On New Year’s Eve 2010, one of the most fundamental statutory instruments – the Tax Code – was passed by Ukrainian Parliament. The very fact of its enactment in contravention of the principles enshrined in previously applicable laws [1] and in the Code itself says that the main principle, which was and will evidently be used by Fiscal Service representatives, is that of administrative permissiveness: anything is permitted if it’s very much needed. The professional tax planning and tax risk management may, however, provide quite foreseeable and comfortable conditions for doing business in Ukraine.
The powers of the State Tax Service of Ukraine (STS) are mainly described in the first two sections of the Tax Code (TC): first, Article 20 of the TC, which is expressly dedicated to the rights of the STS authorities and, second, tax administration-related provisions (Section II of the TC), including provisions about conducting inspections, administrative seizure of assets, etc.
Since most of the TC provisions incorporate previously effective tax regulations, a significant portion of the TC automatically inherited the possibility of its ambiguous interpretation as the best case scenario. According to the TC, such provisions must be interpreted for the benefit of the taxpayer [2]. When commenting on such ambiguous statutory provisions, even advisors have to resort toirony when asked whether the taxpayer may have priority in the taxpayer’s understanding of those provisions. The practice proved that the conflict-of-interest rule is not viable and is ignored by both the Tax Service and the court. Such poor quality of the wording of the tax law provisions (both those of the TC and its subordinate legislation (the latter is virtually non-existent nowadays) constitutes the basis for expansion of the STS rights enshrined in the TC. The imperfect regulation of certain particular issues by the TC will be discussed in the next publications. This publication will deal with the analysis of STS rights conferred by the TC.
It should be immediately noted that Article 20 of the TC has not made any fundamental changes to the regulation of powers of the STS agencies. The provisions of Article 20 in the TC are mainly based on the previously effective provisions of the Law of Ukraine “On the State Tax Service of Ukraine.” The first wordings of the draft TC significantly increased the powers of tax authorities. The further elaboration of the draft TC, in its respective part, made it approximate as much as possible the regulation existing before the TC became effective. The very wording of the TC, which was signed by the President, suggests that the “departure” was a very painful process for fiscal service representatives – a number of provisions were promptly removed from that TC version, which was prepared to be signed by the President of Ukraine, without any change in the number of articles (see, e.g., Clauses 20.1.13, 20.1.14, 20.1.20 of Article 20 of the TC, etc.).
Information
The following saying is undoubtedly true: He who rules the information rules the world. “Information” powers of the STS enable it to lay claim to many things. Information comes to the STS from both taxpayers and other state authorities. The scope of information to be provided to the STS if the latter is interested in such information is restricted by formalities.
Thus, according to Clause 20.1.6. of Article 20 of the TC, the STS shall be entitled to obtain information, statements, certified copies of documents about financial and economic activities, earnings and expenses of taxpayers as well as financial and statistical reports. It is specifically stated that, upon request of the STS, taxpayers must also provide some other information associated with the computation and payment of taxes, or compliance with statutory requirements, which the STS agencies are authorized to control. Similar provisions requiring to provide certified copies of documents, give access to primary data and documents and to maintain bank accounts are also contained in the other TC provisions (see Clauses 20.1.2., 20.1.3., 20.1.7., 20.1.8., 20.1.27., 20.1.28. of Article 20 of the TC, etc.). The list of information the STS may lawfully inquire about is often abstract so much that it may actually be considered as unlimited.
In some cases, the failure to provide information may entail the administrative seizure of property (see part 2 of Clause 20.1.5. of Article 20 of the TC). In order to obtain original primary documents such as financial and economic documents and accounting statements and also to obtain access to bank account statements, tax officers still must have a court decision (Clauses 20.1.3., 20.1.40. of Article 20 of the TC).
Inspection
The STS’s right to conduct tax inspection is stated quite laconically in Article 20 [3]. However, there is hardly any taxpayer who does not know how powerful such instrument can be.
In addition to an on-site tax inspection (scheduled and unscheduled, office or field inspection), the Code introduced the term “inspection without notice” (Article 75 of the TC). What is peculiar about the inspection without notice is that the taxpayer is not previously informed of such inspection. As a general rule, a copy of a tax inspection order is delivered to the taxpayer before the inspection begins. Notwithstanding this fact, a control purchase may sometimes be made, prior to the beginning of such inspection. In the course of such inspection without notice, an immediate “stopwatch” study may be carried out to establish actual performance indices (Clause 14.1.264 of the TC). In practice, state tax service authorities can always find valid grounds for conducting the inspection without notice in respect of certain taxpayers.
