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Transformation of tax disputes on material amounts into criminal proceedings is a painful problem for taxpayers (updated)

09 July, 2014 Newsletters

Despite the significant personnel and ideological changes occurred on the top of the executive authority of Ukraine in general and tax authorities in particular, the initiation of criminal proceedings in accordance with Article 212 of the Criminal Code of Ukraine “Tax evasion” is still a painful problem for Ukrainian business environment.

In spite of numerous statements and promises of the new government regarding reducing of pressure on taxpayers from the side of prosecutors-investigating machine, in practice we can see that old criminal proceedings in accordance with Article 212 of the Criminal Code of Ukraine are still under investigation, while new proceedings are initiated.

A. In particular, Internet-editions confirm the abovementioned statement, indicating hereby that the methods of pressure on business have become more “sophisticated” compared to the methods of the previous government.

For example, in edition “Ekonomichna pravda” in the article “Leaders of the Ministry of Revenues and Duties were encouraged for bad work” as of June 5 it is stated that within the last 2,5 months more than 700 criminal proceedings have been opened1. Herewith the financial investigation service of the Ministry of Revenues and Duties does everything to incline taxpayers to peaceful “settlement of the issue” in the interests of the state. The edition notices that “a mass mailing of letters demanding originals of documents from contractors of the taxpayer, against whom the [criminal] proceedings were opened, is used as the latest know-how. Such practice leads to the fact that partners cease working with “unreliable” contractor1.

We also get the confirmation of continuing pressure on taxpayers through initiating of criminal proceedings upon results of tax audits from our practice.

Herewith, taxpayers keep on receiving so-called “letters of happiness” from the investigation departments of the controlling authority as it has been before – the Demands, in accordance with Article 93 of the Criminal Procedural Code of Ukraine, for provision of primary documents on relations with contractors, who are supposed to have some problems found by law enforcement authorities. At the same time, as it is mentioned in more detail below, more and more new investigations are being initiated as regards the enterprises themselves (which are almost always large taxpayers).

We should hardly expect any facilitation for taxpayers from establishing of the Financial Investigation Service, which should combine functions of pre-judicial investigation authorities regarding so called white collar crimes.

As a confirmation, the following statistics should be provided (in accordance with data, provided in the other publication of the “Ekonomichna Pravda” as of June 10, 2014): the number of documents’ seizure in the year 2013 by the investigators of the tax militia exceeded in 2,5 times the number of criminal proceedings themselves – in other words, investigators visited the same enterprise more than twice. At the same time, in accordance with the same data, the investigators of internal affairs authorities, have confiscated the documents from enterprises only in one case from each 9 criminal proceedings2. From the statistics provided it is seen that enterprises experienced the intensive pressure mainly from the side of tax militia. Seeing the fact that Financial Investigation Service de-facto was created mainly on the basis of the tax militia, we can expect the continuance of traditions of this authority.

B. To be fair it is also worth mentioning about respective signs of positive tendency in this sphere. Thus, from public sources it is known that investigative subdivisions of the Ministry of Revenues and Duties indeed have closed a number of criminal proceedings, what may prove some decrease in the number of criminal proceedings on tax disputes. We also can confirm such closure of a number of criminal proceedings on tax articles from our practice on provision of legal services.

For example, earlier in April 2014 the chiefs of the Ministry of Revenues and Duties applied to the General Prosecutor’s Office of Ukraine with request on  closure of the proceedings which were illegally registered into the Unified Register of Criminal Proceedings with the purpose to put pressure on business. In particular, in accordance with the data of Internet-portal LigaZakon3, by then (publication as of 4.04.2014) the prosecutor’s office closed more than 400 such proceedings, on basis that such cases do not contain the subject of a criminal offence. And now the internal audits are conducting, upon the facts of illegal opening of criminal proceedings (see the presentation “Problems of vagueness of “Tax evasion””, slide 14).

In accordance with the information published on the official web-site of the Ministry of Revenues and Duties, according to deputy Minister V. Khomenko, within the last 3 months (publication as of 26.06.2014) 1009 criminal proceedings regarding taxpayers were closed upon results of review made by the new government4.

