Legalization of [unlawful] tax audits within criminal proceedings?

29 May, 2017 Newsletters

I.

As known, specialists of KM Partners acted as the pioneers in the covering the issue of the illegality of the delivery by the investigating judges of the court rulings on appointment of the tax audit within criminal proceeding, having posted the first analytical material on this topic on 16.10.2016 “Tax audits within criminal proceedings: unlawfulness, inadmissibility, consequences”.

By that time, appointment of such audits was such a prevalent court practice that even in the advocatory community there were attorneys and even entire well-known law firms, which expressed their views on the full lawfulness of such audits.

And after that the “story of confrontation” really began. Several deputies joined the struggle for the rights of the taxpayers, numerous letters were sent with reference to the courts and judges on this matter, there were attempts to prevent the delivery of the court rulings on appointment and to cancel already delivered rulings on appointment of such audits.

One of the most significant achievements in this struggle was successful defense, upon participation of KM Partners specialists, of the interests of Zhurzhii A.V. and cancellation by the Court Ruling of the Kyiv Court of Appeal as of April 11, 2017 of the Court ruling of the Pechersk District Court of the city of Kyiv as of February 2, 2017 in the case No. 757/11320/17k on appointment of the tax audit within the criminal proceeding (more in the analytical material “History of the Victory. The Court of Appeal cancelled the Court ruling on appointment of the tax audit under subpara 78.1.11 of the Tax Code of Ukraine (case of A. Zhurzhii)”.

And the change of the court practice on this issue really began.

Thus, if before 2017 one could practically only dream of denial of petition of the investigator on appointment of the tax audit, now the practice is changing rapidly and significantly. According to the Unified State Register of Court Decisions (hereinafter – “the USRCD”), 46 court rulings on denial of petition of the investigator were delivered in April 2017, which is 27% of the number of all references of investigators to the courts with petitions on appointment of audits.

II.

But while we are changing the practice, bringing it in line with the law and in particular with the Constitution of Ukraine, somebody has decided to change the law.

The Draft Law No. 6482 as of 22.05.2017 “On amendments to Criminal Procedure Code of Ukraine and other laws of Ukraine (regarding the appointment of unscheduled inspections, audits)” (hereinafter – “the Draft Law”) was registered on 22.05.2017 in the Verkhovna Rada of Ukraine, mindfully prepared by the “creative team” of the following national deputies: Gerashchenko A.V., Chornovil T. M., Gavrilyuk M.V.

It is easy to guess from the title of the Draft law, that it is aimed at “squeezing” into the Criminal Procedural Code of Ukraine (hereinafter – “the CPC of Ukraine”) of the right of investigating judges to deliver resolutions on appointment of tax audits within criminal proceedings after all.

ІІІ.

As the matter of curiosity, that in the Explanatory Note to the Draft Law, clear dudgeon by that fact of the cancellation by the above-mentioned ruling of the Kyiv Court of Appeal of the Court ruling on appointment of tax audit within the criminal proceeding is expressed, based on those circumstances that Article 309 of the CPC of Ukraine does not provide the right to appeal such kind of resolutions.

However, why the initiators do not take the same approach and regarding the delivery of rulings on appointment of tax audits upon the absence of investigating judges’ authorities provided by the CPC of Ukraine? That is, the negligence by the investigating judges of the requirements of part 2 of Article 19 of the Constitution of Ukraine somehow does not cause any surprise.

As for the court of appeal, it acted solely and in accordance with the provisions of para. 8 of part 2 of Article 129 of the Constitution of Ukraine (in the new version), in which (at the level of the Constitution!) the principle of mandatory

ensuring of the right to appeal

is stipulated.

IV.

The authors of the Draft law should be thanked, that with such step they probably unintentionally substantially strengthened the legal position regarding the ensuring of the amendments in the current practice on this issue.

The initiators confirmed one more time by this Draft law, that the current version of the CPC of Ukraine foresee neither the right of investigators/prosecutors to apply to the court with the petitions on appointment of tax audits, nor the right and procedure of delivering by investigating judges of the court rulings on appointment of tax audits within criminal proceedings.

The logic is simple here: since the Draft law is intended to secure such rights and procedures in the CPC of Ukraine, then, accordingly, there are currently no such rights and procedures in the current CPC of Ukraine.
The above-mentioned is confirmed also by para. 2 of the Explanatory Note to the Draft Law, which states (quote):

The object-matter of the Draft law is determination of the procedure of the appointment of the unscheduled audits, inspections within the criminal proceedings”.

Thus, the initiators once again recognized that all tax audits, appointed within the recent years by the court rulings of investigating judges within criminal proceedings were delivered upon lack of authority and procedure (method) in the current legislation on criminal procedural legislation. In other words, upon violation by investigating judges upon delivery of such court rulings in part 2 of Article 19 of the Constitution of Ukraine, which establishes that public authorities (including courts as bodies of the judicial branch of the state power) are required to act only on the basis, within the limits of authority and in the manner provided by the Constitution and laws of Ukraine.

