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.

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VAT-Bonds to be Issued

On 27 May 2014 the Resolution of the Cabinet of Ministers of Ukraine of 21 May 2014 No. 139 (the “Resolution”) came into force. The Resolution provides for the issue of government bonds (so-called VAT-bonds) for the purposes of VAT refunding.

The terms of the issue of the VAT-bonds are the following:

- Refunding through the VAT-bonds is voluntary. А taxable person willing to obtain VAT-bonds should submit a respective application to his local tax authority;

- Amount of the VAT to be refunded through the VAT-bonds is currently unknown. In the nearest future the Ministry of Revenue and Duties of Ukraine is supposed to carry out the inventory of the VAT indebtedness. Based on the results of such an inventory the Cabinet of Ministers of Ukraine will approve the threshold limit of the issue;

- Refunding through the VAT-bonds will cover only those amounts of VAT which had been declared for refunding by 1 January 2014;

- Premised on the plain reading of the Resolution, the only amounts of the VAT confirmed by tax audits can be refunded through the VAT-bonds. It is unclear whether it will be possible to refund in such a way the VAT amounts confirmed by the court judgments awarded in the cases concerned with challenging the results of the tax audits;

- Taking into account the time set forth by the Resolution for drafting the inventory registers of the VAT indebtedness as well as the conduct of other formalities required for the issue of the VAT-bonds, the issue may be expected not earlier than in the middle of August 2014;

- VAT-bonds are going to be issued in non-documentary form (uncertified securities). The par value of the VAT-bonds is going to be UAH 1,000. The interest rate equals to that of the National Bank of Ukraine at the time of the the Resolution’s entry into force (9,5% per annum). The interest repayments are going to take place every six months;

- Circulation term of the VAT-bonds is 5 years. The Resolution stipulates the gradual repayment of the bonds. The state is going to repay 10% of the par value every six months. Thus, in 5 years 100% of the par value is going to be repaid.

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Enforcement of Court Decisions on VAT Refund Arrears

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It often happens that taxpayers having VAT refund in arrears owed by the Ukrainian tax authorities doubt whether to claim it through the court or not to do so. The reason is that should the court find for the taxpayer the decision will be enforced on the “first come first serve” basis*. One can assume that there is a long line of such decisions outstanding from the previous years. So, the enforcement of the decision can take years.

On the other hand, the taxpayer always has the possibility to negotiate the VAT refund with the tax authorities and to enjoy it much earlier than when passing through the litigation. As a matter of practice, in exchange of the VAT refund the taxpayer is required to make advance payments of corporate income tax amounting up to 50 per cent or even more of the VAT refund sought.

In view of the above, I have filed the information request with the Ukrainian Treasury Service so as to clarify the situation surrounding the enforcement of court decisions on VAT refund arrears. The Ukrainian Treasury Service omitted to answer the main question being of interest to the taxpayers, i.e. what total amount of the court decisions on VAT refund arrears is currently outstanding. Yet they provided some information on the enforcement of such decisions in 2010,2011 and 2012.

According to the Ukrainian Treasury Service, they enforced 65 decisions on the total amount of UAH83.10 million in 2010, 146 decisions on the total amount of UAH266.53 million in 2011 and 21 decisions on the total amount of UAH 46.58 million in the first quarter of 2012.

Please see below my request to the Ukrainian Treasury Service and their response (in Ukrainian).

* - Pursuant to para 9 of Chapter VI “Closing and Transitional Provisions” of the Budget Code of Ukraine. 

Cereal Exports: VAT and Export Duty

By Roman Blazhko 

This year’s October (2011) seems to be full of pleasant surprises for Ukrainian cereals exporters.

The Law No 3906-VI of 7 October 2011 (in effect from 22 October 2011) abolished the export duty on wheat and corn; there remains, however, the export duty on barley.

Nonetheless, captured by the desire to protect domestic agricultural producers, the Ukrainian Parliament did stop at this and on 20 October 2011 recommenced a VAT zero rate on cereal exports by means of the Law on amendments to the Tax Code of Ukraine relating to the simplified taxation system (the draft law No 8521).

If the latter law is signed by the President of Ukraine, cereal exporters will qualify for VAT refund out of the VAT paid to the cereal suppliers, which they were deprived of with the passage of the Tax Code of Ukraine.

Amendments to the Tax Code of Ukraine (VAT)

By Roman Blazhko 

In my post dated 29 July 2011 I already mentioned the amendments introduced by the law of 7 July No 3609-VI (the draft law No 8217) to the Tax Code of Ukraine touching upon the administration of taxes. Below, I am delighted to call your attention to the most significant, at least to my thinking, amendments brought by this law in respect of VAT:

1. The grounds for the voluntary registration of a VAT payer are broadened. An entity is eligible for the voluntary VAT registration if either its share capital or book value of assets (fixed assets, intangible assets and inventory) exceeds UAH 300 thousand.

2. The criteria for automatic VAT refund were varied. The volume of zero-rated transactions of the taxpayer seeking automatic VAT refund in its total volume of supplies was lowered from 50 to 40 per cent. It is also determined that while defining the discrepancies between the taxpayer’s input VAT and its counterparties’ output VAT three preceding reporting periods (one quarter) are taken into account.

3. The procedure for the issuance of VAT invoices was slightly modified. A VAT payer is obliged to specify in the VAT invoice the product code under the customs tariff if the goods supplied are either excisable or have been previously imported into Ukraine. A VAT payer is now permitted to register its VAT invoices in the Unified register of VAT invoices within 20 calendar days following the day of their issuance.

Please note that the law No 3609-VI has been in effect since 6 August 2011.