Tax Controversy 2016 (Getting the Deal Through)

Overview

1 What is the relevant legislation and who enforces it?

Under the Constitution the tax laws shall be enacted only by Parliament. The Cabinet of Ministers in general is responsible for realisation of tax policy and may also implement certain regulations on tax-related matters. More specifically, the Ministry of Finance is responsible for tax issues and has the right to implement the main regulations on tax matters, including approval of the form of tax returns. The Ministry of Finance also has the right to issue general rulings on tax matters. Day-to-day enforcement of tax laws is within the authority of the State Fiscal Service of Ukraine.

2 Other than legislation, are there other binding rules for taxpayers and the tax authority?

Tax issues are also governed by international treaties wherever applicable. Such treaties are mainly bilateral tax treaties on the prevention of double taxation. These treaties have priority over domestic tax regulations. Tax rulings may be issued on certain matters: general issues are covered by the Ministry of Finance and ad hoc issues by the relevant tax office. While such rulings are not binding for taxpayers, they are binding for the tax authorities. Taxpayers are released from responsibility if acting according to the tax rulings. Apart from formal rulings, the tax authorities also issue various opinions and circulars that become publicly available. These have no formal role under the law and may provide practical guidelines for taxpayers in respect of the anticipated approach of the tax authorities to various issues.

3 How is the tax authority organised?

The tax authorities are organised on a territorial basis, with field offices normally responsible for taxpayers located at the respective territories. Field offices are subordinated to regional offices, which are governed by the national office. Big taxpayers are normally registered with the large taxpayers’ office, which has several regional branches. The large taxpayers’ office is subordinated directly to the national office.

Enforcement

4 How does the tax authority verify compliance with the tax laws? What is the typical procedure for the tax authority to review a tax return and how long does the review last?

Verification of compliance with the tax laws starts with a ‘cameral’ (at desk) audit of all incoming tax reporting for coherence with the applicable norms and regulations. If any mismatch is found in the tax return, the tax authorities issue an act of tax audit based on which an assessment may be made by the tax authorities. The main way of checking compliance with the tax laws are tax audits conducted by the tax authorities, in the field and in-house. Taxpayers are required by law to provide relevant documents for such audits. Filed audits may be either ‘regular’ (ie, conducted upon the relevant schedule formed by the tax authorities in advance, normally on an annual basis) or ‘extraordinary’. Extraordinary audits may be conducted only in cases directly specified by the law. For certain types of extraordinary audits, the tax authorities request relevant explanations of identified issues from the taxpayer in advance; the tax authorities then have the right to conduct an audit only if no satisfactory explanations and their documentary substantiation are provided. The terms of regular tax audits shall not normally exceed 30 working days for large taxpayers, 20 days for standard taxpayers and 10 days for small businesses. These terms may be extended by the tax authorities by 15, 10 and 5 days, respectively, depending upon the category of taxpayer. For extraordinary tax audits, the term is reduced by 50 per cent compared to that for regular audits. A tax audit may be interrupted by the tax authorities for up to 30 working days if required for clearing issues outside the taxpayer’s office or obtaining certain external documentation or information.

5 Are different types of taxpayers subjected to different reporting requirements? Can they be subjected to different types of review?

There are no substantial differences in reporting requirements depending on the type of taxpayer, such as an individual or business entity. However, reporting requirements may be different depending upon the category of taxpayer and type of applicable business regime (eg, a special tax regime for small businesses or agriculture, special VAT status for agricultural producers, etc).

6 What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees?

If so, are there any restrictions? The tax authorities normally review the activities and reporting of taxpayers based on relevant accounting and business documentation. Defects in supporting documentation may be used as the basis for rejecting the deductibility of certain expenses or tax credits. In some cases, the tax authorities go deeper and try to verify all the circumstances and substance of certain activities (eg, requesting a copy of relevant communications and other evidence) in order to find the details or substance of deals, including whether they actually took place. However, the taxpayer is not obliged to provide documentation that is not directly relevant to tax accounts. Although the tax authorities have the right to ask for clarifications from the taxpayer or officers of the taxpayer, there is no obligation under the law to provide such clarifications (ie, it is mainly at the discretion of the taxpayer). The only exception at the moment is the interviewing of officers responsible for transfer pricing, which may be done by the tax authorities in order to better understand transfer pricing methods or policy applied by the taxpayer. Special procedures and rules apply in cases where a criminal investigation on tax matters is open. In such circumstances, the taxpayer is obliged to provide relevant documentation as defined by decision of the court (investigation judge), and the persons called as witnesses are obliged to provide their respective testimonies (with certain limitations related to the protection of their personal rights).