Accordingly, the Draft Law itself, which we hope will remain only as a draft, can be safely used (1) to appeal the court rulings of investigating judges on appointment of tax audit (2) and as an additional argument in recognizing the evidence, obtained during the tax audit on the basis of the court ruling of the investigating judge as inadmissible.

Therefore, as they say, “every cloud has a silver lining”.

V.

At the same time, the Draft Law, in our opinion, corresponds neither with the principles of the Constitution of Ukraine nor with the principles of the CPC of Ukraine, as well as it is aimed at creating opportunities for the putting pressure on business.

1.

In particular, according to the Draft law, Article 131 of the CPC of Ukraine is proposed to be supplemented with para. 10) of part 2, which stipulates “the appointment of an unscheduled field audit, unscheduled inspection” among the measures of securing the criminal proceeding.

However, such provision of authorities to the courts on appointment, in particular, tax audits, does not conform to the current legislation and the Constitution of Ukraine, which is the main legislative act and all the other laws must comply with its provisions.

Thus, according to Article 6 of the Constitution of Ukraine:

“State power in Ukraine is exercised based on the principles of its division into legislative, executive and judicial.

The bodies of legislative, executive and judicial power exercise their authorities within the limits established by this Constitution and in accordance with the laws of Ukraine”.

On this occasion, in subpara. 4 of para. 3 of the Decision as of May 7, 2002 No. 8-рп/2002 the Constitutional Court of Ukraine noted that:

“state power is exercised based on the principles of its division into legislative, executive and judicial, which counterbalance each other by the system of checks and balances”.

At the same time in subpara. 1, 2 of para. 1.2 of the Decision as of August 8, 2016 No. 5-рп/2016 the Constitutional Court of Ukraine noted that:

The purpose of the functional division of the state power into legislative, executive and judicial, is, in particular, the division of authorities between different state bodies, which means the individual performance by each of them of their functions and performance of authorities in accordance with the Constitution and laws of Ukraine”.

That is, in accordance with provisions of the Constitution of Ukraine, authorities of state bodies are clearly demarcated; they can not intersect, and moreover, duplicate each other. Such an approach is intended to balance each branch of government through the system of checks and balances.

In its turn, according to Article 20, para. 41.1 of Article 41 of the Tax Code of Ukraine (hereinafter – the “TC of Ukraine”), the appointment and conducting of tax audits shall be attributed to the exclusive rights of the controlling authorities, which are: the central executive body implementing the state tax, state customs policy and its territorial subdivisions.

In accordance with para. 1 of the Regulation on the State Fiscal Service of Ukraine, approved by the Resolution of the Cabinet of Ministers of Ukraine as of May 21, 2014 No. 236, such a central executive body is the State Fiscal Service of Ukraine.

That is, the right to appoint and conduct tax audits is assigned by the legislator to the exclusive powers of the executive body (!).

However, the investigating judge being a part of the court of first instance is in accordance with the provisions of the Law of Ukraine “On the judicial system and the status of judges” a representative of the judicial branch of power.

That is, granting with the Draft law to the investigating judge the right to appoint tax audit – permits duplication of authorities of the investigating judge as executive body and authorities of the body of the judicial branch.

Therefore, the provisions of the Draft Law and the entire Draft Law should be considered unconstitutional.

1.1.

For the sake of completeness, we would like to note that the argument about unconstitutionality of the appointment of tax audits by the courts as a duplication of authorities of executive body can be used even now upon appealing such court rulings all the way up to the constitutional complaint (institution of which was also introduced last year within the constitutional reform).

2.

The appointment of tax audit within criminal proceedings is attributed to the measures of securing the criminal proceedings.

In particular, according to part1 of Article 131 of the CPC of Ukraine:

“measures of securing the criminal proceedings are applied in order to achieve the effectiveness of this proceeding”.

As follows from the Case law analysis regarding the consideration by an investigating judge of petitions regarding application of measures of securing the criminal proceedings as of February 7, 2014 adopted at the Plenum of the Higher Specialized Court of Ukraine for Civil and Criminal cases:

Under the measures of securing the criminal proceedings, one should understand the enforcement measures, stipulated in the CPC of Ukraine, which are applied upon presence of grounds and in accordance with the procedure established by the law in order to prevent and overcome the negative circumstances that obstruct or may obstruct execution of tasks of the criminal proceeding and ensuring its effectiveness”.

And this clearly demonstrated by the types of measures to secure the criminal proceedings, defined in part 2 of Article 131 of the CPC of Ukraine, which includes:

1) summons by investigator, public prosecutor, judicial summons and writ of attachment;
2) imposition of the fine;
3) temporary restriction on taking the advantage of a special right;
4) suspension from position;
41) temporary removal of the judge from the administering of justice;
5) temporary access to objects and documents;
6) temporary seizure of property;
7) seizure of property;
8) detention of a person;
9) preventive measures.

That is, the purpose of such measures is to prevent interference with the investigation, to prevent the avoidance of criminal responsibility by restricting of freedom of movement, inviolability of housing, secrecy of correspondence, telephone conversations, deprivation of the right to use or dispose of certain property, etc. (when a person is in hiding, does not provide documents, does not appear upon the summons of the investigator, etc.).