It is worth mentioning that the TC also provides for counter-reconciliation, which may be conducted to obtain tax information. The reconciliation is not understood to be the tax inspection. The reconciliation procedure must be established by the Cabinet of Ministers of Ukraine. Considering the lack of regulation, one can only guess now what will be hidden behind this STS instrument.
In the course of the tax inspection, the STS employees are specifically authorized to demand that the inventory of fixed assets, inventory items, cash, including the withdrawal of the inventory and cash balances be taken. Those who doubt the necessity of following the instructions of the STS representatives are likely to face an administrative seizure of assets (Clause 20.1.5. of Article 20 of the TC).
In the course of the tax inspection (including the inspection without notice), the STS representatives are entitled to access the territory and premises or other property that are used for the conduct of business and/or are subject to taxation or used to derive income (profits) or associated with other taxable items and/or may be the source of tax debt repayment. The only exception is the residential real estate owned by citizens. The failure to provide access may result in the suspension of debit transactions on accounts (Clause 20.1.15 of the TC). However, by virtue of paragraph 1 of Clause 1 of Section 19, this sanction will be applied with effect from 2015.
Penalties, Seizure of Assets, Suspension of Operations, etc.
Other rights exercised by the STS authorities, which are the most painful for the taxpayers, are the administrative seizure of the taxpayer’s property and recovery of funds from the debtors of the taxpayer with tax arrears (Clauses 20.1.16 to 20.1.19. of Article 20 of the TC). In accordance with the TC, a court decision is needed for taking the abovementioned measures. By virtue of the amendments affecting the Code of Administrative Proceedings of Ukraine (Article 183-3 of the CAPU), the attendance of the parties is not required for issuance of a court decision and if the court does make such decision, it shall be subject to immediate execution (i.e. whether or not it is appealed by the taxpayer).
The STS agencies are entitled to impose and collect penalties and liabilities or tax arrears to the budget (Clause 20.1.28 of Article 20 of the TC). In some cases, any changes in penalties are believed to be positive for the taxpayers, in particular the elimination of a 200% penalty. However, the analysis of respective provisions of the TC (Chapter 11 of Section 2 of the TC) through the prism of practical working experience of the STS agencies leads us to assume that the “burden” of penalties imposed on the taxpayers is likely to increase.
The Code imposes a one hryvnia limit on penalties for violation of the tax law during the first two quarters of 2011 (and, in addition, releases the income tax payers and the private entrepreneurs taxed on a general basis from liability for violating the tax law during the second and third quarters of 2011). One should remember, however, some other tools of influence available to the STS agencies, including in criminal proceedings. In addition, the abovementioned exceptions do not apply to certain transactions (non-tax transactions, e.g. cash register transactions, foreign economic activities, etc.).
Tax Advice
As is always the case, there will be taxpayers to whom the STS agencies will be particularly loyal. In their case (and only for them), ambiguous provisions of the tax legislation will be interpreted by the STS agencies through the lens of the “conflict of interest rule” or even with more flexibility. Tax advice (previously known as tax explanations) may serve as a good instrument for this purpose. In accordance with the TC, the STS agencies shall provide free tax advice, which will enable to release the taxpayers complying with such advice from penalties if such tax advice is expected to be cancelled in the future. The tax advice is provided on an individual basis only.
Conclusion
The powers of the STS agencies, as laid down in the TC, may be treated as reasonable and sufficiently well-considered. From the practical standpoint, the provisions of the Tax Code should, however, be analyzed through the lens of previous application of the tax legislation by the STS agencies and courts. Unfortunately, the most vivid observation will be a differentiated approach to each taxpayer. Even the recent history of the Ukrainian tax legislation offers ample examples of the application of an unfounded fiscal approach to some taxpayers, with an unreasonably loyal approach to the other. The taxpayer’s rights were often limited without any legal grounds (e.g., in the form of the rejection of tax returns due to taxpayer’s failure to demonstrate the required economic performance, which was not envisaged by law or subordinate legislation). Taken together, all of these facts give reasonable grounds to conclude that the STS powers are virtually unlimited in the sphere of national economy management and are based on an individual and selective approach.
Despite a dismal picture of tax administration in Ukraine, which was repeatedly given one of the most negative assessments by the international community, the adoption of the TC has, however, not resulted in any material changes. The expert tax planning and tax risk management coupled with a professional approach to dealing with controlling authorities may, as before, provide quite foreseeable and comfortable conditions for doing business in Ukraine.
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[1] Clause 4.1.9. of Article 4 of the TC provides for a stability principle saying that no tax element may be changed later than 6 months prior to the beginning of the fiscal year in which it will be applied. The same provision was contained in pat 9 of Article 1 of the Law of Ukraine on Taxation System.
