Notable Tax Disputes of 2023

I had a pleasure of speaking at the meeting of the Tax and Customs Law Committee of the Ukrainian Bar Association on the topic of the most notable court jurisprudence of the Supreme Court in tax disputes in 2023.

In particular, the following issues decided by the Supreme Court in 2023 came into the focus of my attention:

1) The possibility of recovering damages from the state revenues in the form of a contractual fine paid to the purchaser for the untimely registration of the VAT invoice - the judgement of the Grand Chamber of the Supreme Court dated 1 March 2023 in case No. 925/556/21 initiated by "Manufacturing enterprise "Impuls Plus", LLC on the lack of such a possibility in view of the absence of a cause-and-effect relationship between the suspension of the registration of the VAT invoice and the payment of the fine;

2) The possibility of invalidating a contract concluded between two taxpayers at the request of the tax authority - the judgement of the Commercial Court of Cassation dated 29 August 2023 in case No. 910/5958/20 initiated by the Main Department of the State Tax Service of Ukraine in the city of Kyiv on rejecting the tax authority's claim due to the fact that it did not manage to prove a violation of its civil rights and interests in the course of concluding the disputed contract by the taxpayers;

3) The deductibility for the purpose of corporate income tax of non-refundable financial assistance provided to a related company - the judgement of the Administrative Court of Cassation dated 30 May 2023 in case No. 580/3758/19 initiated by "Sokar Petroleum"LLC in favor of such a deductibility;

4) The possibility of a taxpayer to challenge its inclusion in the plan-schedule of scheduled tax inspections - the judgement of the Administrative Court of Cassation dated 4 October 2023 in case No. 480/12329/21 initiated by "Sumy Development Company", LLC stating that this is an incorrect remedy that cannot be applied; and

5) The possibility of applying the principle of stability of tax legislation - the judgement of the Administrative Court of Cassation (the entire "tax" chamber involved) dated 26 September 2023 in case No. 640/7520/21 initiated by "AERO TELECOM", LLC on the impossibility of the application of this principle.

Court Jurisprudence on Procedural Aspects of Tax Audits

It was my pleasure to speak at the meeting of the Committee on Tax and Customs Law of the Ukrainian Bar Association on the topic: " Court Jurisprudence on Procedural Aspects of Tax Audits."

A key issue in the relevant field during 2022 was the issue of canceling tax assessment notices issued premised on the results of tax audits carried out on the basis of the Resolution of the Cabinet of Ministers of Ukraine dated 2 February 2021 No. 89 "On shortening the period of validity of the restriction regarding the moratorium on carrying out certain types of audits".

Currently, this Resolution continues to be reversed in accordance with the judgment of the Sixth Administrative Court of Appeal dated 5 July 2022 in case No. 816/228/17 brought by Prommetsplav, LLC. Furthermore, the jurisprudence of the Administrative Cassation Court (cases No. 640/16093/21 and 160/24072/21) shows that the very fact of conducting a tax audit on the basis of the said Resolution of the Cabinet of Ministers of Ukraine is sufficient for treating the relevant tax assessment notices as illegal.

The Court Jurisprudence in Cases Involving the Sale of Apartments via Individuals

The resolution of the "Tax Chamber" of the Cassation Administrative Court of 23 May 2022 in case No 810/3116/18 has really made a great gift to real estate developers that had been selling apartments through individuals.

In this resolution the justices concluded that the sellers of real estate that are not registered as individual entrepreneurs (IEs) cannot be taxed as IEs, even if they carry out systematic sales of real estate, which "de facto" make up an entrepreneurial activity. 

This resolution also came in handy for us. Using it as one of the key arguments, we managed to win the case in the Sixth Appellate Administrative Court in August 2022.

However, in my opinion, it is too early to "chill out" in this category of cases and rely solely on the said resolution of the "Tax Chamber". 

A very large percentage of the justices (six justices out of fifteen) did not agree with the majority and expressed a dissenting opinion. So, if such a case is assigned to the dissenting justices, there is a great chance that they will direct the case to the Grand Chamber.

If this happens and the Grand Chamber accept the case for its consideration, it is possible that the approach can change radically.

Speaking at the meeting of the Ukrainian Bar Association on tax litigation

It was my pleasure to speak at the meeting of the Committee on Tax and Customs Law of the Bar Association of Ukraine on the topic of court jurisprudence in tax litigation.

