local tax offices related to servicing taxpayers or doing registration work.

It is quite logical that local tax offices are no more in a position to sign documents authorizing the refund of erroneously and/or excessively remitted taxes to taxpayers and to hand over those documents to the State Treasury Service of Ukraine. It can be assumed that tax authorities of regional (oblast) level must sign the above documents and pass them to the State Treasury Service of Ukraine.

However, as of the date of the publication of this article the unofficial position of the State Fiscal Service of Ukraine is that the signing of documents authorizing the refund of erroneously and/or excessively remitted taxes to taxpayers still rests within the powers of local tax offices. What were those arguments used by the State Fiscal Service of Ukraine to bolster this position remains a major  mystery for us.

VAT refund

It is logical that desk and documentary tax audits  in the course of providing VAT refund must be carried out by tax authorities of regional (oblast) level.  

The situation is not clear enough with regard to entering data to the Register of VAT Refund Applications, including data on “approved” VAT refund. However, it is most probably that tax authorities of regional (oblast) level must enter these data to the Register of VAT Refund Applications.

According to section 19-3 of the Tax Code of Ukraine the powers of local tax offices in respect of doing registration work do not extend beyond the registers administered by the bodies of the State Fiscal Service of Ukraine. Yet, in this case the Register of VAT Refund Applications is administered  by the Ministry of Finance of Ukraine, rather than by the State Fiscal Service of Ukraine.  

Influence on tax litigation

Taking account of the redistribution of the functions between the authorities of the State Fiscal Service of Ukraine of different levels, we can provide the following recommendations for the purposes of tax litigation:

- If a tax audit or a notice of tax assessment was carried out/issued following 1 January 2017 by the local tax office, the notices of tax assessment can be well reversed because of the excess of powers on the part of the local tax office.

- If a tax demand or any other contested decision associated with the collection of tax debt was  adopted after 1 January 2017,  those decisions can be well reversed because of the excess of powers on the part of the local tax office.

- In the cases concerned with the refund of erroneously and/or excessively remitted taxes and VAT refund a serious thought should be given to the replacement of defendants from  local tax offices to tax authorities of regional (oblast) level. 

* Photo from https://steptohealth.com/

Ban on Recurring Tax Audits: How to Understand

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.

* Photo from http://blocktalk.wpengine.netdna-cdn.com

Amendments to the Tax Code of Ukraine (Administration of taxes)

In the post dated 22 July 2011 I mentioned the draft law No 8217 (enacted by the Parliament of Ukraine but not signed by the President yet) considerably amending the Tax Code of Ukraine. Here, you can find the information on the chief novelties introduced by the aforesaid draft law in respect of the administration of taxes:

- Improvement in the regulation of tax consultations given by the tax authorities: (i) individual tax consultation must be awarded within 30 calendar days; (b) the possibility to obtain tax consultation in an electronic form; (с) the revival of general tax clarifications (consultations) as a basis for the release of a taxpayer from the responsibility for the breach of tax laws;

- Broadening the grounds on which the information from taxpayers can be required by the tax authorities based on a written request. The draft law lays down the following additional grounds: (a) unreliability of data constrained in tax returns; (b) the receipt by the tax authorities of a complaint against a taxpayer pertaining to its incompliance with VAT invoicing rules; (с) the conduction of cross tax audit;

- Clarifying the grounds on which a taxpayer can bar the tax authorities from exercising its documentary tax audit. According to the draft law, a taxpayer is not only entitled to disallow the tax authorities to proceed with the field documentary tax audit if the tax authorities fail to deliver to such a taxpayer an assignment to carry out the tax audit, but also if they fail to deliver to the taxpayer an order on the appointment of the tax audit and identity cards of the tax officials specified in the said assignment.

- Making clear that in the course of their tax audits big taxpayers  are obliged to submit  in an  electronic form to the tax authorities not all available to them source documents, company accounts, and financial reporting documents,  but only those originally executed in an electronic form;

- Eliminating the tax fines for the overstatement of the negative balance of corporate profit tax and removing the special 75 per cent tax fine for three or more violations of tax laws committed within 1095 days.

As you can see, most of the novelties brought by the draft law No 8217, of course, except for those relating to widening the grounds to demand information from taxpayers, seems to be beneficial for business.

TAX ASPECTS OF IPO PREPARATIONS

This article examines the tax aspects of preparations for the conduct of an IPO (initial public offering) on a foreign stock exchange.

In the course of IPO preparations, the tax lawyer’s job is mainly narrowed down to the following: (1) identification and minimization of the issuer’s tax risks, (2) creation of a tax-efficient corporate structure of the issuer, and (3) development of a scheme for distributing and using IPO proceeds.

1. Identification and Minimization of Tax Risks

During a due diligence review of the issuer, relevant tax risks are identified (to be further outlined in the offering prospectus) and recommendations are given as to their minimization. Obviously, the existence of any significant tax risks can greatly reduce the attractiveness of the issuer’s shares for potential investors.

The tax lawyer’s task is to minimize such risks. There can be different ways to do that: from the execution of additional documents revealing the nature or the economic implications of certain business transactions to the removal of the company plagued by serious tax risks from the structure of the holding participating in an IPO.

2. Creation of a Tax-Efficient Corporate Structure of the Issuer

Nowadays, issuers usually consist of not one but several legal entities, both Ukrainian and foreign. A successful IPO is impossible without an efficient corporate structure of the issuer. Tax lawyers play a very important role in the creation of such a corporate structure. Apart from being transparent and easily understandable for potential investors, the issuer’s corporate structure must be non-burdensome from a tax standpoint.

In view of the flaws in the applicable securities laws (the impossibility of issuing foreign currency-denominated shares, the need to obtain a permit from the Securities and Stock Market State Commission to float a Ukrainian issuer’s shares abroad, etc.), issuers usually prefer to conduct an IPO through their foreign companies.

Thus, tax lawyers are also charged with the task of choosing the most tax-efficient jurisdictions for setting up the holding’s foreign companies. Other criteria for the choice of a jurisdiction include the taxation of dividends, interest, royalties and gains from the sale of shares or other corporate rights and the favorability of the terms and conditions of the applicable double taxation treaties.

A rather popular practice is to incorporate the parent company, which will directly float shares on a foreign stock exchange, in the Netherlands. Cyprus-based companies are often used as the holding’s intermediate companies.

3. Development of a Scheme for Distributing and Using IPO Proceeds

Depending on how the issuer intends to use its IPO proceeds (either for investing in operating companies, or for buying a new business, or otherwise), tax lawyers need to come out with a mechanism for distributing such proceeds between the holding’s companies with least costs. Possible solutions are increases in the share capitals of the holding’s member companies, the provision of loans by one of the holding’s member companies to another, etc. The result of such tax planning largely depends on how tax-efficient the issuer’s corporate structure is.

In Place of an Epilogue

Summing up the above, it can be concluded that the success of an IPO depends chiefly on the involvement of qualified tax lawyers.