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. 

TOP-10 Novelties of Customs Code of Ukraine

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Ukraine’s Customs Code of 11 July 2002 never saw its tenth anniversary: on 1 June  2012, a new Customs Code adopted on 13 March 2012 took effect in Ukraine.

First of all, the new Customs Code contains a number of changes and novelties regarding regulation of customs relations. Below is a brief description of the ten most important of them.

1. Cancellation of "serfdom" (s. 247 (3))

The new Customs Code has cancelled the obligation to perform customs clearance of goods in the place of accreditation at customs office only. Applicants can now undergo customs clearance at any customs authority.

2. Authorized economic operators (ss. 12-18)

Applicants who have a good history of relations with customs authorities and meet the criteria specified in the Customs Code can gain the status of an authorized economic operator.

The authorized economic operator status gives an applicant the right to use special simplifications in customs procedures such as: the right to priority customs clearance or reduction of the amount of data to be submitted to a customs authority before the arrival of goods to the customs territory of Ukraine.

3. The exhaustive list of documents to be required by the customs authorities in respect of customs value (s. 53)

The new Customs Code has provided (ii) a list of documents to be submitted by applicants to confirm the customs value, as well as (ii) a list of documents that can be required from applicants by the customs authorities if there are doubts about the accuracy in identifying the customs value.

The Customs Code contains an express provision according to which customs authorities are forbidden to demand from applicants any other documents than those specified in the said lists.

In light of the recent practice, according to which customs authorities demanded applicants to submit calculations of the price of goods to confirm the customs value, it is noteworthy that the Customs Code gives customs authorities the right to do so only in the event of transactions involving related persons.

4. Reduction of the customs clearance time to 4 hours (s. 255)

The new Customs Code has reduced the customs clearance time from twenty-four hours to 4 working hours.

5. Electronic declaration (s. 257)

This is the first time that the possibility of electronic declaration using an electronic digital signature has been provided on the Customs Code level. It has been established that a customs declaration and other documents submitted to customs authorities have equal legal force if prepared in hard-copy format or as electronic documents.

6. Customs consultations (s. 21)

Similar to the Tax Code, the new Customs Code has introduced the concept of customs consultations (consultations on state customs issues). Consultation are divided into individual and generalized. The latter are approved by an order of the State Customs Service of Ukraine.

A person acting in accordance with the individual or generalized customs consultation is released from liability for non-compliance with the customs legislation.

7. Presumption of innocence (s. 8)

Once again, following the Tax Code, the new Customs Code has introduced presumption of innocence. The Code does not explain the exact meaning of such a presumption. However, it will be logical to assume that due to presumption of innocence, applicants will be deemed innocent of breaking the customs legislation until the customs authorities prove the opposite.

8. Exemption from liability for errors in customs declarations (s.s. 268 and 460)

According to the new Customs Code, an applicant is exempt from liability for errors made in a customs declaration, provided that such errors:

-  do not result in the applicant’s unlawful exemption from customs payments or reduction of their amount, or in failure to ensure compliance with arrangements related to tariff and/or non-tariff regulation of foreign economic activities;

- are not made on a regular basis.

Customs authority employees should allow applicants to correct such mistakes made in a customs declaration.

9. Possibility to file an additional customs declaration (s. 261)

The new Customs Code provides the possibility of filing an additional customs declaration where information required for determining the final customs value will only be known after the goods have been released into free circulation (for example, after the payment/accrual of royalty or other license payments determined based on the volume of sales/proceeds from sales). In this event, an applicant has the right to file a customs declaration within 180 days from the date of release of the relevant goods into free circulation.

The possibility of filing an additional customs declaration is also provided where the price value in a foreign economic agreement is determined according to a formula and is not known as of the declaration date. In this case, an additional declaration is filed within 90 days from the date of release of the relevant goods into free circulation.

10. Post audit (sections 345-354)

This is the first time that issues related to conducting a post audit, i.e. desk audit performed by customs authorities following completion of customs clearance, have been regulated on the Customs Code level.

Regulation of audits resembles to a large extent regulation of the relevant issues in the Tax Code. The Customs Code provides for performing remote and field audits and cross-reconciliations.

Field audits are divided into scheduled and unscheduled.

Personal Income Tax Reporting Changes

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The Law of Ukraine No 4661-VI dated 24 April 2012 "On Amendments to Tax Code of Ukraine and Some Other Laws of Ukraine Regarding Tax Reporting” came into force on 28 April 2012. The law slightly modified the approach to personal income tax reporting. The amendments affected the matters indicated below.

Firstly, the law extended the deadline for submitting an annual tax return on property and income (hereinafter – “Annual Return”) with a view to qualify for a personal income tax rebate (amendments to paras 49.18.4 and 166.1.2 of the Tax Code of Ukraine). The deadline was extended from 1 May of a year following the taxable year to 31 December of this year.

This is where a taxpayer is not required to file the Annual Return by virtue of law, but rather lodges it voluntarily in order to be eligible for a personal income tax rebate. As it is well known, a tax rebate is the reduction of taxable income by the amount of certain expenses permitted by law (such as interest on a residential mortgage loan, the value of medical or educational services) and a tax refund resulting from such a reduction.

Secondly, the modifications concerned the declaration of the income received from several tax agents for the purposes of the application of 17% tax rate. The amendments were made to para 176.1 (“є”) of the Tax Code of Ukraine.

From this time onwards, while determining whether a taxable person receiving the income resulting from his labour relations or his performance of civil contracts from several tax agents, is under the obligation to hand in the Annual Return the annual rather than monthly taxable income is taken into account. While formerly the Annual Return had to be filed if the amount of the taxable income in any month of a year exceeded 10 statutory minimum wages, nowadays, the taxable person is mandated to do so if the yearly amount of the taxable income exceeds 120 statutory minimum wages.

The amendments set forth the recalculation mechanism in relation to the submission of the Annual Return on the above ground. The recalculation mechanism, by itself, is not complicated. The total taxable income declared is reduced by the amount of unified social contribution accrued (withheld) by the tax agents and by the amount of social tax benefits (if any). Of the reduced amount of the total taxable income, 120 statutory minimum wages are taxed at 15 per cent, and the rest is taxed at 17 per cent. The tax charged on the reduced amount of the taxable income decreases by the amount of tax actually accrued (withheld) by the tax agents during the taxable year. The surplus of the tax is payable to the budget within the prescribed term (by 1 August of a year following the taxable year).

In light of the above, the approval of a new appendix to the Annual Return reflecting the results of the aforesaid recalculation is expected soon. Probably it will be the appendix No 8.

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.