Criminal liability under the Tax Code
Part 3 of Art. 3 of the Criminal Code of Ukraine (hereinafter – “the Criminal Code”) establishes: “The criminality of any act and also its punishability and other criminal consequences shall be determined exclusively by this Code” (that is, only by the Criminal Code). However, is it true?
In fact, every day one is being brought to criminal liability not only under the Criminal Code, but for example, under the Tax Code of Ukraine as well (hereinafter – “the Tax Code”).
To understand why it happens so, at first one should grasp the category of a “criminal charge”.
Perhaps, it shouldn’t be reminded, that the practice of application of the Convention for the Protection of Human Rights and Fundamental Freedoms (hereinafter – “the Convention”) with its understanding by the European Court of Human Rights (hereinafter – “the ECHR”) is obligatory for application in Ukraine in order to provide rule of law.
By the practice of the ECHR the specific criteria of a “criminal charge” definition is established in particular for the purposes of the Convention. The ECHR applies three criteria, known as the “Engel criteria” (para. 82 of the ECHR Decision on “Engel and others v. the Netherlands”, namely:
- criterion of domestic law. That is, whether the certain wrongful act is a subject to elements of crime, according to the legal system of the respective state. This criterion is “no more than a starting point”, and the indications so obtained have only a formal value;
- criterion of the range of addressees. If the responsibility extends to the indefinite number of persons, an offense is being qualified as criminal;
- criterion of the aim and degree of consequences. In the event that sanction has in particular an element of punishment, and introduced sanctions are strict enough, the offence is considered upon the nature of criminal offence.
In view of these criteria it’s interesting to consider the nature of penalties, applied under the Tax Code. For example, under Art. 123 of the Tax Code the penalties are applied in the case of determination of the amount of tax liability by the controlling authority, as a rule, at rate of 25% or 50% respectively.
For comparison, upon the analysis of the nature of tax penalties, applied in Finland, in para. 37 and para. 38 of the Decision as of February 10, 2015 in case of Österlund V. Finland1, the ECHR reached the following conclusions:
“37. The Court’s established case-law sets out three criteria, commonly known as the “Engel criteria” …to be considered in determining whether or not there was a “criminal charge”. The first criterion is the legal classification of the offence under national law, the second is the very nature of the offence and the third is the degree of severity of the penalty that the person concerned risks incurring. The second and third criteria are alternative and not necessarily cumulative. This, however, does not rule out a cumulative approach where separate analysis of each criterion does not make it possible to reach a clear conclusion as to the existence of a criminal charge (see Jussila v. Finland [GC], no. 73053/01, §§ 30-31, ECHR 2006-XIV; and Ezeh and Connors v. the United Kingdom [GC], nos. 39665/98 and 40086/98, §§ 82-86, ECHR 2003-X).
38. The Court has taken a stand on the criminal nature of tax surcharges, in the context of Article 6 of the Convention, in the case Jussila v. Finland (cited above). In that case the Court found that, regarding the first criterion, it was apparent that the tax surcharges were not classified as criminal but as part of the fiscal regime. This was, however, not decisive but the second criterion, the nature of the offence, was more important. The Court observed that the tax surcharges were imposed by general legal provisions applying to taxpayers generally. Further, under Finnish law, the tax surcharges were not intended as pecuniary compensation for damage but as a punishment to deter re‑offending. The surcharges were thus imposed by a rule, the purpose of which was deterrent and punitive. The Court considered that this established the criminal nature of the offence. Regarding the third Engel criterion, the minor nature of the penalty did not remove the matter from the scope of Article 6. Hence, Article 6 applied under its criminal head, notwithstanding the minor nature of the tax surcharge (see Jussila v. Finland [GC], cited above, §§ 37-38)”.
That is, based upon analysis of the nature of tax penalties the ECHR reached the conclusion that if such penalties are applied under the general provisions to an unlimited number of taxpayers, (the second criterion) and aim at punishing a taxpayer, rather than compensate for the damage caused by such (partly the third criterion), than such penalties should be considered as “criminal” for the purposes of the Convention.
Herewith, neither the qualification of criminal offense under the national laws, nor even the severity of penalties does not matter anymore for the purposes of their qualification as criminal.
In Court Desicion of “Västberga Taxi Aktiebolag and Vulic v. Sweden” as of July 23, 2008 taking into consideration that in fact under the national legislation of Sweden tax penalties are also not appertained to criminal liability, the ECHR also established (para. 79, 80, 82):
“79. … tax surcharges are not intended as pecuniary compensation for any costs that may have been incurred as a result of the taxpayer’s conduct. Rather, the main purpose of the relevant provisions on surcharges is to exert pressure on taxpayers to comply with their legal obligations and to punish breaches of those obligations. The penalties are thus both deterrent and punitive. The latter character is the customary distinguishing feature of a criminal penalty (see the Öztürk v. Germany judgment cited above, p. 20, § 53)…
80. The criminal character of the offence is further evidenced by the severity of the potential and actual penalty. Swedish tax surcharges are imposed in proportion to the amount of the tax avoided by the provision of incorrect or inadequate information. The surcharges, normally fixed at 20% or 40% of the tax avoided2, depending on the type of tax involved, have no upper limit and may come to very large amounts…
82. To sum up, the Court concludes that the proceedings concerning the tax surcharges imposed on the applicants involved a determination of a “criminal charge” within the meaning of Article 6 of the Convention. This provision is therefore applicable in the present case”.
By the way, the abovementioned Court Decision in the case of “Västberga Taxi Aktiebolag and Vulic v. Sweden” is actively used by the Supreme Administrative Court of Ukraine (for example, in the Court Ruling as of 13.07.2016 in case No. K/800/19602/15 and in Court Ruling as of 10.05.2016 in case No. K/800/32683/15).
