The steps to decrease the number of criminal proceedings upon the results of tax audits

22 August, 2016 Newsletters

The State Fiscal Service of Ukraine by its Order No. 633 as of July 18, 2016 amended subpara. 2.5.1. of the Guidelines on the procedure of interaction between units of the State Fiscal Service of Ukraine when organizing, conducting of audits as well as implementation of materials of tax audits of the taxpayers, approved by the Order of the SFSU as of July 31, 2014 No.22.

The new version of this provision is amended as follows: “2.5.1. If under the results of the audit the reimbursed VAT amount was reduced or any violations of tax, currency and other legislation were identified under which the amount of damages to the state or attempt to cause damage is sufficient for bringing to criminal liability, the unit that carried out the audit, shall notify the investigating unit of financial investigations and transfers materials of audit for a decision to be made in accordance with the provisions of the Code for Criminal Proceedings of Ukraine (except cases provided by para. 36  of Subsection 10 of Section XX of the Code) within 20 working days following the day of reconciliation of tax notification-decisions, delivered upon the audit, on determination of the liability (reduction of budget reimbursement), requirements and decisions regarding the single contribution.”

It is expected that with changes of July 18, 2016 materials of audits will not be transferred to investigative units of financial investigations up till reconciliation of monetary obligations upon the results of such audit and expiry of the term for the payment of such settled obligation. That is, if additional charges are appealed in court, the time of the initiation of criminal proceedings is postponed at least until a court decision comes into force (i.e. after reconsideration of the case in the court of appeal), which will confirm the legality of the accrued liabilities, and after the period provided by the Tax Code (10 days after approval) for the payment of the agreed obligation is passed.

We hope that such amendments will significantly reduce the number of criminal proceedings upon the results of ordinary tax audits, when a dispute arises at a large amount. The abovementioned step is more than welcomed.

Let us remind that the issue of transformation of tax disputes into criminal cases has a long history.

Previous guidelines No. 948 of October 31, 20121 envisaged transfer of tax audits’ materials with pecuniary amounts of additional accruals to the tax police within 10 days after adoption of respective tax notification-decision. Under such conditions, almost all tax audits on pecuniary amounts turned into criminal proceedings (for details in our newsletter follow the reference).

After repeated appeals on this issue, in 2014 with the adoption of currently effective Guidelines No. 22 on this issue, some positive developments have been achieved: the time of transfer of materials to investigation units was shifted to the end of procedure of administrative appeal. That is, at the time the movement toward the criminal proceedings was carried out regardless of further challenging to the court and unreconciled nature of tax liability (for details in our newsletter follow the reference).

Understanding of existence of respective problem of pressure put upon business due to excessive amounts of such proceedings that were opened even upon unreconciled tax liability identified the necessity for further changes in this direction. The above current changes were made at request of the Ministry of Finance of Ukraine as of 12 July 2016.

We hope that the Guidelines in this amended part would be abided in practice. In this respect, a lot depends on the actual attitude of executive bodies, since such Guidelines are not a normative document (so is not formally binding from the legal point of view).

In the past the cases of transfer of materials of audits earlier than it is envisaged by the Guidelines in force at that time, referring that respective guidelines are not a law, were known. So we do not exclude that in spite of the changes, materials of audits in some cases may be transferred to the Tax Police authorities earlier than it is envisaged in the Guidelines.

Therefore, to guarantee the solution of the problem with the transformation of tax audits into criminal proceedings, respective provisions shall be introduced into the law. Therefore, amending the Guidelines we consider, rather, as an intermediate step on this way.

Solution of the problem at the legislative level is expected in the draft law No. 3448 (for more details follow the reference), which, is expected to make changes to Article 212 of the Criminal Code of Ukraine: the fact of tax evasion (that is the ground for opening the criminal proceedings) can take place only if settled financial obligations have not been paid.

The abovementioned issues were discussed within the work on this draft law during the meetings of the Verkhovna Rada of Ukraine Committee for tax and customs policy, with the Business Ombudsman and the representatives of the Ministry of Finance of Ukraine. In fact, in general terms, such draft law was supported by the Ministry of Finance of Ukraine.

Given the fact that the draft law was not on the agenda of the last session of the Verkhovna Rada of Ukraine, representatives of the Verkhovna Rada of Ukraine Committee for tax and customs policy have made an attempt to at least get an interim working solution of the issues at the level of executive power, that is the issues on opening criminal proceedings upon almost every act of audit at more or less pecuniary amount. Ministry of Finance has supported these efforts and made the appropriate step, which materialized in the above mentioned changes. Now we hope that after start of the regular session of the Verkhovna Rada of Ukraine, work on this issue on the legislative level will be continued.

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.

Notes:

1Guidelines on the procedure of interaction between units of STS of Ukraine when organizing, conducting of audits as well as implementation of materials of tax audits of the taxpayers, approved by the Order of the STS No. 948 of 31.10.2012 p.

Kind regards,

© WTS Consulting LLC, 2016

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