[2] The conflict of interest rule is enshrined as a principle in Clause 4.1.4 of Article 4 of the TC, as is a special provision contained in Clause 56.21 of Article 56 of the TC.
[3] See Clause 20.1.4. of Article 20 of the TC.
The powers of the State Tax Service of Ukraine (STS) are mainly described in the first two sections of the Tax Code (TC): first, Article 20 of the TC, which is expressly dedicated to the rights of the STS authorities and, second, tax administration-related provisions (Section II of the TC), including provisions about conducting inspections, administrative seizure of assets, etc.
Since most of the TC provisions incorporate previously effective tax regulations, a significant portion of the TC automatically inherited the possibility of its ambiguous interpretation as the best case scenario. According to the TC, such provisions must be interpreted for the benefit of the taxpayer [2]. When commenting on such ambiguous statutory provisions, even advisors have to resort toirony when asked whether the taxpayer may have priority in the taxpayer’s understanding of those provisions. The practice proved that the conflict-of-interest rule is not viable and is ignored by both the Tax Service and the court. Such poor quality of the wording of the tax law provisions (both those of the TC and its subordinate legislation (the latter is virtually non-existent nowadays) constitutes the basis for expansion of the STS rights enshrined in the TC. The imperfect regulation of certain particular issues by the TC will be discussed in the next publications. This publication will deal with the analysis of STS rights conferred by the TC.
It should be immediately noted that Article 20 of the TC has not made any fundamental changes to the regulation of powers of the STS agencies. The provisions of Article 20 in the TC are mainly based on the previously effective provisions of the Law of Ukraine “On the State Tax Service of Ukraine.” The first wordings of the draft TC significantly increased the powers of tax authorities. The further elaboration of the draft TC, in its respective part, made it approximate as much as possible the regulation existing before the TC became effective. The very wording of the TC, which was signed by the President, suggests that the “departure” was a very painful process for fiscal service representatives – a number of provisions were promptly removed from that TC version, which was prepared to be signed by the President of Ukraine, without any change in the number of articles (see, e.g., Clauses 20.1.13, 20.1.14, 20.1.20 of Article 20 of the TC, etc.).
Information
The following saying is undoubtedly true: He who rules the information rules the world. “Information” powers of the STS enable it to lay claim to many things. Information comes to the STS from both taxpayers and other state authorities. The scope of information to be provided to the STS if the latter is interested in such information is restricted by formalities.
Thus, according to Clause 20.1.6. of Article 20 of the TC, the STS shall be entitled to obtain information, statements, certified copies of documents about financial and economic activities, earnings and expenses of taxpayers as well as financial and statistical reports. It is specifically stated that, upon request of the STS, taxpayers must also provide some other information associated with the computation and payment of taxes, or compliance with statutory requirements, which the STS agencies are authorized to control. Similar provisions requiring to provide certified copies of documents, give access to primary data and documents and to maintain bank accounts are also contained in the other TC provisions (see Clauses 20.1.2., 20.1.3., 20.1.7., 20.1.8., 20.1.27., 20.1.28. of Article 20 of the TC, etc.). The list of information the STS may lawfully inquire about is often abstract so much that it may actually be considered as unlimited.
In some cases, the failure to provide information may entail the administrative seizure of property (see part 2 of Clause 20.1.5. of Article 20 of the TC). In order to obtain original primary documents such as financial and economic documents and accounting statements and also to obtain access to bank account statements, tax officers still must have a court decision (Clauses 20.1.3., 20.1.40. of Article 20 of the TC).
Inspection
The STS’s right to conduct tax inspection is stated quite laconically in Article 20 [3]. However, there is hardly any taxpayer who does not know how powerful such instrument can be.
In addition to an on-site tax inspection (scheduled and unscheduled, office or field inspection), the Code introduced the term “inspection without notice” (Article 75 of the TC). What is peculiar about the inspection without notice is that the taxpayer is not previously informed of such inspection. As a general rule, a copy of a tax inspection order is delivered to the taxpayer before the inspection begins. Notwithstanding this fact, a control purchase may sometimes be made, prior to the beginning of such inspection. In the course of such inspection without notice, an immediate “stopwatch” study may be carried out to establish actual performance indices (Clause 14.1.264 of the TC). In practice, state tax service authorities can always find valid grounds for conducting the inspection without notice in respect of certain taxpayers.
It is worth mentioning that the TC also provides for counter-reconciliation, which may be conducted to obtain tax information. The reconciliation is not understood to be the tax inspection. The reconciliation procedure must be established by the Cabinet of Ministers of Ukraine. Considering the lack of regulation, one can only guess now what will be hidden behind this STS instrument.
