Practice of the European Court of Human Right and VAT refund

By Roman Blazhko 

Recently, more and more tax disputes have had a bearing on the issue of the responsibility of VAT payers for the abuses committed by their suppliers in the chain of supply. According to the tax authorities, a VAT payer (buyer of goods) is not entitled to input VAT (“tax credit”) and, accordingly, to VAT refund if some of its suppliers in the chain of supply have not declared their tax obligations or appeared to be fictitious companies (for example, those that are not located at their registered addresses, those that do not have sufficient fixed assets, those that are understaffed, etc.).

The Law of Ukraine "On Value Added Tax" and commencing 1 January 2011 the Tax Code of Ukraine do not provide an explicit answer to the question whether the VAT payer (buyer of goods) is eligible for input VAT (“tax credit”) as well as to VAT refund in such cases.

Fortunately, the above question finds its solution in the practice of the European Court of Human Rights. The practice of this court is recognized as an independent authority and must be applied by the courts of Ukraine (art.17 of the Law of Ukraine "On the Enforcement of Judgments and the Application of the Practice of the European Court of Human Rights").

To date, one can note three judgments of the European Court of Human Rights touching upon the issue in question. These encompass the judgments in Intersplav v Ukraine (2007, application No 803/02), “Bulves" AD v Bulgaria (2009, application No 3991/03), and Business Support Centre v Bulgaria (2010, application No 6689/03).

In the case of Intersplav v Ukraine (para 38 of the judgment), the European Court of Human Rights found for the VAT payer stating that the latter can not be denied the entitlement to VAT refund in the absence of any indication of its direct involvement in VAT abusive practices.

In the case of "Bulves" AD v Bulgaria (para 71 of the judgment), the European Court of Human Rights found that the VAT payer should not be held liable for the abuses committed by its suppliers, if it does not have knowledge of those abuses or the means to obtain such knowledge.

In the case of Business Support Centre v Bulgaria the European Court of Human Rights reaffirmed its conclusions contained in the case of "Bulves" AD v Bulgaria.

Consequently, relying on the practice of the European Court of Human Rights, it is possible to contend that a VAT payer should not be deprived of the entitlement to input VAT (“tax credit”) and VAT refund in the case of the abuse of its suppliers in the chain of supply. The exceptions are the only situations where VAT payer was involved in such abuses, or it had knowledge of those abuses or the means to obtain such knowledge.

To finish with a happy end, it is worth mentioning that the domestic courts have gradually begun to apply the practice of the European Court of Human Rights in relation to VAT disputes. For instance, as at 8 September 2011 there were 47 and 102 court decisions in the Unified State Register of Judgments of  Ukraine citing Intersplav v Ukraine and "Bulves" AD v Bulgaria, respectively.

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.