7 What actions may the agencies take if the taxpayer does not provide the required information?

If the taxpayer does not provide the relevant required substantiation or documentation in the course of the tax audit, the tax authorities merely document that fact. Under the law, this serves as the basis for disallowing relevant expenses or tax credits for which no requested information or documentation is provided. Therefore, the tax authorities make the tax assessment with disallowance of what is not substantiated by the taxpayer. The tax authorities may also apply an administrative penalty in this respect, although the sum is not significant (less than US$50 at present). If the taxpayer does not admit a tax audit in general (without proper reasons provided by the law), the tax authorities are allowed to apply an administrative arrest on the assets of the taxpayer, which is to be checked by the court within 96 hours. If the legitimacy of such an administrative arrest is not approved by the court within this term, the arrest is automatically lifted.

8 How may taxpayers protect commercial information, including business secrets, from disclosure?

First of all, the Tax Code prohibits the requesting of information or documentation that is not directly related to tax matters and not envisaged by the Tax Code. The transfer of confidential information and documentation is subject to a special procedure which envisages documenting this in writing, with an indication of the tax officer to whom the information and documentation is provided for review.

9 What limitation period applies to the review of tax returns?

The limitation period is normally 1,095 days, except for transfer pricing reviews (for which the statute of limitations is 2,555 days) and in cases where a court award in a criminal tax avoidance case has been served, or no tax returns were submitted while due. In the latter case, the statute of limitations is linked to relevant statutes applicable under the criminal law and may be up to 10 years.

10 Describe any alternative dispute resolution (ADR) or settlement options available.

The tax law allows appealing the outcome of the tax audit, including respective assessments, under administrative appeal procedure (ie, appealing to the higher tax body). The term of appeal under this procedure is limited to 10 days after receipt of the relevant assessment. When in court, the law also allows the completion of the judicial dispute at any stage by amicable agreement with the tax authorities.

11 How may the tax authority collect overdue tax payments following a tax review?

In cases where the tax assessment following the tax review is not accepted by the taxpayer and challenged through administrative appeal or judicial procedure, the assessment is considered as ‘in dispute’ and is not subject to mandatory payment until confirmed by the Court of Appeal (second instance court after the court of trial). If the agreed (either voluntarily by the taxpayer or by the court) liability is not paid by the taxpayer within the terms provided by the tax law, the tax authorities apply tax lien in respect of the assets of the taxpayer and may finally even seize assets of the taxpayer for sale in order to cover that liability.

12 In what circumstances may the tax authority impose penalties?

The tax authority may impose penalties in cases where:

• the tax audit reveals under-assessment of tax liability or over-assessment of losses or tax credits;

• the agreed tax liability is not paid in time;

• there are delays in submission or non-submission of the returns and other similar documents; • there is a delay in registration with the tax authorities;

• the taxpayer attempts to conduct business with assets under arrest; and

• in certain other cases listed in the Tax Code.

13 How are penalties calculated?

Penalties are most often calculated as a percentage of the additional tax assessment (eg, 25 per cent of the additional tax assessed as a result of the tax audit, or 50 per cent if non-compliance for the same tax is identified for the second or more time within a 1,095-day period. A 10 per cent penalty is applied if the tax is paid with a delay less than 30 days, and 20 per cent if in excess of 30 days.

14 What defences are available if penalties are imposed?

If penalties are imposed they may be challenged through administrative appeal or judicial procedure.

15 In what circumstances may the tax authority collect interest and how is it calculated?

An interest penalty is applied if under-assessment of taxes for a certain period is identified. The interest penalty is linked to the prime rate of the National Bank (1.2 times the prime rate) for the whole period of delay. The procedure for calculating interest is not well defined: normally it is expected that the calculation and payment is to be done by the taxpayer; but the tax authorities also automatically calculate this amount in order to verify the calculation and payment. If accrued above a certain limit and not paid by the taxpayer, a tax lien may be applied in order to enforce payment.

16 Are there criminal consequences that can arise as a result of a tax review?

As a matter of practice, any tax audit with a following tax assessment exceeding a certain limit (currently around US$29,000) triggers a criminal investigation. This is due to internal regulations which require submission to the investigative body of certain notifications on the assessment exceeding the said amount after completion of administrative appeal procedure, and provisions of the Code of Criminal Procedure requiring an automatic opening of a criminal investigation in case of such notification. This situation creates a significant burden for taxpayers. In such cases, the investigation may be finalised in a criminal penalty.

