Іnterrogation protocol of the contractor’s director ≠ Proof of the “unreality” of transactions

22 May, 2017 Newsletters

Year by year tax authorities invent new “schemes” of proving unreality of enterprise’s economic transactions, such as contractor’s absence at the place of registration, lack of human resources, absence of primary documents or mistakes in them etc. And courts actually should determine sufficiency and reasonability of such arguments.

And in every season, as the saying is, the vogue of arguments changes: some of them “drop away”, new items appear, and “long forgotten” become recalled.

Taxpayers know that that if their contractor was found guilty of fictitious entrepreneurship under Art. 205 of the Criminal Code of Ukraine (hereinafter – “CC of Ukraine”), it shall be considered as the “death verdict” for such taxpayer in tax dispute, at least, taking into account SCU’s practice. However, the verdict under Art. 205 of the CC of Ukraine cannot implicate fictitiousness of all the transactions made by such subject (it is a matter for separate analysis), there may be grounds for discussion.

The year 2016 can safely be called as the year of “interrogation protocols”, since the Supreme Court of Ukraine (hereinafter – “SCU”) has issued at least 3 decisions1 based on this method of proof.

There are the cases where it was sufficient for tax authority to bring a copy of the interrogation protocol of the contractor’s director, drawn up within the framework of the pre-trial investigation of criminal proceeding initiated under Art. 205, in which the director noted that he was not involved in the business of the Enterprise – and this piece of evidence became determinant in the tax dispute.

In particular, in the Resolution of SCU as of October 04, 2016 in case No. 810/7161/14 the court considered sufficient the fact that:

“USTI during the trial provided the court with the copy of witness interrogation protocol of Person 6, who also testified that he agreed for an honorary to become a founder and manager of “Karragen”, LLC, without intention to perform entrepreneurial activities and he was not involved in commercial activity of this entity and signing financial documents”.

In the Resolution of the Supreme Court as of November 22, 2016 in the case No. 826/11397/14 the interrogation protocol also became crucial:

“…the criminal proceeding No. 3201400000000052 was instituted. During the pre-trial investigation Person_1 – director of “Mikas Plus”, LLC informed that she did not sign any primary documents, did not know the contractors, did not prepare, sign, and submit tax and financial statements of the mentioned company

The panel of judges of the Court Chamber in administrative cases of the Supreme Court of Ukraine does not agree with this conclusion on the grounds that the status of a fictitious, illegal enterprise is incompatible with legal business activity. Commercial operations of such enterprises cannot be legalized even after formal confirmation by accounting documents”.

In other words, the SCU in its decisions, the conclusions of which are mandatory according to Art. 244-2 of the Code of Administrative Procedures of Ukraine (hereinafter – “the CAP of Ukraine”), actually determined that the interrogation protocol as an evidence has a sort of “the highest force”, regardless of how much and which other evidence is available in the case file.

However, does this contradict at least section 2 of Art. 86 of the CAP of Ukraine, which stipulates that

“There is no evidence of foreseeable force for a court”?

At the same time, the SCU did not analyze in rendered decisions whether the interrogation protocol was valid and admissible evidence, whether it should be analyzed in conjunction with other evidence, and did not provide arguments as to why the interrogation protocol was “the strongest evidence” in the opinion of the court.

Well, in this case, we consider it vitally necessary to understand the legal status of the protocol of interrogation of pre-trial investigation within the criminal proceeding as evidence in administrative proceeding.

1.

Well, let’s divide the goats from sheep. Therefore, first of all, we should find out what status has the protocol of interrogation, and whether it is an indisputable proof in criminal proceedings according to provisions of the Criminal Procedure Code of Ukraine (hereinafter – “the CPC of Ukraine”).

In accordance with section 1 of Art. 84 of the CPC of Ukraine:

In criminal proceedings, evidence is factual knowledge, which has been obtained in a procedure prescribed in the present Code on grounds of which investigator, public prosecutor, investigating judge and court establish the presence or absence of facts and circumstances which are important for the criminal proceedings and are subject to be proved”.

In accordance with clause 1 of sec. 1 of Art. 103 of the CPC of Ukraine, the protocol is a form of fixation of procedural action during criminal proceedings. Accordingly, the interrogation protocol is a document that fixes the fact of conducting a procedural action – interrogation.

