Criminal liability for tax evasion – how it was corroborated by the courts in 2016 and what are the real sanctions

22 February, 2017 Newsletters

In lieu of a preface

Due to amendments in the Tax Code of Ukraine1, there are no legal boundaries for the Tax Police activity since 01.01.2017 and therefore it should be terminated starting from the mentioned date, at least according to part 2 of Art. 19 of the Constitution of Ukraine.

At the same time, according to public statements, the budget revenues within the same period since January 1, 2017 have increased by 25,5 billion UAH, which is 1.6 times more than in January of the last year2.

Coincidence?

Let’s try to analyze how much criminal prosecution for tax evasion is really effective from the ensuring budget revenues on the basis of court verdicts point of view.

We will consider all revealed court verdicts for tax evasion (under Art. 212 of the Criminal Code of Ukraine), for the year 2016 in analysis.

 

Which penalties were applied by the courts for tax evasion during the year 2016?

1.

The main type of punishment for tax evasion (Art. 212 of the Criminal Code of Ukraine) is a fine.  Its size mainly depends on such determinant as the amount of evasion3:

Art. 212, part Amount of tax evasion,

the tax-free minimum incomes

Fine,

the tax-free minimum incomes

1 1 000 – to 3 000 1 000 – to 2 000
2 3 000 – to 5 000 2 000 – to 3 000
3 ≥ 5 000 15 000 – to 25 000, or = amount of evasion

It can be seen, that the amount of the fine according to first two parts is less than the amount of evasion. Especially according to part 2: the maximum amount of fine is limited to the lower threshold of evasion amount.

2.

However, the difference is actually much more than it seems in the table above, where the threshold for evasion and fine amount are indicated in tax-free minimums. Exactly in that way, in tax-free minimums, it is established in Art. 212 “Tax evasion” of the Criminal Code of Ukraine (hereinafter – “the Criminal Code”).

However, (1) tax-free minimum for the matter of calculation of evasion amount ≠ (2) tax-free minimum for the matter of calculation of the fine amount. 

For qualification according to evasion amount, tax-free minimum (1) is established at the level of the tax social privilege for the relevant year (50 % of the living minimum wage for employable person), in 2016 tax-free minimum is (1) = 689 UAH 4, and in order to determine the amount of the fine tax-free minimum is (2) = 17 UAH. This is determined in para. 5 of subsection 1 of Section XX of the Tax Code of Ukraine

Taking into account the abovementioned, if to convert the table above into Hryvnia, it results as follows:

Art. 212, part Amount of tax evasion, UAH  (for 2016) Fine, UAH
1 689 000 – to 2 067 000 17 000 – to 34 000
2 2 067 000 – to 3 445 000 34 000 – to 51 000
3 ≥ 3 445 000 255 000 – to 425 000, or = amount of evasion

3.

We have analyzed verdicts under Art. 212 of the Criminal Code5  for the year 2016 within actual fines applied. There are only 346 verdicts for tax evasion in 2016. The summary for such verdicts by parts of Art. 212 of the Criminal Code concerning the actual ratio of the amount of evasion and fines applied is as follows:

Art. 212, part Amout of evasion,

within7, UAH

Fine, within, UAH

(after the fact)

Amount of fine in % to amount of unpaid taxes
1 585 626,56 – 1 938 450 17 000 – 34 000 1,01 – 5,81
2 683 562,29 – 4 572 770,57 34 000 – 51 000 0,74 – 5,31
3 3 182 871,35 – 355 530 714,33 191 2508 – 355 530 174,33 2,18 – 100,00

Thus, the fine under part 1 and part 2 of Art. 212 of the Criminal Code is significantly smaller than the amount of actual evasion, ranging within 0,74 – 5,81 % of the evasion amount.

Under part 3 of Art. 212 of the Criminal Code the percentage is different whereas the courts have imposed the fine taking into account the actual property damage from the crime in accordance with part 2 of Art. 53 of the Criminal Code of Ukraine:

“For the crime for which a fine in amount of more than three thousand times the tax-free minimum is foreseen as the primary punishment, the fine amount, determined by a court, can’t be less than amount of property damage for criminal offense or criminally-obtained profit, regardless of fine’s margin amount, foreseen by the penal part of Article (penal part of the part of Article) in the Special Part of this Code”.

4.

The generalized data on the total evasion amount confirmed by court verdicts and the amount of fines awarded in 2016, and how they are correlated with the classification according to the relevant parts of Art. 212 of the Criminal Code, is listed below in the table:

Art. 212, part Number of verdicts Amount of evasion, total, UAH Amount of fines, UAH Overall fines in % to amount of unpaid taxes
1 21 22 219 976,89 555 900 2,51
2 5 10 563 037,86 272 000 2,58
3 8 393 033 512,42 367 556 561,68 93,52
Total 34 425 816 527,17 368 384 461,68 86,51

*Information regarding the evasion and fine amount in the context of each verdict is available in the table below, being Appendix 1 hereto.

