Such Wanted Agency

In March 2017 the Cabinet of Ministers of Ukraine approved a bill on the establishment of the Service of Financial Investigations (the “Service”). The main purpose of this bill is to eliminate the Tax Police and optimize the system of law-enforcement agencies dealing with financial crimes.

Currently, there are four law-enforcement agencies in Ukraine counteracting financial crimes:

- the Tax Police;

- the Department of Economic Security of the National Police;

- the Department of Counter-Intelligence Economic Security of the Security Service of Ukraine (the “SSU”);

- The investigative bodies of the State Prosecutor’s Office.

Once the law is adopted, the Service will be richly endowed with all the powers as to detection and pre-trial investigation of crimes in  economic, financial and tax areas. Thus, there will arise “a monster” taking on all the powers on combating crimes in the economic sphere.

The establishment of the Service will mean not only “extermination” of the Tax Police, but also the elimination of the Department of Economic Security of the National Police.  In the meanwhile, the powers of the Department of Counter-Intelligence Economic Security  of the SSU will be considerably narrowed.

Co-authored by Anton Havryk 

 

It is planned that the Service will investigate crimes related to the use of financial resources, tax and the turnover of excisable goods, to name but a few.

Approximately thirty sections of the Criminal Code of Ukraine will fall under the jurisdiction of  the Service,  including such popular ones, as:

- section 191 - misappropriation of property through the abuse of office; 

- section 212 - tax evasion;

- section 222 - financial fraud;

- section 358 - forgery of documents, seals, stamps and forms, sale or use of forged - documents, stamps, seals.

The establishment of the Service can be regarded as a certain kind of lustration process aimed at the Tax Police and other law enforcement agencies concerned with financial crimes. 

The bill provides that the Service will filled by quite a new staff. Persons who have been working at law-enforcement agencies counteracting financial crimes since 2010 onwards will not be admitted to the recruitment process.

In our opinion, the admission criteria are not clearly formulated. 

If, for instance, to talk of once employees of the National Police (former Militia), one may take note of the following. The road to the Service is surely opened  for district inspectors  (sheriffs). On the contrary, this road is  unequivocally closed for former servicemen of the Department of Economic Security of National Police. The latter are considered to be former employees of a law-enforcement agency concerned with financial crimes. 

There is a much more difficult situation with investigating officers and former employees of the once legendary Organised Crime Department of the National Police. Those two categories of the servicemen were only  partially involved in dealing with financial crimes (along with dealing with ordinary crimes). The moot point here is whether they can be allowed to the recruitment process.

The officers of the Service, just as those of National Anti-Corruption Bureau of Ukraine (the “NABU”), will be called detectives. There will be no intelligence and investigating officers as they currently exist in the Tax Police and other law-enforcement agencies responsible for financial crimes.

It is planned that the detectives of the Service will have decent salaries. For example, the usual detective’s salary will be 20 living wages, which is about 32 000 hryvnias. This approach is used following the example of the NABU to reduce the temptation of the Service’s detectives to continue “deep rooted corrupt practices”.

In our opinion, the creation of the Service may be of a great benefit to Ukraine.  At least, the beneficial effect is visible in the concentration of powers to investigate financial crimes in one body. This will lead to the elimination of the duplication of the functions of law-enforcement agencies and may improve the efficiency of investigation.

For example, it is well possible today that the same criminal offences, say, related to taxation, are being investigated by different law-enforcement agencies. If information on a VAT evasion gets to the National Police, the offence may be qualified and investigated under section 191 of the Criminal Code of Ukraine (misappropriation of property through the abuse of office). If the same information gets to the Tax Police, the offence may be qualified and investigated under section 212 of the Criminal Code of Ukraine (tax evasion). The creation of the Service must bring an end to such a wrongful practice.

However, the real and much more significant beneficial effect will take place, if only the reform fully succeeds. Instead of the currently existing law-enforcement agencies with excellent “corruption track records” we will have the new independent agency totally free from corrupt practices.

