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Does (not) the moratorium apply to audits aiming at confirmation of VAT refund?

21 April, 2020 Newsletters

The information as regards moratorium on tax audits has been published on the official tax sources, i.e. in the “Visnyk” – Official Edition of the State Tax Service of Ukraine1, as follows:

“In particular, from March 18 until May 31, 2020 the moratorium shall be applied to the documentary and actual tax audits of business entities, except for audits as regards VAT stated for budget refund. Tax audits of business entities being in progress from March 18, 2020 and not completed yet shall be temporary suspended for this time period”.

However, whether audits on budget refund are not indeed covered with the moratorium as declared by the State Tax Service of Ukraine?

Let’s refer to the provisions of the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Support of Taxpayers within Measures Aimed at Preventing the Occurrence and Spread of Coronavirus Disease (COVID-19)” No. 533-IX as of March 17, 2020, which actually has implemented the moratorium on documentary tax audits:

“52-2. To establish a moratorium on documentary and actual tax audits within the period March 18 – May 31, 2020, except for:

documentary unscheduled tax audits appointed under subpara. 78.1.1 of para. 78.1 of Article 78 of this Code…”.

It means, that the moratorium shall not be applied to the tax audits stipulated by subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code of Ukraine (the “Tax Code”).

Please note, that under subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code a documentary unscheduled tax audit shall be conducted under the following circumstances:

“78.1.8. if the taxpayer filed a tax return, which included VAT stated for budget refund providing there are grounds for conducting an audit defined in Section V of this Code, and/or VAT negative value exceeding UAH 100K.

Under the grounds defined in this subparagraph a documentary unscheduled tax audit shall be conducted only as regards the lawfulness of declaration of VAT stated for budget refund and/or VAT negative value exceeding UAH 100K”.

On the surface it seems that VAT stated for budget refund is considered to be auditable even within the moratorium. However, this first impression is not entirely correct.

Thus, as regards the budget refund, subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code stipulates that tax audits may be conducted providing there are grounds defined in Section V of the Tax Code.

It means, that under subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code the amounts stated for budget refund may be audited only if there are grounds defined in para. 200.11 of Article 200 of the Tax Code, which refer to the following two cases:

“200.11. … if the amount stated for budget refund was calculated based on negative value formed under the following transactions:

[1] performed within periods before June 01, 2015, which are not confirmed by the documentary audits;

[2] referred to goods/services purchased within the period before January 01, 2017 from the taxpayers that used special tax regime defined by Article 209 of this Code”.

Therefore, VAT refund for the periods after 2015 (after 2017 for entities that used special tax regime defined by Article 209 of the Tax Code) is not subject to be audited under subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code, as directly stipulated by provisions of para. 37 of Subsection 2 of Section XX “Transitional Provisions” of the Tax Code:

“37. To establish, that controlling authorities shall not conduct documentary unscheduled on-site audits on lawfulness of VAT amounts stated by the taxpayers for budget refund within the reporting periods following July 01, 2015, except for cases stipulated by para. 200.11 of Article 200 of this Code”.

Stated above position was recently confirmed by the Supreme Court. Thus, in the Resolution No. 460/2939/182 dated March 19, 2020, the Supreme Court, while recognizing the order on conducting tax audit as unlawful, stated the following:

“Under subpara. 78.1.1 of para. 78.1 of Article 78 of this Code the documentary unscheduled tax audit shall be conducted if the taxpayer filed a tax return, which included VAT stated for budget refund, subject to grounds for conducting an audit defined in Section V of this Code, and/or VAT negative value exceeding UAH 100K.

A literal interpretation of the provision of this subparagraph indicates two separate cases for conducting an unscheduled documentary tax audits: the first one is filing a tax return, which includes VAT stated for budget refund, and the second one is filing a tax return, which includes VAT negative value exceeding UAH 100K. Along with that, in the first case an unscheduled documentary tax audit shall be conducted providing there are grounds defined in Section V of the Tax Code….

Referring to the provisions of subpara. 78.1.1 of para. 78.1 of Article 78 and para. 200.11 of Article 200 of the Tax Code and collocations “VAT stated for budget refund”, “amount stated for budget refund” along with “VAT negative value” indicates, that the condition of exceeding UAH 100K as a ground for conducting an unscheduled documentary tax audit, which is stipulated by subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code, shall refer to VAT negative value in the meaning of tax accounting rate, that differs from the amount of budget refund. Along with that, the defendant substantiated the presence of sufficient grounds for conducting an unscheduled documentary tax audit of “Euroshpon-Smyga” PE solely by references to the fact that the company stated VAT in amount of UAH 3  496  114,00 for budget refund in tax return for September 2018”.

Consequently, the Supreme Court confirmed that the amounts stated for budget refund are not subject to be auditable in the absence of grounds defined in para. 200.11 of Article 200 of the Tax Code and within an unscheduled documentary tax audit appointed under subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code.

Therefore, in situation under consideration the moratorium is also applied to the tax audits of amounts stated for budget refund, since they are not covered by provisions of subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code, which is confirmed by the Supreme Court.

Hence, if the company does not have VAT negative value exceeding UAH 100K (as a specific rate in line 21 of a tax return), there are no grounds for providing an access for officials of tax authorities intending to conduct a tax audit under subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code. Moreover, a taxpayer is entitled to challenge to the court the order on conducting such a tax audit.

Attempts of tax authorities aimed at expanding the subject matter of tax audits stipulated by subpara. 78.1.1 of para. 78.1 of Article 78 of the Tax Code are based not on legal provisions, but on current problems with automatic reimbursement of amounts stated for budget refund, “freezing” and failure to perform VAT refund, which are evidenced by lively discussions in the business community and at the level of business associations (among others, in the American Chamber of Commerce).

Hence, with regard to the current situation and expected level of the state budget incoming receivables, tax authorities are attending companies for the purpose of tax audits with the intention of “cutting” the budget reimbursement. Therefore, from an economic point of view, a quite justified approach is to deny access to the tax authorities intending to conduct a tax audit followed by challenging to the court an order on conducting such a tax audit.

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:

1Available by the link.

2In the Unified State Register of Court Decisions by the link.

Kind regards,

© WTS Consulting LLC, 2020

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