17 What is the recent enforcement record of the authorities?

The enforcement record of the authorities is comparatively low, but it depends on the type of issue. Most often the tax authorities challenge taxpayers’ assessments due to insufficiency or defects in documents, challenging business relevance or reality of transactions, etc.

Third parties and other authorities

18 Are third parties involved in the authority’s review of tax returns and what rights do taxpayers have with respect to their involvement?

Third parties are not normally involved in respect of normal tax audits. Such involvement appears when there is a criminal investigation. If auditing certain transactions of the taxpayer, the tax authorities may initiate an audit of the counterparties involved in those transactions. Taxpayers have no specific rights in this respect.

19 Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?

The cooperation of the tax authorities with other state bodies is somewhat limited. Cooperation with the tax authorities of other countries is also limited, yet progressing. Normally this is done on the basis of bilateral agreements for exchange of information and exchange of information articles of double tax treaties. In some cases, information received from foreign tax authorities (eg, the Netherlands) has already been used in disputes and is reflected in relevant court awards (eg, in respect of the qualification of the recipient as the beneficial owner of respective payments and application of double tax treaty benefits). Special procedures

20 Do any special procedures apply in cases of financial or other hardship, for example when a taxpayer is bankrupt?

If in hardship, the taxpayer may apply principally to the tax authorities for an agreed delay of payment. This may be allowed by the tax office, but with interest.

21 Are there any voluntary disclosure or amnesty programmes?

There are no specific ongoing voluntary disclosure or amnesty programmes. However, these may happen from time to time for various reasons. In 2015 a window of opportunity was open for a three-month period for self-disclosure for a specified period of time (during the preceding political regime), when relief from responsibility was provided against self-disclosure, and payment of 5 per cent of the tax thus assessed as the result of self-disclosure for that specific period. As far as the regular programme is concerned, the Tax Code allows self-adjustment for any period of time (prior to the start of the tax audit for that period) within the statute of limitations, with the taxpayer paying the applicable tax in full and a special penalty of 3 per cent (if adjusting is done of the tax return in which the error has been made with resubmission of the adjusted tax return) or 5 per cent (if corresponding (balancing) adjusting entry is done merely in the current tax return). In such cases, no additional penalty applies.

Rights of taxpayers

22 What rules are in place to protect taxpayers?

The rights of taxpayers are provided by the Tax Code. They include the right not to respond to the tax authorities to requests that do not comply with the requirements of the Tax Code; not to provide documentation that is not relevant to tax matters; and not to admit field tax audits if in violation of the applicable procedure and without grounds envisaged by the Tax Code. The rights also include the right to appeal outcomes of the tax audits, including the administrative appeal procedure. Taxpayers also have rights to request rulings from the tax authorities and be released from responsibility if acting in line with the received rulings.

23 How can taxpayers obtain information from the tax authority? What information can taxpayers request?

The way taxpayers receive information from the tax authorities depends on the type of information. Generally, it may be a request for information that can be made available to the public under the relevant law. Certain information is available through administrative procedures (eg, reconciliation of the tax liabilities and payments). In some cases, especially in cases of judicial dispute, the taxpayer may ask the court to obligate the tax authorities to provide the required information. 24 Is the tax authority subject to non-judicial oversight? The tax authorities are subject to certain non-judicial oversight (eg, the possible involvement of business ombudsmen and tax ombudsmen). However, such procedures are of limited capacity and basically provide for third-party involvement aimed at finding some proper balance in dispute by agreement. The tax authorities may be subject to oversight by the AttorneyGeneral’s office in cases of clear non-compliance with the law.

Court actions

25 Which courts have jurisdiction to hear tax disputes?

Administrative courts have jurisdiction to hear tax disputes. Criminal cases related to taxes are, however, considered by general (civil) courts.

26 How can tax disputes be brought before the courts?

A tax dispute may be brought before the courts if it affects the position and interests of the taxpayer. Normally, a case is submitted to the court in cases of additional assessment made by the tax authorities as a result of the tax audit. The taxpayer may bring the case to court at any time within the statute of limitations period. There is no minimal threshold amount for claims. Normally, taxpayers seek cancellation of tax assessments that are (from the point of view of the taxpayer) unlawful or made without proper basis. As a separate type of claim, the Tax Code allows challenging through the court individual tax rulings provided to the taxpayer. In cases of cancellation by the court of the tax ruling (as an alternative to recognition by the court that no answer of substance has been provided), the tax authorities are obliged to issue new rulings in line with the opinion of the court. In general, taxpayers may challenge through the court any action or lack of action of the tax authorities provided that they adversely affect the taxpayer.