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Tax Evasion: Its Majesty Intention

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One of the key issues surrounding the qualification of tax crimes is an issue of intention. Intention (mens rea) is the attribute of tax evasion (s. 212 of the Criminal Code of Ukraine). If the tax has not been paid without the intention to do so, there is no criminal liability under s.212 of the Tax Code of Ukraine. However, given the existing practice the person who has failed to pay tax unintentionally (for instance, due to the poor knowledge of tax laws or their incorrect application) may incur criminal responsibility under s. 367 of the Tax Code of Ukraine (neglect of official duty).

There naturally arises a question as to how to determine that an intention aimed at tax evasion is in place? Undoubtedly, the main guidance here is para 3 of the Resolution of the Plenum of the Supreme Court of Ukraine dated 8 October 2004 No  15 "On Some Issues of Application of Tax Evasion Legislation" (hereinafter - "Resolution No 15"). This paragraph comprises  the non-exhaustive list of circumstances that may indicate the intention aimed at tax evasion, including:

• the absence of tax accounting records or keeping them at variance with the established procedure;

• distortions in accounting or reporting records;

• failure to register cash received for services rendered;

• maintaining dual (official and unofficial) accounting;

• the use of bank accounts not disclosed to the tax authorities;

• overstated cost of sales.

This very list is cited at almost all conferences, seminars and similar events dedicated to

tax evasion matters.

Unfortunately, the aforesaid circumstances are not formulated clearly enough to be safe in saying that there has been/has not been the intention aimed at tax evasion in a particular situation. I decided to try to go beyond the list and look at "live" criminal cases from the Unified State Register of Judgments.

Some examples from this register are outlined below.

No	Case	Court	Circumstances indicating the intention directed at tax evasion
1	In re Vinspetsodyag, 2010, http://reyestr.court.gov.ua/Review/7889655	Zamostyanskiy District Court of Vinnytsia	To substantiate the intention aimed at tax evasion, the court, namely, referred to the following circumstances from the Resolution No 15: (i) the keeping of tax accounting record in defiance of the established procedure; (ii) distortions in accounting and reporting records. In the court’s opinion, the tax accounting violations were evidenced by the declaration of deductable expenses/input VAT deduction related to the transactions with fictitious companies. The distortions in the accounting/reporting documentation, according to the court, were confirmed by the expert report pursuant to which the accounting was conducted improperly (confusions in line numbers and irregularities in the cash book).
2	In re Oris, 2009 , http://reyestr.court.gov.ua/Review/7499249	Chornuhynskiy District Court of  Poltava Region	The director’s failure to file annual corporate income tax return as well as three monthly VAT returns was regarded as an indicative of an intention leveled at tax evasion.
3	In re one private entreproneur, 2011, http://reyestr.court.gov.ua/Review/15414299	Andrushivskiy District Court of Zhytomyr Region	The private entrepreneur exceeded the revenue threshold allowed for the simplified system of taxation and failed to shift to the general system of taxation.

As you can see, even the rather modest sampling features how inventive courts and prosecuting authorities can be while deciding on the presence of the intention aimed at tax evasion.

New Criminal Proceedings Code of Ukraine: Bail Amount to Decrease

Photo from http://ibarraturismo.com The extremely famous Humanization of Liability for Economic Offences Act 2011 (for more details please see my post of 8 November 2011) being in operation from 17 January 2012 has received mixed estimates from taxpayers. The most of the criticism has been aimed at its provisions stating that: - A fine as a punishment for certain crimes, including large-scale tax evasion, must not be less than the amount of the actual damage caused by the crime (the amount of the tax evasion); - The amount of bail must not be less than the amount of the actual damage caused by the crime (the amount of the tax evasion). The existence of such provisions hampers or even makes it impossible to benefit from the progressive rules of this Act with regard to the replacement of an imprisonment by an fine and the replacement of an arrest (as a preventive measure) by bail. It seems that the government has accepted the criticism, at least in part. The new Criminal Proceedings Code of Ukraine (for more information on this code please see the post of 19 May 2012) has no rules determining that the amount of bail ought not to be less than the actual damage (the amount of the tax evasion). With the entry into force of the new Criminal Proceedings Code of Ukraine the amount of bail will no more tied to the amount of the damage and will be limited to 300 minimum wages (UAH 321.9 thousand for the year 2012).

