Criminal proceedings for tax evasion in the first half of 2017: “ghost” of tax police and “efficiency” of the court

27 September, 2017 Newsletters

According to the statistical data published on the official web site of General Prosecutor’s Office of Ukraine, within the first half-year of 2017, 557 criminal offences on tax evasion were registered. Actually the fact of registration of any number of criminal proceedings on tax evasion raises questions immediately, since the tax militia is deprived of any authorities, including authorities to initiate and conduct pre-trial investigation, starting from the beginning of this year1.

Even not taking into account issue regarding lawfulness of initiating of any criminal proceedings in general2, their number still goes off scale compared to the number of evasion facts later confirmed by the courts3. However, there are certain improvements with regard to decreasing the number of initiated criminal proceedings. Thus, compared to the similar period of 2016 (the official statistical data on the first half-year of 2016 is available on the web site of General Prosecutor’s Office of Ukraine by the reference, as well as in the Table for your convenience), the number of initiated criminal proceedings is decreased by 38 %4.

At the same time, other efficiency indexes of the pre-trial investigation bodies’ activity remain at the low level. Thus, number of closed criminal proceedings compared to the similar period of 2016 has decreased from 13 % to 7 %5, however the number of criminal proceedings transferred to the court hasn’t increased and still constitutes 1 %6. In other words, despite reduction of work volumes (decrease of the number of initiated criminal proceedings) the pace of pre-trial investigation unfortunately has not quickened.

As regards results of consideration of criminal proceedings in the court, the rate of court decisions delivered by the court without verification of any evidence regarding criminal offence has increased. This entails court judgments approving the plea agreement. Thus, within the first half-year of 2017 among 32 delivered verdicts there are 18 court judgments approving the plea agreement (for comparison, during the first half-year of 2017 the courts delivered only 7 verdicts of acquittal and 7 verdicts of guilty, i.e. number of court judgments approving the plea agreements exceeds the number of cases examined by the courts on the merits). It means that for the first half-year of 2017 the mentioned judgments approving plea agreements make up 56 % of all delivered verdicts. That said, in 2016 this rate constituted only 24 %7.

However, the number of verdicts as such should be considered along with data on the actual amounts of evasion. Thus, the total amount of evasion under all verdicts constitutes UAH 4 154 996 000, while under verdicts approving plea agreement – UAH 4 137 175 000, which makes 99,6 %. Actually, almost all evasion amounts were not examined by the courts.

With regard to content of the court decisions delivered by the courts within the first half-year in cases on tax evasion we will try to analyze respective decisions in view of their texts available in the Unified State Register of Court Decisions. We settle on the analysis of the court decisions of the 2nd quarter (analysis of the court decisions of the 1st quarter is available in our newsletter “Criminal proceedings for tax evasion in the first quarter of 2017: verdicts, trends and statistics“).

As before, the most of the verdicts under Art. 212 of the Criminal Code of Ukraine (hereinafter – the “Criminal Code”) are related to void transactions. However, we can trace the trend of consideration of such criminal offence as cumulative crime, in particular as tax evasion along with sham business activity under Art. 205 of the Criminal Code8.

Short description of all verdicts, delivered by the court in first half-year of 2017 is stated in Annex 1 to this newsletter.

For analysis it is worth to refer to the most interesting court decisions, and in particular, to those which content may be derived from the decisions. Unfortunately, sometimes the wording of the court decision does not allow to define even which official or business entity is brought to responsibility, even not about the essence of the committed offence and its examination by the court (text of the Verdict of the Desniansky District Court of the city of Kyiv dated June 13, 2017 in case No. 754/3515/17, available by the reference).

Among verdicts of acquittal, the verdict in the case No. 757/3118/16 deserves attention (Verdict of the Sviatoshynsky District Court of the city of Kyiv dated June 26, 2017 in case No. 757/3118/16, available by the reference). The criminal proceeding against a person was initiated by the fact of evasion from taxes by non-including of operations with investment assets into the tax return. The court found that the termination of the contract on investment asset and return of funds took place. Thus, there had been no operations with investment assets.

Besides, the verdict in the case No. 757/18693/15-k is also quite interesting (the Verdict of the Pechersk District Court of the city of Kyiv dated April 18, 2017 in case No. 757/18693/15-k, available by the reference). The criminal proceeding concerned incorrect display of reimbursable financial aid in the tax accounting and incorrect definition of the production cost. It was properly established by the court that this case is not about evasion, but about tax dispute. Due to the fact that the tax dispute was lost, tax accruals were paid by the Company. Accordingly, the court found that there was no intention for tax evasion and there was no fact of failure of delivery of funds to the budget, due to which, the person was acquitted.

As for verdicts of guilty and plea agreements it is worth to considerate decisions in two related cases No. 523/8045/17 (the Verdict of Suvorovsk District Court of the City of Odesa dated June 19, 2017 No. 523/8045/17, available by the reference) and No. 510/328/17-к (the Verdict of Reninsk District Court of the City of Odesa dated April 05, 2017 No. 510/328/17-к, available by the reference). Particularly, the criminal proceedings were related to unlawful use of custom regime of processing, according to which oil products were imported to the territory of Ukraine allegedly for the purpose of processing but were sold to business entities. Processing products (which actually didn’t exist) were allegedly exported, and registered by complicit custom officers. While approving the plea agreement the court applied sufficiently heavy-handed sanctions in the form of asset forfeiture of all property of oil refinery to the state revenue, which illegally applied customs regime of processing, as well as of all property of enterprise, which rendered services of loading of nonexistent processing products on vessels in port for export.