My speech was dedicated to:

1) The court jurisprudence in cases related to challenging the tax authorities' orders on appointing tax inspections in accordance with the Resolution of the Cabinet of Ministers of Ukraine (CMU) of 3 February 2021 No 89. This Resolution narrowed the scope of the moratorium on tax inspections set out for the period of the quarantine. The Resolution, among other things, allows carrying out scheduled tax inspections.

Court jurisprudence currently exists at the level of the courts of appeals at the maximum. Such cases have not yet been decided by the Supreme Court.

The court jurisprudence at the level of the courts of appeal is ambiguous. In some cases, the courts side with the taxpayers, recognizing that the CMU's resolution cannot narrow the scope of the moratorium provided for in the Transitional Provisions of the Tax Code of Ukraine. In other cases, on the contrary, the courts of appeal hold that the narrowing of the moratorium introduced by the CMU's resolution is legal. They refer to the fact that the CMU's resolution was adopted in accordance with the direct provision of the Law of Ukraine of 17 September 2020 No 909-IX (on amendments to the Law on State Budget of Ukraine for 2020).

It is interesting that, as a rule, the Sixth Administrative Court of Appeal (Kyiv) demonstrates a loyal approach to the taxpayers. The Fifth (Odessa) and Second (Kharkiv) Administrative Courts of Appeal, on the other hand, are more likely to share the logic of the tax authorities.

2) The court jurisprudence on the application of indirect methods of determining taxable income. 

This court jurisprudence has emerged in recent years in connection with the attempts of the tax authorities to issue additional tax assessments to statesmen when some discrepancies are found between their official income and the value of assets in the electronic declarations.

The relevance of this court jurisprudence has greatly increased in connection with the implementation of the tax amnesty in Ukraine starting from September 2021.

The court jurisprudence in this category of cases is already present at the level of the Administrative Court of Cassation (a division of the Supreme Court) and is absolutely favourable for the taxpayers. The court finds the use of indirect methods of determining income illegal.

Webinar on Court Jurisprudence in Tax Litigation

I was delighted to hold a webinar at the Business Consulting Academy, dedicated to the judicial practice of resolving tax disputes.

The webinar focused on exemplary tax disputes and tax disputes resolved by the Grand Chamber of the Supreme Court.

Among the important judgments rendered by the Grand Chamber in 2020, it is necessary to note the following three:

- The resolution of 7 April 2020 in case No 910/4590/19 initiated by LLC "Askop-Ukraine" => administrative courts have jurisdiction over the cases involving the recovery under section 625 of the Civil Code of Ukraine of annual 3% interest and inflation charges in case of the failure of the state authorities to provide VAT refund on a timely manner; 

- The resolution of 1 July 2020 in case No 804/4602/16 initiated by LLC “Salamandra Insurance Company” => the failure of a bank to remit a tax liability to the state revenues based on the payment instruction of a taxpayer exempts the taxpayer from penalties and daily default interest, but does not exempt him from paying to the state revenues the tax liability itself; and 

- The resolution of 18 November 2020 in case No 813/5892/15 brought by LLC “Yablunevyi Dar” => orders on appointing tax inspections issued by the tax authorities based on court orders in criminal cases cannot be challenged in any type of court proceedings in Ukraine.

Court Jurisprudence in Tax Disputes Involving an International Element

I want to thank the Business Consulting Academy for the opportunity to speak at a webinar on the topic of court jurisprudence in tax disputes involving an international element. 

In the context of the webinar, I would like to point out that at the end of 2020, the Supreme Court published its Review of court jurisprudence in the field of transfer pricing and international taxation. The review (in Ukrainian) is available at this link: https://supreme.court.gov.ua/userfiles/media/new_folder_for_uploads/supreme/Ohliad_transfertne_tsinoutvorennia_1.pdf.

Unfortunately, I am supposed to say that the document does not live up to the expectations that arise from reading its name. It cannot be called even a more or less comprehensive review of the court jurisprudence of the resolution of tax disputes in the field of international taxation. 

In general, the review discusses only the topic of transfer pricing, including quoting a number of unnecessary, in my opinion, for such a review, court judgements on certain obvious and non-debatable issues. 

