Ukrainian “tax vacation”

The most common issue faced by taxpayers at the moment is interaction with tax authorities during the quarantine. During this period, a lot of regulations have been adopted that change the order of interaction between business and regulatory authorities. The state declares the facilitation of a business “life” during quarantine, which has led to a large-scale cessation of economic processes in the country and has caused a direct ban on certain types of business activities. We want to help get things straight if everything is indeed the way it was declared and if there is the flip side of the coin.

Myth 1. All tax audits are canceled for the period of quarantine.

Everyone is aware that in accordance with the laws recently adopted by the Verkhovna Rada in connection with the coronavirus spread, they established a moratorium on documentary and factual audits by tax authorities, including single social security tax inspections. The moratorium is limited to the period from March 18 to May 31, 2020. Audits that were started by tax authorities before March 18, 2020, and were not completed must be suspended until the last day of the quarantine’s final month.

Everything seems to make sense − the state provides businesses with benefits and facilitation during the quarantine period. However, there are some hitches here.

Not everyone knows that the moratorium does not apply to in-house, unscheduled documentary tax audits on VAT refunds and/or ones declaring a negative VAT indicator for the amount of over UAH 100,000.

Moreover, there is a very interesting detail here: during the moratorium on inspections, tax authorities are not prohibited from conducting review procedures including sending requests for information to businesses. How does this affect entrepreneurs?

We have analyzed the requests and activities of tax authorities during the quarantine period and the so-called moratorium, and it is highly likely that the temporary suspension of inspections is used by the tax service as another opportunity to gather information and make cross-audits with counterparties.

How do tax authorities do this? They send relevant requests for information to businesses − and this is evidenced by numerous requests from tax authorities that a lot of companies have received over the past two months.

At the same time, such requests often have to do with economic activity even of 2014 and 2015. Many counterparties whose business transactions interest tax authorities and the list of requested documents prove the intention to appoint and conduct unscheduled audits after the lifting of the moratorium.

We come to this conclusion based on our many years of practice working with tax cases. We know for sure that frequent requests from a tax company are the first harbinger of an unscheduled audit. According to current law, tax authorities have the right to conduct such an inspection of the business entity in case of failure to provide or incomplete provision of explanations and documents at their request.

The economic crisis and a significant budget gap are just the tip of the iceberg of the negative consequences for Ukraine caused by the quarantine introduced due to the pandemic. Activation of tax authorities and numerous additional charges is exactly the process inevitable for business in the country, and it is caused by a rapid economic downturn and a significant lack of budget revenues.

The idea that everything is very bad with the budget replenishment comes up to the minds of entrepreneurs more and more often. Especially to those who during the quarantine and moratorium received a request from the tax office for documents that prove the repayment of budget loans back… in 1997-1998!

Therefore, companies should be prepared for the fact that tax authorities will begin active unscheduled audits immediately after the quarantine ends.

What should companies do to prepare for and minimize possible additional charges?

Firstly, do not ignore any action from tax authorities. All the phone calls, written requests, inquiries, letters, etc. must be carefully analyzed.

Secondly, responses to requests for information and documents should be carefully prepared. It often determines whether you will have an audit or not.

Thirdly, provide documents during the audit only after you have analyzed them carefully.

Based on our experience, most mistakes are made by taxpayers both when responding to tax inquiries and when going through a direct audit. All these mistakes lead to serious surcharges difficult to refute even in court. As a result, they lead to significant costs for complex company litigation and criminal proceedings.

Thus, a timely audit at the stage of receiving requests from the tax authority or the order to conduct an audit actually allows to:

– significantly reduce the amount of surcharges;

– reduce litigation costs;

– reduce the risks of criminal prosecution of the company’s officials.

When talking about the audit, we mean a careful analysis of the tax authorities’ mistakes which can be reasonably used by the company in defending its rights. It’s great if you can do it on your own. However, if you understand that you probably do not have enough practical and theoretical knowledge, it is best to find a consultant able to help you protect your rights. This approach provides real savings as you try to prevent issues and losses in the future instead of solving current problems. By the way, problems of the day are usually not the easiest ones to solve.

Myth 2. Rumor has it among businesses that criminal prosecution for tax evasion can be initiated only after the assessed amounts are agreed. Therefore, if the company has applied to the court to cancel a tax assessment notice (TAN), criminal proceedings cannot be initiated until the decision of the Administrative Court of Appeal enters into force.