The number of high profile cases regarding the scheme of excise tax evasion upon purchase of liquid gas allegedly for needs of citizens and its further sale to other business entities at market price was enriched in the second quarter of the year9. During the analysis of such decisions, we noticed the proportionality of the penalty and punishment to amounts of evasion. Thus, Komintern District Court of the City of Kharkiv considered 4 related cases10 and delivered verdicts based on plea agreements. The total amount of excise tax evasion was UAH 172 931 777,67 , while the amount of penalty in the amount of UAH 238 000,00  was paid only by two of six accused. The rest of accused persons were released from completement of sentence with probationary period.

Such trend may be also traced from other verdicts. As far as we see, the more the amount of tax evasion is, the less is the extent of criminal responsibility. Thus, for instance, the correlation of penalty (along with charges under civil claims on damage, inflicted to the state) and evasion under part 3 of Article 212 of the Criminal Code constitutes only 0,28 %11, while the correlation under part 2 of Article 212 such correlation is 1,52 %12 and under part 1 of Article 212 – 19,92 %13. As a result of tolerant attitude of courts to substantial amounts of evasion, we face the situation in which while the total amount of evasion is UAH 4 154 996 421,95, the compensation of losses to State budget of Ukraine in the form of penalty and secured civil claims is UAH 13 313 648,75.

Then the question arises whether there is a need at all in such instrument as a criminal prosecution for tax evasion if such an instrument as a matter of fact is not effective.

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:

1As we recall, since the Law of Ukraine “On Amendments to Tax Code of Ukraine regarding Improving of Investment Climate in Ukraine” as of December 21, 2016 No. 1797-VIII came into force on January 1, 2017, the Section XVIII-2 “Tax Police” was excluded from the Tax Code. Detailed information is set forth in analytic material “What is to be done with “ghosts” (or if the financial investigations department as a part of the tax authority is addressing you now)”.

2Except crimes, commited by the authorities, since the pre-trial investigation with regard to such crimes should be carried out by the investigation authorities of the prosecutor’s office.

3Thus the courts delivered 7 verdicts of guilty in the first half-year of 2017, which amounts to only 1,3 % of all criminal proceedings registered by law enforcement authorities in this period.

4According to official statistics data, published on the web-site of General Prosecutor’s Office of Ukraine, 896 criminal proceedings under art. 212 of Criminal Code of Ukraine were registered in first half-year of 2016, and 557 criminal proceedings in the first half-year of 2017. Thus, the difference is 339 proceedings, which amounts to almost 38 % of total amount of proceedings in the first half-year of 2016.

5According to official statistics data, published on the web-site of General Prosecutor’s Office of Ukraine, 37 criminal proceedings were closed in first half-year of 2017. Thus, the ratio of closed proceedings to the amount of proceedings registered was proximate to 7 %. In the meantime, during the similar period of 2016, 115 criminal proceedings were closed, which amounts to almost 13 % from the total amount of criminal proceedings registered.

6Thus, according to official statistics data, published on the web-site of General Prosecutor’s Office of Ukraine, 6 of 557 criminal proceedings registered were forwarded to the court with criminal indictment in first half-year of 2017, which amounts to 1 % of total amount of proceedings; during the similar period of 2016, 12 of 896 criminal proceedings were forwarded to the court, which amounts proximate to 1 %.

7The courts delivered 53 verdicts in proceedings regarding willful tax evasion in 2016, 13 verdicts of which were delivered based on the plea agreements. It means that the ratio of plea agreements in percentage in 2016 was 24 %.

8In the first quarter of 2017 there were only 3 verdicts from 13 ones concerning cumulative crimes committed (which amounts to 25 %), in the second quarter this amount was almost doubled and persons were accused for tax evasion and sham business in 7 cases of 13 (54 %).

9Verdicts are available in United State Register of Court Decision by the references: http://www.reyestr.court.gov.ua/Review/64580751http://www.reyestr.court.gov.ua/Review/64580781http://www.reyestr.court.gov.ua/Review/65729597http://www.reyestr.court.gov.ua/Review/66269798http://www.reyestr.court.gov.ua/Review/66689266http://www.reyestr.court.gov.ua/Review/66752001.

10The Verdict of Komintern District Court of the City of Kharkiv dated April 03, 2017 in case No. 641/1900/17 is available by the reference; the Verdict of Komintern District Court of the City of Kharkiv dated April 28, 2017 in case No. 641/2195/17 is available by the reference; the Verdict of Komintern District Court of the City of Kharkiv dated May 24, 2017 in case No. 641/2949/17 is available by the reference; the Verdict of Komintern District Court of the City of Kharkiv dated May 26, 2017 in case No. 641/2509/17 is available by the reference.

11The correlation of total amount of tax evasion under part 3 of Article 212 of the Criminal Code of Ukraine of UAH 4 140 713 046,53 to amount of penalties and charges under civil claims of UAH 11 495 573,76.

12The correlation of total amount of tax evasion under part 2 of Article 212 of the Criminal Code of Ukraine of UAH 5 581 988,00 to amount of penalties and charges under civil claims of UAH 85 000,00.

13The correlation of total amount of tax evasion under part 1 of Article 212 of the Criminal Code of Ukraine of UAH 8 701 386,52 to amount of penalties and charges under civil claims of UAH 1 733 074,99.

Kind regards,

© WTS Consulting LLC, 2017

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