Other issues of international taxation are not covered in the review at all, except for the two judgements concerned with permanent establishments and one judgement concerned with a tax difference arising from purchasing goods from counterparties registered in low-tax jurisdictions. 

CASE LAW IN TAX LITIGATION: GRAND CHAMBER AND MODEL CASES

I was pleased to hold a webinar on the case law of the Supreme Court in tax disputes for the students of the tax course of the Business Consulting Academy. 

This time model (exemplary) cases and cases considered/to be soon considered by the Grand Chamber were dealt with. 

While there are not many  model cases in the field of tax litigation  (one two and that is all), the situation with the cases of the Grand Chamber is much more interesting.

Among the most recent cases of the Grand Chamber, it is worth especially noting the following two:

1) Case No. 804/4602/16 intiated by Salamander Insurance Company, LLC. In this case, the Grand Chamber on 1 July 2020 put an end to disputes related to the failure of banks to execute wire transfer instructions of the taxpayers on transferring taxes to the state revenues. The conclusion of the Grand Chamber is unlikely to please such taxpayers. It ruled that the  taxpayers are exempt from fines and daily default interest, but the tax liability itself must be paid once more by the taxpayers to the state revenues. 

2) Case No. 826/9464/18 initiated Ukrvydavpoligrafiya. The case has not been resolved yet. The consideration at the Grand Chamber is scheduled for 26 August  2020. This is really one of those cases being of a great significance to tax lawyers. The case addresses the issues that are extremely important for tax litigation in general. In particular, the Grand Chamber will opine on: (i) the possibility of challenging the tax audit orders after their execution and (ii) the possibility of invoking procedural violations as legal grounds for the cancellation of tax assessments in the event that the taxpayer allowed the tax authorities to carry out the tax audit.

TAX LITIGATION: MITIGATION OF QUARANTINE

One can say that yesterday (17 July 2020) went down in history as a day of serious mitigation of the quarantine in the area of tax and, in fact, other litigation.

On this day, the Act of 18 June 2020 No. 731-IX came into force. This Act:

- Repeals the provision of the Code of Administrative Procedure of Ukraine and other procedural codes  on the  extension of almost all procedural time-limits for the full  duration of the  quarantine.

- Lays down that the procedural time-limits extended in accordance with the above-mentioned repealed provision for the full duration of the quarantine expire twenty days after the entry into force of the Act, i.e. on 6 August 2020.

- Instead of the automatic extension of procedural time-limits for the time-frame of the quarantine, introduces the possibility of their renewal by the court.  The renewal does not promise to be easy. To renew a procedural time-limit, it is necessary to satisfy the court that the time-limit has not been obeyed due to the very effect of the  measures introduced in connection with the quarantine.

There turn out to be some curiosities. The Act provides for an absolutely illogical rule that the court may extend the procedural time-limits within 20 days after the entry into force of the Act on the grounds specified by the Act.

What was meant by this is not clear at all. 

First, as noted above, over these 20 days, the procedural time-limits are considered to be automatically extended by virtue of the direct provision of the Act.

Second, the Act sets forth only the grounds for renewal, not the extension of procedural time-limits.

Please note that the resumption  of the application of  procedural time-limits only relates to court tax disputes. In the field of administrative appeals, everything remains unchanged.

Paragraph 52-8 of subsection 10 of the Transitional Provisions of the Tax Code of Ukraine continues to apply. According to this paragraph, the time-limits for administrative appeals are considered to be suspended until the last calendar day of the month in which the quarantine expires.

TAX LITIGATION AND QUARANTINE

I was delighted to speak at an e-meeting of the Committee on Tax and Customs Law of the Ukrainian Bar Association dedicated to the issues of tax changes adopted in response to the quarantine period.

My speach concerned specifics of tax litigation over the quarantine period.

Very briefly, such specifics in accordance with the Act of Ukraine of 30 March 2020 No 540-IX are as follows:

- deadlines for consideration of administrative complaints by the tax authorities have been suspended until 31 May 2020;

- due to the imperfection of the wording of the Act it is disputable whether the deadlines for filing administrative complaints by taxpayers have been also suspend until 31 May 2020; 

- the time-limits for bringing lawsuits against tax assessments, time-limits for bringing appeal and cassation claims as well as a number of other procedural time-limits have been suspended for the whole period of the quarantine;

- the possibility of participation in court hearings via a videoconference (EasyCon or other software) has been provided for the period of the quarantine.