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This is also a significant mistake that contradicts reality. Therefore, it can come at a price for the company.

The relevant provision can be found in the “Guidelines for the interaction procedure between the State Fiscal Service units under the organization, conduct, and implementation of taxpayers’ audit materials”, approved by the Order of the SFS of Ukraine №22 from July 31, 2014. However, this document is not normative, which means that in practice, tax authorities, to put it mildly, do not always follow these recommendations and quite often pass the audit materials to the investigative units not only after the issuance of tax assessment notices but also after filing an audit report. This is in no way taken as a violation of applicable law as, in accordance with the requirements of Art. 212 of the Criminal Code of Ukraine, criminal proceedings are registered in the Unified Register of Pre-trial Investigations (URPI) on the basis of any information about the commission of a criminal offense. We carried out very long and extensive criminal proceedings against our clients (very large companies) in our practice. Such criminal proceedings were caused by the reports from the taxpayers who believed that companies evaded taxes. These reports were sent to law enforcement agencies immediately after the audit and drawing of the act. Therefore, both the process of appealing the additional tax amount and criminal proceedings took place as parallel and completely unrelated processes. It involves all the “great things” of criminal prosecution like searches and seizures, interrogations, asset freezes, and even official inquiries to non-resident companies, interrogations of their owners, and officials in their countries. Even if a company receives a positive court decision which enters into force, this is not an indisputable reason to close a criminal proceeding. Our practice shows that such criminal proceedings were closed only after the final decision of the Supreme Court of Ukraine and thanks to a large-scale naming and shaming.

Myth 3. All issues, including non-payment of taxes or criminal prosecution for alleged tax evasion, can be solved by selling the corporate rights of the struggling company, changing its owners and officials.

This myth is actively spread in business circles, and sometimes even lawyers offer entrepreneurs “a helping hand” to solve all their problems (including tax evasion and criminal prosecution for alleged tax evasion) by changing owners, officials and re-registering the company in Donbas (temporarily occupied territories), as well applying other similar techniques.

This is really a myth and a trap because those who worked as directors and chief accountants of the company during the period when tax liabilities were accrued or other violations of tax legislation were established are prosecuted for tax evasion.

That is, by changing the management and owner of the company before or after the start of criminal proceedings, you will not solve the problem. After all, the fact that a person is no longer a director at the time of the investigation does not in any way release them from responsibility for the acts committed during their tenure.

The liability of a person who was the company’s executive and whose actions led to tax evasion, in accordance with Art. 212 of the Criminal Code of Ukraine, can be significant and depends on the amount of unpaid taxes.

Thus, tax evasion in the amount of UAH 3,153,000 to UAH 5,255,000 reserves collection of a fine in the range of UAH 51,000 – 85,000 or deprivation of the right to hold certain positions or engage in certain activities for up to three years.

For tax evasion in the amount of 5,255,000 to 7,357,000 UAH you will have to pay a fine of 85,000 – 11,900 UAH with deprivation of the right to hold certain positions or engage in certain activities for up to three years.

For the above-mentioned violations in the field of tax payment, the fine is often complemented by seizure of funds, valuables and other property acquired during criminal activities. In practice, it is difficult to prove the fact that this property was acquired during the period of criminal activity and at the expense of such activity. However, all official’s property can be easily seized even for the entire period of criminal proceedings. It is possible to lift the seizure of property in court, but it can be quite difficult both because of the lack of time and additional legal aid costs.

As for larger amounts, for tax evasion in the amount of UAH 7,357,000 and more, you get a fine in the range of UAH 255,000 – 425,000 with deprivation of the right to hold certain positions or engage in certain activities for up to three years, as well as seizure of property regardless of its value. In this case, it means that this seizure is mandatory for a guilty person, and the amount and value of the property to be confiscated does not depend on the amount of unpaid taxes. In fact, all property owned by an individual who used to be an official of the company may be seized regardless of its value and the term of acquisition of such property.

All the above-mentioned once again shows that companies should not wait for problems to occur. You should be one step ahead: create and implement a mechanism that can help avoid problems instead of wasting time and money on solving them.

Maybe now it is the time to change everything? First of all, to change something important inside your company…

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