The protocol of the interrogation fixes the testimony – oral or written reports given in the course of interrogation by the suspect, accused, witness, victim, and expert on circumstances they know and which are of importance for the criminal proceedings concerned (Sec. 1 of Art. 95 of the CPC of Ukraine).

That particular testimony relates to the source of evidence according to sec. 2 of Art. 84 CPC of Ukraine:

Procedural sources of evidence are testimonies, objects, documents, expert findings”.

Thus, the testimony is the source of evidence, and the protocol is the form of their fixation.

It’s interesting that according to clause 3 of sec. 1 of Art. 99 of the CPC of Ukraine, documents

Drawn up in accordance with the procedure established by the present Code, protocols of procedural actions and annexes thereto, as well as data media on which procedural actions have been fixed by technical means…”

are also referred to as the source of evidence.

In fact, both the testimony and the interrogation protocol are the source of the same information, although actually the interrogation protocol is still a derivative of testimony.

However, the fact of the existence of certain testimony committed in the interrogation protocol itself does not automatically make such testimony and such interrogation protocol the evidence in criminal proceedings. To do this, they must meet the adequacy and admissibility criteria.

Thus, according to sec. 1 of Art. 85 of the CPC of Ukraine, evidence is adequate if it directly or indirectly confirms the presence or absence of circumstances to be proved in criminal proceedings and other circumstances which are important for the criminal proceedings, as well as credibility or non-credibility, possibility or impossibility of using other evidence.

In turn, Art. 86 of the CPC of Ukraine stipulates that:

“1. Evidence is found admissible if obtained through a procedure prescribed in the present Code.

2. Inadmissible evidence may not be used and referred to by the court adopting a court judgment“.

Thus, before certain testimony, documents, evidence of things are taken into account, they must pass an adequacy and admissibility check. And if the check is “not passed” – they cannot be considered as evidence and used during pre-trial investigation and/or in court.

For example, there shall not be evidence in:

  • testimony received from a person who cannot be interrogated as a witness: attorneys, notaries, clerics, etc. (Art. 65 of the CPC of Ukraine);
  • testimony given on facts that a person did not perceive personally (sec. 5 of Art. 95 of the CPC of Ukraine);
  • testimony obtained without the use of an interpreter (Art. 68 of the CPC of Ukraine);
  • testimony received in violation of the order of conducting the interrogation: without rights explanation; interrogation was conducted without the participation of an attorney, interrogation lasted more than 8 hours in a row, etc. (Art. 224 of the CPC of Ukraine).

Consequently, testimony received in violation of the CPC regulations and, accordingly, the interrogation protocol to which they were executed shall not be considered admissible evidence in criminal proceedings and shall not be used either by the investigation or by the court.

Moreover, taking into account the peculiarities of criminal prosecution as regards testimonies and, accordingly, protocols in which such testimony is committed, special conditions are established for their inadmissibility, in particular:

  • inadmissible shall be evidence obtained
from the testimony of witness who was further considered suspect or accused in this criminal proceedings”

(para. 1 of sec. 3 of Art. 87 of the CPC of Ukraine);

  • inadmissible shall be evidence obtained from
testimony or explanations from a person who has not been advised of his right to refuse to testify or answer questions, or where these were obtained in violation of this right”

(para. 4 of sec. 1 of Art. 87 of the CPC of Ukraine);

  • inadmissible shall be evidence obtained through significant violation of human rights and fundamental freedoms guaranteed by the Constitution of Ukraine and international treaties the Verkhovna Rada of Ukraine has given its consent to be bound by, as well as any other evidence resulting from the information obtained through significant violation of human rights and fundamental freedoms (sec. 1 of Art. 87 of the CPC of Ukraine).

    According to para. 2 of sec. 2 of Art. 87 of the CPC of Ukraine:

“2. The court shall be required to find significant violations of human rights and fundamental freedoms, in particular the following acts:

2) obtaining evidence subjecting a person to torture and inhuman or degrading treatment or threats to apply such treatment”.

These provisions, enshrined in the CPC of Ukraine, are not accidental and consistent with Art. 3 of the 1950 Convention for the Protection of Human Rights and Fundamental Freedoms, which establishes the right to prohibit torture:

no one shall be subjected to torture or to inhuman or degrading treatment or punishment“.