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.

TOP-3 Judgements of New Supreme Court in Tax Disputes

The new Supreme Court is working and tax disputes are no exception here.

Over  the first half of 2018, the new Supreme Court managed to consider 6,900 tax disputes.

Undoubtedly, among such an array of cases there are a lot of important and interesting positions of the new Supreme Court, which just need to be known in order not to lose face while representing a taxpayer before court.

Below is just the "top of the iceberg" which is  TOP-3 most important, in our opinion, judgements of the new Supreme Court rendered from the beginning of 2018.

No 1: the ruling of the investigating judge on the appointment of an inspection is subject to appeal

For a long time, there has been a debate as to whether an investigating judge has the right to appoint a tax inspection at the request of law enforcement agencies, and whether it is possible to challenge a ruling of the investigating judge on the appointment of such an inspection.

The Grand Chamber of the Supreme Court (ruling dated 23 May  2018 in case No. 237/1459/17) made a clear conclusion that it is possible to appeal from rulings of investigating judges on the appointment of inspections.

The Great Chamber did not give a straight answer to the question on whether such inspection were lawful. Actually, this question was not placed before the Grand Chamber. However, the Grand Chamber hinted that such a ruling of the investigating judge is not provided for by the  criminal-procedural legislation. Such a hint in itself indicates the illegality of the investigating judge's ruling on the appointment of an inspection.

Formally, the ruling of the Grand Chamber concerns the appeal of the appointment of a labor inspection, not that of  tax rules. However, this in no way reduces its importance to tax litigation. According to the analysis of the data of the Unified State Register of Court Judgements, the legal position of the Grand Chamber has been already successfully used many times  by the court of appeal to reverse the ruling of the investigating judges on the appointment of tax inspections.

No 2: sham entrepreneurship  of a counterparty

Again, this is practically the "eternal" issue for tax litigation. If the corporate officers of a counterparty have been convicted of sham  entrepreneurship (section 205 of the Criminal Code of Ukraine), is it possible for the taxpayer to retain his input VAT and deductible expenditure on the purchase of goods or services from this counterparty.

In the past, some administrative courts supported a rather rigorous taxpayer-unfavourable approach. According to this approach, the sham entrepreneurship of a counterparty excludes the right of the taxpayer to enjoy input VAT / deductible expenditure in relation to the transactions with this counterparty under any conditions.

Other administrative courts maintained a more taxpayer-favorable "liberal" approach. According to the approach  sham entrepreneurship charges brought against the corporate officers of a counterparty, should not deprive the taxpayer of the right to input VAT and deductible expenditure, if the taxpayer can prove that the underlying transaction has in fact occurred.

The turning point was the end of 2015, when the former Supreme Court of Ukraine in its ruling of  1 December  2015 in the case No  826/15034/14 actually "legitimized" the unfavorable approach.

After the creation of the new Supreme Court, there were some examples of support by the Administrative Court of Cassation of both approaches (for example, the ruling of 27 February 2018 in the case No. 813/3594/17 for the first approach and the ruling of 27 February 2018 in the case No. 813/ 1766/17 for the second approach).

Finally, the Administrative Court of Cassation dared to trouble the Grand Chamber with this "ambiguous" issue.

Attention  here! The Grand Chamber (the ruling of 26 March 2018 in the case No. 826/19939/16) has abandoned the consideration of this issue, noting that it does not make up  "the existence of an exclusive legal problem" and "in each particular case the court must carry out a legal assessment of the actual circumstances of the case ".

Some optimists see in the words of the Grand Chamber that "in each particular case the court must carry out a legal assessment of the actual circumstances of the case " its  support to the position that the taxpayer can keep input VAT and deductible expenditure provided that the true nature of the transaction with the “sham” counterparty has been  confirmed.

No 3: right remedy for recovery of overdue VAT refund

This is an issue of a real "intellectual battle" happening between the former  High Administrative Court of Ukraine and the former Supreme Court of Ukraine. The High Administrative Court of Ukraine was the supporter of a more effective remedy “collection of the overdue VAT refund from the state revenues”  (for example, the ruling of 4 February 2016 in the case No. 806/2256/15).