27 Must the taxpayer pay the amounts in dispute into court before bringing a claim? Can the costs of a dispute be recovered?

There is no requirement to pay the amounts in dispute to the court before bringing a claim. However, court duty is to be paid, which is currently 1.5 per cent of the amount in dispute (without cap) for the court of trial and then ever increasing for the next court instances. This duty is principally recoverable from the guilty party if a case is won. As far as other court-related expenses are concerned, the recoverability is limited. For instance, attorneys’ fees are recoverable at the expense of the guilty party only if claimed specifically and are limited by the fees related to direct presence in the court (ie, no recovery for preparatory time) at the rates established by the state (which are quite low).

Update and trends

Currently, the tax authorities use heavy threats of criminal procedures as a de facto enforcement mechanism. As a matter of practice, criminal investigations are started in respect of any substantial tax dispute exceeding roughly US$29,000 at the current exchange rate. This represents a significant burden for taxpayers. A draft bill registered in November 2015 envisages stopping this practice by prohibiting criminal investigation in respect of amounts in dispute unless they are proved by the courts of appeal and not paid within the terms provided by the law. Hopefully, when this law is adopted it shall stop the above-mentioned damaging practice of the tax authorities. Another issue is that the tax authorities are not always acting bona fide and in fact harass taxpayers with the tax audits. The tax authorities are not answerable for this, even if it is proved in the courts. Generally, the current state may be described as the use of blunt pressure in order to squeeze additional taxes. At the same time, some taxpayers linked to oligarchs use various types of political leverage and influence on the tax authorities and the courts in order to stay in special positions and avoid paying taxes in full.

28 Who is the decision maker in the court?

Is a jury trial available to hear tax disputes? In the court of trial, the case is normally decided by one judge. However, in complex cases the parties may request, and the court may decide, to consider the trial by a panel of judges. In further instances, the case is considered by a panel of judges.

29 What are the usual time frames for tax trials?

In the court of trial, the time frame is normally around two months, which is the time envisaged by the Code of Administrative Procedure. However, the case may be halted for the period of actions outside court (eg, requests for expert opinion on specific matters). The case may be restarted from the very beginning if, at certain point, the judge is changed for whatever reason, or it is decided to shift to consideration by a panel of judges.

30 Describe the discovery process for a tax trial.

The process for a tax trial starts with a preparatory stage when the judge clarifies the position of the parties and checks whether all required documentation has been provided by the parties and is available in the court file. The position of the parties is then represented by the parties in the substance process, and each document to which the parties refer shall be considered by the court as well as the explanations of the parties.

31 What testimony is permitted in a tax trial?

Each party is allowed to provide verbal explanations, documents as evidence, provide witnesses and request an expert’s opinion. Expert opinion is requested by the court from experts or expert institutions with appropriate licences as appointed by the court. Expert opinion may be requested on specific issues requiring specific knowledge, not on legal questions that are to be decided by the court.

32 Who can represent taxpayers in a tax trial? Who represents the tax authority?

Taxpayers can represent themselves in the courts or appoint a legal representative (currently this may be any person trusted by the taxpayer). Please note that draft amendments to the Constitution have been registered which envisage that any representation in the court may be only by an attorney admitted to the bar. These have not yet been adopted and, therefore, are not in force.

The taxpayer may also request the court to consider the case in a written proceeding without calling the parties. The tax authorities are normally represented by tax officers from the legal department.

33 Are tax trial proceedings public?

Principally yes, except for cases that have been specifically prohibited from being public by the court (eg, for public security or other valid reasons).

34 Who has the burden of proof in a tax trial?

Under the Tax Code the burden of proof literally shall be with the tax authorities. However, due to the position of the Supreme Court, practically the burden of proof is levied on both sides and even more on the taxpayer.

35 Describe the briefing process for a tax trial.

At the very beginning of the proceedings, the court of trial provides a standard briefing in writing to the parties. The texts of the decisions of the court of trial (including procedural decisions) that may be appealed shall be in writing and shall include briefings on the right and procedure to appeal. The same is applicable to the decision of the court by substance (ie, briefing whether a party may appeal, within which terms and under which procedure to which court).

36 Can a court decision be appealed?