Unfortunately, the history knows many cases of obtaining evidence, and especially confessions in “all possible and impossible crimes” through the application of at least threats. At the same time, the ECHR case-law in cases against Ukraine on these matters is, unfortunately, disappointing.

In connection with such features that may occur during the pre-trial investigation, and especially during interrogations and obtaining testimony, there is one of general principles of criminal proceedings stipulated by clause 16 of sec. 1 of Art. 7 of the CPC of Ukraine –

“directness of examination of testimonies, objects and documents”.

Art. 23 of the CPC of Ukraine gives an explanation of such a principle:

“1. The court shall examine evidence directly. The court takes testimonies of the participants in criminal proceedings orally.

2. Except as otherwise provided in this Code, information contained in testimonies, objects and documents that have not been directly examined by court may not be admitted as evidence…“.

Therefore, all the testimony and interrogation protocols, if their details are not confirmed by a person in a court hearing within criminal proceedings and are not directly perceived by the court, are not evidence in criminal proceedings and cannot be the basis for a verdict (guilty/ acquittal).

Moreover, Art. 95 of the CPC of Ukraine is more specific about testimony:

The court may base its findings only on testimonies taken directly during court hearing or those obtained under the rules of Article 225 of this Code. The court may not base court decision on testimonies given to investigator, public prosecutor, or refer to such“.

Thus, at the stage of pre-trial investigation, interrogation protocols, in which the testimony is fixed, have in fact an uncertain status. Are they procedural documents? – most likely. Are they evidence? – in fact, it will be determined only during the trial.

2.

In such a case, can the interrogation protocol drawn up in the pre-trial investigation actually be evidence of administrative proceedings?

In accordance with sec. 1 of Art. 69 of the CAP of Ukraine:

The evidence in administrative proceedings shall be any evidence on which the court determines the presence or absence of circumstances that justify the claims and objections of persons involved in the case and other circumstances relevant for the proper resolution of the case. These data are set by the court based on explanations of the parties, third parties and their representatives, testimony, written and physical evidence, conclusions of experts“.

Then what kind of evidence can be the interrogation protocol referred?

In particular, the testimony protocoled in such a protocol is important to the court; however, they cannot be referred to as the testimony in the administrative proceedings, since such testimony should be obtained by the court directly. At the same time, according to Art. 77 of the CAP of Ukraine:

“1. The testimony is a witness’s report on circumstances known to him that are relevant to the case.

2. There is no evidence of a testimony from a witness who cannot explain the source of his knowledge of a particular circumstance”.

Thus, the information of the interrogation protocol cannot be considered as the testimony in administrative proceedings.

As for the interrogation protocol as a written evidence, according to sec. 1 of Art. 79 CAS Ukraine stipulates that:

Written evidences are documents (including electronic documents), acts, letters, telegrams, any other written protocols containing information on the circumstances relevant to the case“.

The protocol is indeed a document, however, procedural, and in fact it only confirms the fact of interrogation of a person in a certain date, at a certain time and at a certain place. In turn, the substantive information contained in the protocol is a person’s testimony.

However, the testimony of a person should be perceived directly by a court during the hearing of an administrative case.
Therefore, the interrogation protocol can not be unambiguously attributed to the written evidence in administrative case. In this case, even in the case of attribution to evidence, it must again pass the “test” criteria of relevance and admissibility.

So, according to Art. 70 of the CAP of Ukraine:

“1. Relevant is the evidence, which contains information on the subject of proof. Court does not take into consideration the evidence which is not relevant to the subject of proof.

3. Evidence obtained in violation of the law is not taken into account by the court while deciding the case“.

In turn, the CPC of Ukraine is the law that defines the procedure for obtaining testimony within pre-trial investigation and the procedure for their fixing in the interrogation protocol.

In this case, if the testimony is received and, accordingly, the interrogation protocol is drawn up in violation of the CPC regulations, such interrogation protocol will be a document received in violation of the law and can not be considered as admissible evidence in administrative proceedings.

However, only the court within the trial and direct examination of testimony in accordance with Arts. 23, 95 of the CPC of Ukraine will establish whether the testimony was received and the protocol drawn up in violation of the CPC regulations of Ukraine (details in Section 1 of this article).

Accordingly, prior to bring the verdict within criminal proceedings, the pre-trial investigation interrogation protocol can not be regarded as relevant evidence in an administrative proceeding.