Criminal Liability for Declared but Non-Discharged Tax

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In practice, there is a question whether the criminal charges can be brought against a company’s officers who have declared tax but have failed to remit it to the budget within the prescribed term.

It appears that the Unified State Register of Court Decisions (an “inexhaustible source of knowledge” to a certain extent) is able to provide an answer even to this question.

Let me look at two analogous cases from the register. These are In re Mirgorod Kombinat Khliboproductiv № 1 (http://reyestr.court.gov.ua/Review/20486739) and In re Tsukrovyi Zavod Maharynetskyi (http://reyestr.court.gov.ua/Review/9105838). The cases were resolved in 2011 by the general courts of first instance.

In the given cases directors were convicted because of the failure to discharge the declared tax liabilities on personal income tax and unified social contribution (pension contribution) in the presence of the financial ability to do so. 

The conduct of the Director of Mirgorod Kombinat Khliboproductiv was classified as neglect of official duty (s. 367 of the Criminal Code of Ukraine), while the conduct of the director of Tsukrovyi Zavod Maharynetskyi was classified as tax evasion/unified social contribution evasion (sections 212 and 212-1 of the Criminal Code of Ukraine).

Can this approach be extended to other taxes and contributions? For example, may the director who has declared corporate income tax due but has not paid it in time be exposed to criminal conviction?

It seems that the answer is rather ‘yes’ than ‘no’. Even though there is no priority for paying corporate income tax liabilities over any other liabilities at law, the prosecuting authorities can identify a crime in the conduct of the director remitting an amount “X” available at the company’s account not to the state budget, but to the supplier providing raw materials needed for the continuation of the company’s business.

In the above cases, the judges did not apparently burden themselves with considering the matter of priority/non-priority of certain payments. If they had opined that the criminal responsibility for the declared but not paid tax is only possible insofar as the legislation lays down the priority of the payment of such tax to the budget over making other payments, the directors of these companies would have been convicted only for the failure to remit unified social contribution (pension contribution), and would not have been convicted for the failure to discharge personal income tax.

Currently, the law sets forth the priority of discharging unified social contribution (pension contribution)*, but does not provide such a priority for personal income tax.

* - para 12 of s. 9 of the Law of Ukraine "On the Collection and Accounting of Unified State Social Contribution" and para 12 of s. 20 of the Law of Ukraine "On Compulsory State Pension Insurance".

New Criminal Proceedings Code of Ukraine and Taxpayers

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The new Criminal Proceedings Code of Ukraine (hereafter – the “CPCU”) was officially published the other day. The new code will take effect in six months after its publication (on 19 November 2012). This article is devoted to outline what taxpayers can specifically expect of the enactment of the new CPCU.

The biggest blow to taxpayers, in my opinion, is the deprivation of the possibility to challenge a decision on instituting criminal proceedings in court. The institution of criminal proceedings stage is displaced by the entry of the information on a crime into the Unified Register of Pre-trial Investigations. Although the new CPCU does not preclude the judicial review of the decisions of the pre-trial investigators/prosecutors on making entry into the aforesaid register (the analogue of the decision on instituting criminal proceedings), the corresponding type of complaints are not included in the list of the complaints to be dealt with by a court at the pre-trial investigation stage (s. 303 of the CPCU).

Thus, the court may consider the complaint only after the pre-trial investigation is completed. But the hearing of the complaint at this late stage eliminates any reasonability behind lodging the complaint at all and makes taxpayers virtually defenceless in face of the arbitrarily initiated criminal proceedings.

It should be noted that the adoption of the new CPCU has turned out to be the highly successful continuation of the reform launched by the Tax Code of Ukraine and levelled at the denudation of the taxpayers of the right to oppose the unlawfulness of the institution of the criminal proceedings through the court. The Tax Code of Ukraine has significantly narrowed the possibilities for the judicial review of decisions on instituting criminal proceedings in view of its provision (para 58.4), whereby in the event of the institution of a criminal case the tax assessment ought not to be issued until the final resolution of the case and the delivery of the guilty verdict.