In the course of the tax inspection, the STS employees are specifically authorized to demand that the inventory of fixed assets, inventory items, cash, including the withdrawal of the inventory and cash balances be taken. Those who doubt the necessity of following the instructions of the STS representatives are likely to face an administrative seizure of assets (Clause 20.1.5. of Article 20 of the TC).
In the course of the tax inspection (including the inspection without notice), the STS representatives are entitled to access the territory and premises or other property that are used for the conduct of business and/or are subject to taxation or used to derive income (profits) or associated with other taxable items and/or may be the source of tax debt repayment. The only exception is the residential real estate owned by citizens. The failure to provide access may result in the suspension of debit transactions on accounts (Clause 20.1.15 of the TC). However, by virtue of paragraph 1 of Clause 1 of Section 19, this sanction will be applied with effect from 2015.
Penalties, Seizure of Assets, Suspension of Operations, etc.
Other rights exercised by the STS authorities, which are the most painful for the taxpayers, are the administrative seizure of the taxpayer’s property and recovery of funds from the debtors of the taxpayer with tax arrears (Clauses 20.1.16 to 20.1.19. of Article 20 of the TC). In accordance with the TC, a court decision is needed for taking the abovementioned measures. By virtue of the amendments affecting the Code of Administrative Proceedings of Ukraine (Article 183-3 of the CAPU), the attendance of the parties is not required for issuance of a court decision and if the court does make such decision, it shall be subject to immediate execution (i.e. whether or not it is appealed by the taxpayer).
The STS agencies are entitled to impose and collect penalties and liabilities or tax arrears to the budget (Clause 20.1.28 of Article 20 of the TC). In some cases, any changes in penalties are believed to be positive for the taxpayers, in particular the elimination of a 200% penalty. However, the analysis of respective provisions of the TC (Chapter 11 of Section 2 of the TC) through the prism of practical working experience of the STS agencies leads us to assume that the “burden” of penalties imposed on the taxpayers is likely to increase.
The Code imposes a one hryvnia limit on penalties for violation of the tax law during the first two quarters of 2011 (and, in addition, releases the income tax payers and the private entrepreneurs taxed on a general basis from liability for violating the tax law during the second and third quarters of 2011). One should remember, however, some other tools of influence available to the STS agencies, including in criminal proceedings. In addition, the abovementioned exceptions do not apply to certain transactions (non-tax transactions, e.g. cash register transactions, foreign economic activities, etc.).
Tax Advice
As is always the case, there will be taxpayers to whom the STS agencies will be particularly loyal. In their case (and only for them), ambiguous provisions of the tax legislation will be interpreted by the STS agencies through the lens of the “conflict of interest rule” or even with more flexibility. Tax advice (previously known as tax explanations) may serve as a good instrument for this purpose. In accordance with the TC, the STS agencies shall provide free tax advice, which will enable to release the taxpayers complying with such advice from penalties if such tax advice is expected to be cancelled in the future. The tax advice is provided on an individual basis only.
Conclusion
The powers of the STS agencies, as laid down in the TC, may be treated as reasonable and sufficiently well-considered. From the practical standpoint, the provisions of the Tax Code should, however, be analyzed through the lens of previous application of the tax legislation by the STS agencies and courts. Unfortunately, the most vivid observation will be a differentiated approach to each taxpayer. Even the recent history of the Ukrainian tax legislation offers ample examples of the application of an unfounded fiscal approach to some taxpayers, with an unreasonably loyal approach to the other. The taxpayer’s rights were often limited without any legal grounds (e.g., in the form of the rejection of tax returns due to taxpayer’s failure to demonstrate the required economic performance, which was not envisaged by law or subordinate legislation). Taken together, all of these facts give reasonable grounds to conclude that the STS powers are virtually unlimited in the sphere of national economy management and are based on an individual and selective approach.
Despite a dismal picture of tax administration in Ukraine, which was repeatedly given one of the most negative assessments by the international community, the adoption of the TC has, however, not resulted in any material changes. The expert tax planning and tax risk management coupled with a professional approach to dealing with controlling authorities may, as before, provide quite foreseeable and comfortable conditions for doing business in Ukraine.
--------------------------------------------------------------------------------
[1] Clause 4.1.9. of Article 4 of the TC provides for a stability principle saying that no tax element may be changed later than 6 months prior to the beginning of the fiscal year in which it will be applied. The same provision was contained in pat 9 of Article 1 of the Law of Ukraine on Taxation System.
[2] The conflict of interest rule is enshrined as a principle in Clause 4.1.4 of Article 4 of the TC, as is a special provision contained in Clause 56.21 of Article 56 of the TC.
[3] See Clause 20.1.4. of Article 20 of the TC.