Tax penalties provided by the Chapter 11 of the Tax Code and by national legislation, actually, are not considered to be criminal sanctions. That is, the first “Engel criterion” is not being held. However, this criterion is not crucial.
At the same time, the penalties are applied in accordance with the general provisions that are applied to taxpayers in general. That is, the second “Engel criteria” is being held completely.
Moreover, such penalties are directed not at monetary damage compensation, however have a punitive character, and aimed at prevention the commitment of repetitive offence. This follows from the fact that, for example, in accordance with para. 113.2 of the Tax Code:
That is, the penalty is not considered as a tax amount (or pecuniary punishment for late payment), which the payer should compensate to the budget.
A penalty cannot be considered as a compensation for damage for late delivery of funds to the budget, both in view of the separate pecuniary punishment for late payment, and from the standpoint of fixing the amount of penalty, regardless of the date of receipt of the tax to the budget.
Therefore, at least, partially the third “Engel criteria” is being held.
Another requirement of the third criterion regarding severity of punishment already does not have any key value, since, as according to the ECHR, in para. 38 of the judgment in the case of Österlund v. Finland as of February 10, 2015:
Compliance with the abovementioned criteria, on its own, suggests that penalties, provided by the Tax Code, are of criminal nature and requirements of Art. 6 of the Convention are applied to them.
And although this is not essential, however, in most cases, the strictness of the tax penalties itself allows to qualify their implementation as criminal prosecution (that is, the third criterion is being fully held).
Thus, penalties according to the Tax Code correspond to the «Engel criteria» and therefore are of criminal nature.
Note that the penalties applied to the taxpayer under the Tax Code, may be even higher than those, provided under Art. 212 of the Criminal Code for the tax evasion (in given article the main sanction is also a penalty).
In the Letter of the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development No. 3630/0/20-13 as far back as of April 25, 2013 was recognized that:
Which conclusions can be drawn from the foregoing?
At first, perhaps, such situation does not conform to the provisions of the Coalition agreement on the declared withdrawal from the punitive tax control model. Probably, relevant provisions of the Coalition agreement were accepted only to put up a smoke-screen, since until now nothing was done for their implementation.
Secondly, the issue arises regarding the eligibility for application of such sanctions according to the Tax Code in general, because they are of criminal nature. And, as we stated in the beginning of this overview letter, relevant issues should be governed solely by the Criminal Code. That is, the application of sanctions, in fact, of criminal nature according to the Tax Code can be challenged in whole.
However, perhaps, the essential is that in accordance with the Convention the sanctions of criminal nature can only be applied upon conclusion of guilt.
According to part 2 of Art. 6 of the Convention:
That is to bring a person to criminal liability tone should certainly prove the person’s guilt. Herewith, to put it another way, the concept of criminal charges, which is given in Art. 6 of the Convention, the ECHR understands autonomously and wide enough, and not only the way it’s understood by the national law of certain State. The penalties under the Tax Code fall into that category.
Thus, in the light of Art.6 of the Convention for the application of tax penalty, the tax authority should not only prove the existence of violations, but also conclude the payer’s guilt in its commission (intent or negligence). Otherwise, the penalties should be recognized as illegal.
Please note, that the specified law enforcement dispenses introduction of any changes in procedural laws. Particularly, according to Art. 9 of the Constitution of Ukraine, the Convention is a part of the national legislation of Ukraine3. According to part 1 of Art. 17 of the Law of Ukraine “On the enforcement and the application of the case-law of the European Court of Human Rights” and according to para. 1) of part 1. of Art. 9, part 2 of Art. 8 of the Code of Administrative Procedure of Ukraine, the courts are obliged to apply the ECHR practice as a source of law. Thus, upon absence of conclusion of taxpayer’s guilt, the penalties are subject to cancellation.
The abovementioned approach already comes into use at the level of the Ukrainian courts. For example, in the Resolution of the Administrative Court of L’viv District in case No. 813/3187/16 as of October 31, 2016 the court established:
“the existence of penalty does not exclude this case from the application of Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms. These court’s conclusions were based on the judgment of the European Court in the case of Österlund v. Finland as of February 10, 2015 and on introduced in the aforementioned Court “Engel criteria”.
Thus, according to the provisions of part 1 of Art. 6 of the aforementioned Convention, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial court established by law, which would decide the case in regarding his rights and duties of a civil nature or establish the relevance of any criminal charge against him.
Part 2 of the same Article envisages that everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.
Taking into consideration that, in act of tax audit the controlling authority has not provided any assessment of the plaintiff’s guilt, the court cannot consider a controversial act of individual action as such which meets the criterion of reasonableness (Para. 3 of Part 3 of Art. 2 of the Code of Administrative Procedure of Ukraine)”.
In other words, the court declared the penalties illegal on the ground that the revenue body has not explored the issue of guilt of the taxpayer upon application of such.
Let’s hope, this approach directed to provide the supremacy of law with due account for the ECHR practice, will gain the further spread.
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.
2Let’s remind that the compared penalties under the Tax code of Ukraine are applied in the amount of 25% or 50% respectively, that is in the bigger amount than the penalties considered in the decision of ECHR in Sweden.
3Based on the Law of Ukraine “About ratification of the Convention on human rights protection and fundamental freedoms of 1950, the First protocol and protocols No. 2, 4, 7 and 11 to the Convention” No. 475/97- the Verkhovna Rada of 17.07.1997.
Review of ECHR case-law relevant for tax disputes
Judgment of the European Court of Human Rights in the case of N.K.M. v. HUNGARY
Judgment of the European Court of Human Rights in Case of Österlund v. Finland
Court practice of the European Court of Human Rights on the issues of court fees