5.

Which conclusions can be drawn from the stated above?

Foremost, probably, it is conclusions on absolute ineffectiveness of criminal prosecution under part 1 and 2 of Art. 212 of the Criminal Code in terms of pumping up the budget. Even if the tax evasion is established and confirmed by a court decision, corresponding fines for this are averagely slightly more than 2,5 % of the unpaid taxes amount. In all these cases the courts established evasion for the total amount of 32 783 014,75 UAH, the total fines in the amount of 827 900,00 UAH was awarded.  Is it cheaper to pay fines?

Secondly, proceedings under part 1 and 2 of Article 212 of the Criminal Code constitute the overwhelming majority (26 out of 34, or 76,5 %) of cases on tax evasion, verdicts on which are available. So mainly a steam-hammer is being used to crack nuts (the amount of fines averagely by the verdict is only 31 842,00 UAH). And each such case results in spending taxpayers` money  for supporting and maintenance of activity of corresponding bodies.

Really, only proceedings under the part 3 of Art. 212 of the Criminal Code have the potential for generating budget revenues. Evasion according to this part of Article in 2016 was recognized by courts in 8 cases: evasion of only 425,8 million UAH was established, for which fines in amount of 368,4 million UAH were applied.

Therefore, can the budget count on this money at least?

In order to assess the reality of such expectations one should probably look at the “case of the year”, based on the amount of tax evasion established by the court and the amount of fines applied. This verdict is given under No. 32 in the table: evasion for the amount of 355 530 714,33 UAH, fine in amount of 355 530 174,33 UAH9. For convenience, this verdict has been retained from the register and is attached as Appendix 2 hereto.

If to judge by the amount of fine in this case, it is 96.7% of the total amount of fines applied by the courts under part 3 of Art. 212 of the Criminal Code in 2016, or 96,5 % of total amount of penalties applied by the courts under Art. 212 of the Criminal Code as a whole in all cases in 2016.

This case takes the same main place sequence higher than any other case if to judge by the amount of evasion.

That is, this case is the case of all cases, the greatest achievement of the anti-tax evasion efforts, which passed through the courts and was confirmed in 2016.

Therefore, the verdict in this case can be considered significant and reflects more than 90 % of the result of the struggle against the tax evasion, as determined by the courts in 2016.

6.

Let’s consider the “case of the year” upon the verdict as of January 13, 2016 in details (the verdict is provided in full in Appendix 2):

The case concerns the years 2004 – 2008. Person_2 (with no previous convictions, positively characterized, not registered with drug rehabilitation or psychiatric institutions, not married, unemployed, disabled person of group II) has established PSK “Vertical”, LLC as the founder, and was holding position of both director and accountant.

He provided various economic entities with the documents with the requisites of the company on the provision of works and services that were not actually performed, which resulted into provision to all contracting customers opportunity for tax evasion.

He withdrew the cash from company’s account “on condition of accountability”, however did not report neither returned the cash, so all the cash is considered as his private income and is subject to personal income tax, from payment of which he evaded, in the total amount of 79 592 674,33 UAH.

Also, he “covered” by the documents allegedly incurred expenses and VAT from enterprises further in supply chain, which actually haven’t delivered any works, services or goods. Accordingly, he illegally formed the expenses and the tax credit, resulting in tax evasion: 153 298 911,00 UAH in profit tax and 122 639 129,00 UAH in VAT.

Thus, in total, the tax evasion is 355 530 714, 33 UAH.

He pleaded guilty, confirmed the actual circumstances specified in the charge.

Since the Person_2 pleaded guilty fully and voluntary, confirmed the actual circumstances of accusation, the court considered the case without examination of evidence upon agreement of the parties.

Actions were qualified under part 3 of Art. 212 of the Criminal Code — tax evasion and part 2 of Art. 364 of the Criminal Code — official misconduct.

Final penalty: a fine in the amount of 355 530 174,33 UAH, deprivation of the right to occupy posts associated with organizational-administrative and administrative-economic sanctions for 3 years, a fine in the amount of 17 thousands UAH , deprivation of liberty for 5 years with remission of this penalty with a probation period of 3 years.

Upon familiarization with the verdict one may have an impression that some “whipping boy”, some “frontman Funt” got this verdict. Or maybe someone would believe that unemployed disabled person of group II created an enterprise and operated all by himself both as a director and as an accountant with such amounts without any “backing” and real “string-pullers”?

It is also interesting, why it took so much time – to figure out what happened all the way back in 2004-2008? Because in verdict we see only a loner who is doing “everything by himself” and besides he pleaded everything voluntary.

Therefore, it is highly unlikely that this case was duly examined, the circumstances were really as established, and that there is really no one else’s “stink” all over it.

But let’s leave it on the conscience of the investigation.

What is interesting in view of the analysis in this newsletter is the reality of recovery of the fine imposed by the court. Would someone believe that this Person_2 will pay a fine set by the court in the amount of 355.5 million UAH? We don’t believe it.