Such conclusions are quite logical, since, for example, if a person testified as a result of torture/ degrading treatment / threats during interrogation, the use of protocols for such interrogations in an administrative case is inadmissible. Moreover, the situation will arise when in the criminal proceedings in the court an interrogation protocol will be recognized as inadmissible evidence, and the testimony given is false, and an acquittal has been issued – in the administrative case, such a report will appear as a single proof and an illegal decision will be delivered not in favor of the taxpayer.

And, unfortunately, this is not a fiction situation. Thus, in one of the criminal proceedings, the director signed an agreement on the recognition of guilt under Art. 205 of the Criminal Code of Ukraine and the counterparty (the real enterprise) paid the tax surcharge, and in the administrative court the director swore admitted that he had signed an agreement under pressure because of threats “otherwise it would be worse” (circumstances of the case No. 826/19639/14).

Thus, before the verdict is passed – the interrogation protocol is not a proof.

The specified conclusion corresponds to the requirements of Art. 62 of the Constitution of Ukraine according to which

An individual shall be considered innocent of the commission of a criminal offence and may not be imposed a criminal penalty unless his guilt is proved in accordance with the legal procedure and is established by the guilty verdict of the court.

No one shall be required to prove their innocence of having committed a criminal offence.

Charges shall not be based on evidence obtained illegally, as well as on presumptions. Any doubt of person’s guilt proof shall be interpreted in favor of such a person”.

However, the SCU has at the moment ignored all the principles of the CAP of Ukraine, the CPC of Ukraine and even the Constitution of Ukraine, since it considers the presence of the interrogation protocol as an unconditional fact of guilt of a person in committing a crime without a guilty verdict. And, accordingly, it applies all the consequences of this “guilt”, spreading it to the contractors of the enterprise.

It should be noted that we do not consider the existence of a verdict under Art. 205 of the Criminal Code of Ukraine as the unconditional proof of the “unreality” of business operations, because if the transaction took place, and from the side of the counterparty’s signature, for example, was forged, the real taxpayer should not be held liable for his counterparty. As an example, seals were purchased for fictitious entrepreneurship, but would the operation of purchase the seal be unreal?

Separately we would also like to draw attention to the fact that by making a decision referring to the protocol of interrogation, the SCU, and all courts that apply its position, also ignore the requirements of sec. 4 of Art. 79 of the CAP of Ukraine, which stipulates the obligation to examine the originals of written evidence.

In particular, as a consequence of the decisions, the tax authorities did not and could not provide the original of the interrogation protocol in any case. The courts themselves refer to copies of such protocols, and sometimes even to information on the supposed existence of such protocols.

Conclusions

All the foregoing is a confirmation of inconsistency, superficiality and, ultimately, the illegality of the position of the Supreme Court in tax disputes, in which the interrogation protocol of the counterparty within criminal proceedings was used as the evidence.

We hope that the new compound of the Supreme Court, which is currently being formed in connection with the judicial reform, will review the above-mentioned approaches of the SCU, will draw its conclusions based on the spirit and letter of the law and will change the negative judicial practice.

As long as the Supreme Court is formed, the practice needs to be changed from bottom, so if your tax case has a counterparty interrogation protocol, it should not stop you, and, with the above arguments, such a protocol must be tried to recognize as inadmissible evidence.

As for the mandatory decisions of the SCU, then clause 2 of sec. 2 of Art. 161 of the CAP of Ukraine, which affirms that

the court has the right to depart from the legal position set forth in the conclusions of the Supreme Court of Ukraine, while simultaneously bringing appropriate motives

– is not canceled, and an independent, fair court can make a legal and founded decision based on the results of the assessment of the evidence in the case, in its “internal conviction”, based on direct, comprehensive, complete and objective examination.

Thus, the interrogation protocol of the counterparty director is not a “death verdict” in an administrative case.

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:

1Resolution of the Supreme Court of Ukraine as of April 26, 2016 in the case No. 2а-4201/11/2670; Resolution of the Supreme Court of Ukraine as of October 04, 2016 in the case No. 810/7161/14; Resolution of the Supreme Court as of November 22, 2016 in the case No. 826/11397/14.

Kind regards,

© WTS Consulting LLC, 2017

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