Because of these changes the taxpayers lost their possibility to appeal the tax assessments to administrative courts and later to use the judgments of the administrative courts on abolishing such tax assessments as an argument in favour of the illegality of the institution of the criminal proceedings. The CPCU goes much further by saying complete and the absolute "no" to any attempt on the part of a taxpayer to resist the criminal investigation through a court appeal.

Another no less remarkable aspect of the new CPCU is confining the jurisdiction of the tax police over certain tax-related crimes. In particular, the following crimes will fall outside the jurisdiction of the tax police since the effective date of the new CPCU: s. 191 (misappropriation of property through abuse of office), s. 366 (forgery in office) and s. 367 (neglect of official duty) of the Criminal Code of Ukraine (hereinafter – the “CCU”). The first section, in practice, is often used for qualifying activities aimed at obtaining illegal VAT refund (the unlawful receipt of VAT refund is viewed as a theft of public funds). The second section is almost always utilized in conjunction with s. 212 (tax evasion) of the CCU, given the fact that tax evasion in most cases is not possible without including false information into the tax returns (e.g. understating income or overstating expenses). Finally, the third section is employed in cases where there is an unintentional failure to pay tax (by virtue of an error, unawareness of tax laws technicalities, etc.).

In the confinement of the jurisdiction of the tax police over certain tax-related crimes one can identify something positive for taxpayers. It can be assumed that, not wanting to give the "lucrative" piece of its work to the ordinary police, the tax police will categorise the cases of illegal VAT refund as tax evasion (s. 212 of the CCU) rather than misappropriation of property through abuse of office (s.191 of the CCU). S. 212 of the CCU, in contrast to s. 191 of the CCU does not entail imprisonment (imprisonment in a tax evasion case is only possible when the fine adjudged has not been paid in time). It can also be supposed that tax evasion will not receive the additional qualification under s. 366 (forgery in office) of the CCU. By the way, the latter, just as s. 191 of the CCU, stipulates imprisonment.

When it comes to the exclusion of s. 367 (neglect of official duty) of the CCU from the jurisdiction of the tax police, it will most likely trigger no changes. In practice, the tax police usually do not utilise this section for the qualification of tax crimes. Even in cases of complete absence of evidence indicating the existence of intent aimed at tax evasion, the tax police in the pursuit of good performance figures institute criminal proceedings under s. 212 (tax evasion) of the CCU. Only during the trial stage the court sees the groundless of the qualification under s. 212 of the CCU and changes it to s. 367 of the CCU.

Draft law No 9221 "On Humanization of Liability for Economic Offences"

On 6 October 2011, the Ukrainian Parliament approved in the first reading the draft law No 9221 "On Humanization of Liability for Economic Offences" (the Draft law No 9221). The draft law radically changes the approach to economic crimes, including those related to tax evasion.

The state decided to punish white-collar criminals by high fines rather than by imprisonment. Does it make sense to sent unconscientious entrepreneurs and managers to prisons and spend government funds on them, when they can be turned into the separate revenue of the state budget?

Tax evasion (s. 212 of the Criminal Code of Ukraine) and evasion of unified social contribution (s. 212 of the Criminal Code of Ukraine) will no more be punished by imprisonment irrespective of the amount of the evasion.

The amounts of the fines are rather big. For instance, a large-scale tax evasion incurs a fine ranging from UAH255 thousand to 425 thousand, and a large-scale evasion of unified social contribution incurs a fine ranging from UAH170 thousand to 425 thousand. Yet, this is not a ceiling. Pursuant to the draft law in any case the amount of the fine should not be less than the amount of the damage caused by the crime. Consequently, the maximum amount of the fine is not confined at all and may reach fantastic sums in large tax cases.