And therefore, the fines imposed upon this verdict should be excluded from the calculation of the economic efficiency of the criminal proceedings for tax evasion. Even if to assume that all other fines inflicted under Art. 212 in 2016 will be paid, their amount will be only 12 854 287,35 UAH (that is little less than 13 million UAH).

Therefore, maybe exactly this amount — 13 million UAH should be considered to be a real indicator of the economic effectiveness of struggle against tax evasion, which was confirmed by the courts in 2016?

Taking the per cent ratio of fines to the amounts of evasions established by the verdicts of the courts, it constitutes only 3 % of the total evasion amount.

7.

It is also interesting to compare the relative value of taxes amounts, which were subject of evasion, with the total amount of taxes paid.

The total amount of evasion established by courts verdicts in 2016is 425 816 527, 17 UAH, that is about 426 million UAH.

And the tax revenues in 2016 constituted amount of 377 billion UAH10.

That is, the amount of criminal tax evasion established by courts verdicts in 2016 is little more than 0,1 % of the amount of tax revenues of this year.

8.

From the stated above it follows that criminal proceedings for tax evasion according to the data confirmed by court verdicts, have no significant effect on pumping up the budget.

According to the individual observation, more than a third part of verdicts on tax evasion for the year 2016 — are on approval of the plea agreements. And regarding other cases, namely the “case of the year”, the question arises as to which extent they can actually be a result of the agreement, although it was not so formalized.

The represented data speaks for itself. Criminal proceedings for tax evasion are exceptionally economically non-effective. At the same time, they actually create a significant burden for business.

At that, liability provided by the Tax Code of Ukraine is more efficient for purposes of pumping up the budget. After all, the Tax Code foresees both recovery of the additionally accrued tax amount, and the penalties, which in general constitute 25 % or 50 % of the taxes amount, that is, in fact more than under part 1 and part 2 of Art. 212 of the Criminal Code.

By the way, these penalties under the Tax Code, based on criteria recognized by the European Court of Human Rights, even despite their establishment in tax legislation are of criminal nature11.

So the question arises, to which extent actually a dual criminal liability is corresponded to Art. 61 of the Constitution of Ukraine:

“No one may be brought to legal liability of the same type for the same offence twice”.

Also taking into account the results of the struggle against tax evasion demonstrated by the results of 2016, confirmed by the court decisions, it is probably worth reverting to the matter of the appropriateness of such criminal proceedings only when there is an agreed tax obligation not paid within the time limits established by the Tax Code (as this, in particular, is provided in the draft law 3448 (d)).

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Footnotes:

1In the Law of Ukraine No 1797-VIII as of December 21, 2016 “On Amendments to the Tax Code of Ukraine” in para. 134 Section XVIII2 was deleted, which determined legal principle activates of the Tax Police.

2According to reports of Mr. Roman Nasirov the Head of SFSU, on main indicators of the SFS work, in January 2017 68 billion UAH are remitted by the State Fiscal Service of Ukraine to the summary budget, which is 1,6 times or 25.5 billion UAH more than in relevant period of 2016. The news is available on the official website of the State Fiscal Service of Ukraine by reference.

3The qualification of the payer’s action by particular part of Art. 212 of the Criminal Code of Ukraine, except the amount of evasion, also depends on the existence of such circumstances as wrongdoing by a group or wrongdoing by a person previously convicted for tax evasion.

4More on this in the article “Thresholds of criminal liability for tax evasion under Art. 212 of the Criminal Code in 2017. Which amount of tax notification-decisions would become intimidating this year?”.

5All verdicts revealed by us in the Unified State Register of Court Decisions under Art. 212 of the Criminal Code of Ukraine in 2016.

6Meaning verdicts of guilty and approval of the plea agreements in cases for tax evasion in 2016. More details with the analysis can be found in the table – Appendix 1.

7Bringing to criminal liability occurs with a certain delay for acts that took place in different periods. For qualification purposes, the threshold effective as of the moment of wrongdoing is applied. Since the tax-free minimum as a tax social privilege changes from year to year, the qualification thresholds in Hryvnia change as well.

8Minimal actual amount of fine applied under part 3 of Art. 212 of the Criminal Code of Ukraine. A fine in this amount was applied under the verdict in case No. 712/13146/16-k. The verdict is given in the general table by sequence number 28 and available in the Unified State Register by reference.

9In the court decision, the total amount of taxes that the accused has not paid is not reflected. If to add up upon the separate types of taxes, 79 592 674,33 personal income tax + 122 639 129,00 VAT + 153 298 911,00 profit tax, that is = 355 530 714,33 UAH. Most likely, the court when determining the fine in the decision (355 530 174,33 UAH) simply made a mistake by interchanging two digits.

10According to data of Infographic “Receipt to the State  budget of Ukraine in 2016”.

11More on this issue can be found in the material by the link: “Criminal liability under the Tax Code”.

Kind regards,

© WTS Consulting LLC, 2017

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