Explanations of Undeclared Staff on Salaries “in the envelope” are Not a Proof for Charging Additional Taxes

April 2, 2019, the Supreme Court ruled in the administrative case No. 808/434/16 on the suit of a private entrepreneur to the Pology State Tax Inspectorate in the Zaporizhia region, which established that the only explanations of officially undocumented workers are not enough to prove the salaries payments “in the envelope” for charging additional taxes.

The court refused to satisfy the complaint of taxpayers, as all decisions and claims of the defendant were made based on the fact that he paid the income to individuals without registering their labor relations. The conclusions of the tax authority regarding the revealed violations are based only on the written explanations, however, the amounts indicated in the act are not confirmed, they are actually based on assumptions, which proves the unlawfulness of the taxpayer’s liability to the plaintiff on personal income tax, military fees and unified social tax.

The courts noted that the explanations of these persons actually contain information on the actions of the plaintiff or his inactivity, which may be characterized as the violation of the legislation of Ukraine on labor. However, the issuance of a tax notice – a decision in the absence of any evidence confirming the amount of the assessed taxes and fees is illegal.

A similar case was considered in an appeal, which appealed the order of the State Labor Administration on the results of the inspection of a business entity, which, according to them, started labor relations with employees as civil relations. In the case No.1140/2746/18, Kirovograd District Administrative Court acknowledged that the State Labor Administration has no legal grounds for conducting business inspections. Thus, according to the courts, the inspections of the State Labor Administration were carried out in accordance with the Law of Ukraine “On the Basic Principles of State Supervision (Control) in the Field of Economic Activity”. Still, the requirements of Part 4 and 5 of Article 2 of the Law stipulate that the control measures carried out by the state supervisory authorities and control over observance of the legislation on labor and employment of the population in accordance with the procedure established by this Law, taking into account the peculiarities determined by the laws in the relevant areas and international agreements.

Since there is no law in Ukraine which would specify the procedure for conducting inspections by the State Labor Administration, the whole inspection is assumed illegal. So, the order of the State Labor Administration issued on the basis of the unlawful inspection results is also illegal.

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