Failure to discharge the fine within the prescribed time frame entitles the court to convert it into a prison sentence. The calculation formula is quite simple: one day of imprisonment is equal to eight non-taxable incomes (UAH17x8=UAH136). In the light of this, the conclusion about the cost of one day in prison can be easily made.

Fortunately, the draft law sets the maximum possible term of imprisonment in the application of such a "conversion", which is  12 years. Therefore, the prison sentences of several human lives length will be avoided (they may have been possible in several million hryvna cases if such a restriction had not been in place).

Another important feature of the draft law is that it limits the power of the law enforcement agencies to apprehend and arrest persons suspected or accused of tax evasion (evasion of unified social contribution). The law enforcement agencies will not be eligible to apprehend or arrest such persons, unless they fail to pay the bail or fulfill the obligations imposed on them in connection with the application of other preventive measures. These obligations may include: the timely appearance before an investigator or court, the ban to contact certain persons or visit certain places, the withdrawal of "foreign" passport by an investigator, etc.

It appears that the adoption of this bill will significantly improve the fate of taxpayers accused of tax evasion, and, conversely, will complicate the life of law enforcement agencies. The latter will be notably limited in the application of an apprehension and arrest as the most effective methods to influence "indocile" businessmen.

However, everything is not as good as it seems at first glance. In fact, the reform is half-done. Unfortunately, it did not touch upon such crimes as "forgery in office" (Article 366 of the Criminal Code of Ukraine) and "neglect of official duty" (Article 367 of the Criminal Code of Ukraine). A forgery in office and neglect of official duty leading to serious adverse consequences (UAH117,625 as at the date of the publication) regardless of whether these crimes are committed by an official of the private or public sectors carry a penalty of imprisonment for a term of one to five years.

The jeopardy for taxpayers is as follows.

Criminal proceedings under s. 366 of the Criminal Code of Ukraine ("Forgery in Office") are being instituted almost in all cases of the institution of the criminal proceedings for tax evasion. While producing a tax return, an accountant included false information in it, for example, understated taxable income (VAT output) or overstated deductable expenses (VAT input). This is well enough to accuse the accountant of forgery in office.

As for neglect of official duty (s. 367 of the Criminal Code of Ukraine), in practice this section is often employed to qualify the actions of persons who have not paid taxes to the budget without the intent to do so (by virtue of ignorance of the relevant tax laws or their improper application, etc.).

Hence, in reality things are not so bad for "fighters" against tax evasion. To command the full arsenal including the possibility to apprehend and arrest "indocile" businessmen, it is enough to initiate the criminal proceedings not only for tax evasion, but also for forgery in office, or instead of the institution of the criminal proceedings for tax evasion to institute criminal proceedings for neglect of official duty. This seems easy. Is not it?

This situation arose due to the fact that during the adoption of the so-called anti-corruption set of laws in April of this year (2011) introducing the division of criminal offences in office into those committed by officials of the private and public sectors, the legislature did not pay proper attention to forgery in office and neglect of official duty.

At that time, the Criminal Code of Ukraine was supplemented by the provisions laying down the responsibility for abuse of power and excess of authority committed by the officials of the private sector (ss. 364-1 and 365-1, respectively), but was not supplemented by the provisions establishing the criminal responsibility for forgery in office and neglect of official duty committed by this category of the officials.

Thus, there appears to be the paradoxical situation where the criminal responsibility for abuse of power and abuse of authority committed by the officials of the private sector is governed by the special provisions of the Criminal Code of Ukraine stipulating less severe penalties than those for the officials of the public sector, but when it comes to forgery in office and neglect of official duty the officials of the private sector are treated in the same way as the officials of the public sector.

Under these conditions, it seems expedient to ask the Parliament:

(1) to supplement the Criminal Code of Ukraine by the provisions that would set forth the criminal responsibility for neglect of official duty and forgery in office by the officials of the private sector;

(2) to extend the new fines regime provided by the Draft law No 9221 to neglect of official duty and forgery in office committed by the  officials of the private sector.

If these amendments are made, taxpayers will be put in much better position to resist the "ghost" of criminal responsibility for tax evasion.