Accordingly, the temporary access provides the receipt of documents, the writ on attachment – conducting interrogations by the investigator, seizure of property – avoiding its sale, etc.

In this case, could the tax audit be related to securing measures? What can it provide with?

In addition, all such measures are conducted precisely by the pre-trial investigation bodies, which are a party of criminal proceeding, the prosecution party. And this is logical, since the CPC of Ukraine regulates the procedural relations formed during the investigation of criminal proceeding, and they concern only the participants of such criminal proceeding.

In its turn, the tax authorities, on which according to the Draft Law will be the full burden of executing of court ruling of the investigating judge, that is, conducting tax audits – are not a party of the criminal proceeding according to the CPC of Ukraine, and they do not obey its procedural principles, especially in the matter of conducting the tax audit.

The foregoing clearly demonstrates that the initiators of the Draft Law are simply trying to artificially write “anywhere” into the CPC of Ukraine the right to appoint tax audits within the criminal proceedings without getting to the principles and sole bottom of the criminal procedure.

However, no matter how one would “twist” it (tax audit) – tax audit is not and cannot be a measure of securing the criminal proceeding.

3.

For contrast, one can compare with an expert study that has a separate status.

It is also being appointed by the decision of the investigator or by the court ruling of the investigating judge, however, is not performed by the prosecution party.

In this regard, we would like to note that, according to the CPC of Ukraine, an expert is “another” party of the criminal proceeding in respect of which clear rights, duties and what is the most important – responsibilities are established. An expert can be called at the inquest during a court session. According to Article 101 of the CPC of Ukraine the clear requirements are set to the conclusion of the expert.
At the same time, the CPC of Ukraine does not contain any of the following provisions regarding the tax authority, the rights and duties of which, as well as its status, are not defined for the purposes of the criminal procedural law.

Also, the question about the direction of such actions arises. Thus, the experts issue a conclusion on the basis of special knowledge based on the results of examination of criminal proceeding’s evidence. While conducting the tax audit within the criminal proceeding under the Draft Law is designed to “create” new evidence, which the investigation is “lacking”?

At the same time, surely there is an attempt to substitute the conclusions of experts with appointment of tax audit, since the illegal act of the tax audit slips off the tax authority like water off a duck’s back.

4.

The Draft Law proposes to supplement the CPC of Ukraine with the Chapter 18-1 The appointment of an unscheduled inspection, unscheduled audit and with relevant articles 2131 – 2135, which define the procedure for applying by the investigation with petitions, the procedure for consideration, and delivering ruling on appointment of the tax audit by an investigating judge.

The specified norms of the Draft Law:

  • Do not provide the rights of other participants, other than investigator, to apply to the court with a petition on appointment of the tax audit.

While, for example, petition for provision of temporary access may be filed by parties of the criminal proceeding (part 1 of Article 160 of the CPC of Ukraine).

  • Establish “blurred” requirements for the petition of the investigator.
  • States that consideration of petition is performed exclusively “upon participation of investigator, prosecutor”, that is, the person whose tax audit is to be appointed, has no right to provide objections and explanations.
  • Obligatory information of the resolution of the investigating judge on appointment of tax audit is also blurred in the Draft Law, in particular (quote):

“3. As a result of consideration of the petition, the investigating judge delivers the court ruling, in which should be stated:

1) the reasons for satisfaction or refusal in satisfaction of petition for appointment of the unscheduled field audit, unscheduled inspection;

2) grounds for conducting the audit, dates of its beginning and ending, as well as other information, determined by the legislation;

3) the procedure of execution of the ruling”.

However, which legislation other than the CPC of Ukraine can determine the information that has to be contained in the court ruling of the investigating judge. And the procedure for execution a court ruling should be determined not by investigating judge in the court ruling, but in the law, as prescribed in the CPC of Ukraine, for example, in respect of execution of court rulings on granting the temporary access to objects and documents. By the way, the period of validity of the ruling on temporary access according to the CPC of Ukraine (Article 164) can not exceed one month starting from the date of the delivery of the court ruling. And as regards the audit, it turns out that it is possible at any time, however the court decides, even for a hundred years?

That is, the initiators seem to say “write what you want, just appoint the tax audit”.

  • The draft law does not provide the right to appeal the court ruling of the investigating judge on appointment of tax audit in spite of para. 8 of part 2 of Article 129 of the Constitution of Ukraine, which states that:

The basic principles of judicial proceedings are: …

8) ensuring the right to appeal and in cases determined by the law – right to cassation appeal of the court decision;”.

Thus, all these provisions violate the basic principles of criminal proceeding, namely: the rule of law, equality before the law and court, the competitiveness of parties, provision of the right to appeal procedural decisions, actions and inaction, etc. – and do not have the right to life.

We hope that all the above-mentioned will be as obvious to the Committee on Legislative Provision of Law Enforcement Activity, which is considering this Draft Law, as well as for national deputies, and this Draft Law will remain only as a project.

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.

Kind regards,

© WTS Consulting LLC, 2017

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