Ukraine’s new Supreme Court|1| has begun consideration of its first tax cases. The court’s resolutions in these cases are of great importance to taxpayers, since according to the new Code of Administrative Proceedings of Ukraine, the conclusions of the Supreme Court will be taken into account by the courts of lower instances (part 5 of Article 242).
In this alert, we would like to address the most important issues raised:
Non-commodity business transactions
One of the first categories of cases considered by the Supreme Court relate to non-commodity business transactions. At the same time, the approach of the court to the considerationof such cases depends on the availability of information or other documents on criminal proceedings against the taxpayer’s counterparties.
1) Relevance and sufficiency of evidence in cases related to non-commodity business transactions
In its decision in case No. 826/1398/14|2|, the Supreme Court upheld the taxpayer’s arguments regarding the proper proof of the real character of the business transactions. The court stated, “the acts of tax audit of the plaintiff’s counterparties do not prove the circumstances to which the defendant attributes the findings set out in the tax audit report of the plaintiff and disputable tax assessments issued on its basis. The arguments of the tax authority that the plaintiff’s counterparties do not have the necessary number of employees that is required to conduct a business, technical, transport, other production resources, and the absence at the legal address at the time of the tax audit do not prove the non-commodity character of supply agreements with the plaintiff”.
Judging by the case circumstances, the conclusions of the tax authority were based solely on information set out in the tax audit reports of the plaintiff’s counterparts and electronic databases, and acts on the impossibility of counter reconciliation with the plaintiff’s counterparties. Additionally, in this case, the tax authority did not refer to the information on any criminal proceedings against the plaintiff’s counterparties.
At the same time, the plaintiff provided the court with proper and admissible evidence of the actual conduct of the disputable transactions; in particular, the plaintiff proved the actual transfer of goods, funds, and legal standing of the respective counterparties.
It would be relevant to remind that in practice, tax authorities often use the tax audits of counterparties by submitting them further by the chain and acts on impossibility of counter reconciliation with certain counterparties as evidence of the non-commodity character of business transactions and do not take into account the primary documents and other evidence.
2) “Fictitious” contractors in the supply chain: the practice has not changed
In another case, the Supreme Court, when analyzing the circumstances of case No. 2а-7075/12/2670|3|, supported the position of the Supreme Court of Ukraine expressed back in 2015, in particular that: “The status of fictitious, illegal enterprises is incompatible with legal business activity. The commercial operations of such enterprises cannot be legalized even after formal confirmation by accounting documents.”
In support of its decision, the Supreme Court referred to criminal proceedings regarding the plaintiff’s counterparty concerning fictitious businesses. In addition, it appears from other decisions in this case that a verdict was issued against the director of the plaintiff’s counterparty under Article 205 of the Criminal Code of Ukraine (fictitious businesses), which the Supreme Court did not mention in its decision.
Indeed, the actual circumstances of a particular case may include markers of non-commodity business transactions, especially since the substance of the disputed transaction relates to providing the plaintiff with multiple types of services.
At the same time, it would be taken into account that this legal position was used and interpreted by the courts and that tax authorities so that the sole existence of criminal proceedings under Article 205 of the Criminal Code of Ukraine (fictitious businesses) in relation to one of the counterparties in the supply chain of both goods and services constitutes indisputable proof of the non-commodity character of business transactions.
However, it is unclear whether this position will become universal for all tax cases related to non-commodity transactions, and whether it follows from the peculiarities of the circumstances of the particular case.
At the same time, the wording of the decision taken by the previous Supreme Court of Ukraine gives cause for concern since taxpayers expected that previous the legal positions of the Supreme Court of Ukraine would be subject to review by the new judges as the next stage of judicial reform.
We hope this legal position will be subject to review by the Grand Chamber of the Supreme Court.
Consequences of procedural violations during tax audits:
Having analyzed the circumstances of case No. 2a/1570/4582/11|4|, the Supreme Court determined that procedural violations during tax audits result in cancelation of tax assessments issued on their basis. In particular, this means: “The taxpayer should be familiarized with the order on appointment of the audit, the date of its commencement and place of its conduct prior to its commencement and in accordance with the statutory procedure. Failure to comply with the requirements of clause 79.2 of Article 79 of the Tax Code of Ukraine results in recognition of the audit as illegal and the absence of legal consequences from the audit.”
This position of the court of cassation is not new and corresponds to the position of the Supreme Court of Ukraine set forth in resolution as of 27 January 2015.
Please note that taking into account this position of the Supreme Court, challenging orders on the appointment of tax audits remains one of the most effective elements of the strategy of protection of taxpayer rights.
|1|For instance, according to articles 36-37 of Law of Ukraine “On Judiciary and Status of Judges”, the Supreme Court is the highest court in the system judiciary in Ukraine, which ensures unity and consistency of court practice according to the law. The Supreme Court includes the Grand Chamber of the Supreme Court, Cassation administrative court, Cassation commercial court, Cassation criminal court and Cassation civil court.