The Supreme Court of Ukraine adhered to a more moderate position regarding the exclusive role of the tax authorities in providing VAT refund and insisted on the obliging the tax authorities to handing over a document initiating VAT refund to the body of the state treasury (for example, the ruling of 16 September 2015 in the case No. 2а / 0570 / 17001/2012).

In case No  826/7380/15, the Administrative Court of Cassation sided with the High Administrative Court of Ukraine and preliminary recognized “the collection of the overdue VAT refund from the state revenues” as the correct remedy.

Since this position of the Administrative Court of Cassation is at odds with the position of the former  Supreme Court of Ukraine, the Administrative Court of Cassation by its ruling of  26 June 2018 referred the case to the consideration of the Grand Chamber.

As of the day of writing, the Grand Chamber has not yet rendered its judgement on this issue. Hopefully, the Grand Chamber will have enough common sense to agree with the Administrative Court of Cassation’s stance on the correct remedy.

Photo from http://yvu.com.ua

New Code of Administrative Proceeding of Ukraine to Enter into Force

Co-authored by Anton Havryk

The long-lasting story surrounding the adoption of new procedural codes  and the beginning of the work of the new Supreme Court has finally found its end.      

15 December 2017 is going to be the starting point at which the new procedural codes will come into force and the new Supreme Court will start functioning.

We cannot exclude the scenario under which  the formation of the apparatus and material and technical base of the new Supreme Court is not entirely completed until 15 December 2017.  Given this fact, as well as the large balance of the unresolved cases (about 50 thousand), the easy launch of the new Supreme Court will be very unlikely to happen.

As for tax disputes, from 15 December 2017 on they will be dealt with under the new wording of the Code of Administrative Proceedings of Ukraine (CoAP Ukraine). The Highest Administrative Court of Ukraine will cease its activities on 15 December 2017.  The tax disputes undergone the cassation appeal  will be considered by the Administrative Court of Cassation in the capacity of the subdivision of the Supreme Court.

The most painful moment is that the new CoAP of Ukraine does not provide for virtually any transitional provisions. All disputes will be considered under the new rules irrespective of the court in which they are pending, and regardless of whether the proceedings have been or not opened before or after the entry into force of the new CoAP of Ukraine.  

The exception is set forth only for already filed applications on the review of court judgements by the previous Supreme Court of Ukraine on the grounds of ambiguous application of the rules of law and inconsistency of the contested judgment with the opinion of the Supreme Court of Ukraine.

Such applications will be considered by the Administrative Court of Cassation under the rules of the old version of the CoAP of Ukraine.

By the way, some time ago we analyzed then draft of the CoAP of Ukraine and published our brief descriptions of the most striking changes having bearing on tax litigation. Undoubtedly, the final version of the new CoAP of Ukraine and its draft are different. However, in their majority the novelties described by us have not lost their relevance as of today.

If interested, the review of the novelties is available  at following links: Novelty No 1, Novelty No 2, Novelty No 3, Novelty № 4, Novelty No 5, Novelty No 6, Novelty No 7, Novelty No 8, Novelty No 9, Novelty No 10, Novelty No 11, Novelty No 12, Novelty No 13, Novelty No 14,  Novelty No 15  and Novelty 16 .   

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Novelty 16 - New Procedure for Filing Appeals

Co-authored by Anton Havryk

This article continues a series of publications on the most striking changes in the new version of the Code of Administrative Procedure of Ukraine for the purposes of tax litigation.

What follows is the overview of the sixteenth most significant change, in our opinion,  attributable to the changed procedure for filing appeals against the judgements of courts of first instance.

The overview of the other essential changes is available here: Novelty No 1, Novelty No 2, Novelty No 3, Novelty № 4, Novelty No 5, Novelty No 6, Novelty No 7, Novelty No 8, Novelty No 9, Novelty No 10, Novelty No 11, Novelty No 12, Novelty No 13, Novelty No 14, and  Novelty No 15.   

There are two key changes anticipated.

Firstly, appeals will be filed directly with courts of appeal, not through courts of first instance, as it happens now.

Secondly, time limits for filing appeals are expected to be elongated. Appeals against judgements on the merits of the case can be lodged within 30 days (against today's 10 days), and appeals against court orders (rulings) can be lodged within 15 days (against today's 5 days).

* Photo from http://motortransportsolicitor.co.uk