A vivid evidence of decrease of pressure on business in “post-revolutionary period” is closure of 23 criminal proceedings regarding officials of “Roshen” corporation, business of the current President of Ukraine (see the presentation “Problems of vagueness of “Tax evasion””, slide 13).

C. To continue on the topic of pressure reduction the Ministry of Revenues and Duties reports on the tendency regarding reduce of criminal proceedings. In particular, deputy Minister V. Khomenko reported that within first half of the year 2014 the investigators of the Ministry of Revenues and Duties initiated 3964 criminal proceedings regarding taxpayers, which, according to Mr. Khomenko, is twice less than within the same period of the year 20135.

At the same time the situation with such at the first sight positive tendencies on criminal proceedings is not so simple. Thus, some decrease of number of criminal proceedings does not give any opportunity to estimate whether the number of proceedings really started to decrease. However there are other trends, which influence on the indexes and reliability of the respective statistics.

In practice investigators of the controlling authority continue to comply scrupulously with the “demands” of normative act which is not registered by the Ministry of Justice of Ukraine  – “Methodical Recommendations regarding Order of Interaction of Authorities of the State Tax Service of Ukraine when Organizing, Conducting and Fulfilling Materials of Taxpayers’ Audits”, approved by the Order of the State Tax Service of Ukraine No. 948 as of November 31, 2012, which obliges tax inspectors to hand over the materials of tax audit acts with  large-scale amounts of extra charged taxes to the tax militia for initiating of a criminal proceeding.

Moreover, there are facts of initiation of criminal proceedings regarding “old” acts of tax audit. For example, in June, 2014 we faced with the case of one of our clients where the criminal proceeding has been initiated upon conclusions of tax audit act of the enterprise, composed as far back as in 2010!

Herewith, the “new” method of initiation of criminal prosecution, which the investigators of tax body started to apply, makes impossible to track objectively the trend to decrease/increase of number of criminal proceedings regarding taxpayers.

Thus, the investigative subdivisions of the controlling authority practice reduction of the statistical data regarding the number of criminal proceedings through consolidation of several existing criminal proceedings into one. Further, when obtaining new tax audit acts from tax inspectors, they do not register new proceedings in the Unified Register of Criminal Proceedings, but simply, in accordance with Article 217 of the Criminal Procedural Code of Ukraine, “join” the new episode to already existing the proceeding.

Thus, at the moment it is a possible and further frequent situation, when in regard to taxpayer one criminal proceeding can be registered, within which more and more new episodes, both regarding new and regarding already “pre-revolutionary” audit acts, will become the parts of this  proceeding.

Herewith, the investigative authorities are not obliged to inform taxpayer on investigation of new episodes in his criminal proceeding.

At present all above mentioned factors together do not allow to affirming definitely about tendency to the real reducing of the number of the criminal proceedings, conducted regarding taxpayers.

D. Seeing the above mentioned information it is obviously that at the moment situation with criminal proceedings upon results of tax audits has not substantially changed.

Measures on closure of criminal proceedings which are actively announced nowdays look rather like “raking the Augean stables” and  some  tactical changes, than settlement of the root of the problem.

The cure, as we consider, should consist in changes of approaches. In particular, regarding differentiation of such definitions as “economical/tax dispute” and “tax evasion” as a crime, foreseen by the Criminal Code of Ukraine.

We would like to note that the problem of uncertainty of the definition “tax evasion” at the legislative level is being raised by us constantly (see, for example, speech on the II Annual Judicial-Legal Forum of the Supreme Court of Ukraine). We would like to remind also that Advisers of the KM Partners law firm raised the issue of differentiation of tax disputes and crimes also in times of the previous government. For example, in October, 2013 the brochure “Tax dispute vs. crime” was published, where the generalized practice and issues of defense after opening and investigating criminal proceedings in accordance with Article 212 of the Criminal Code of Ukraine were reviewed and analyzed.

We would like to sum up again: current tendencies indicate on absence of fundamental difference between approaches of previous and current government at the moment.

New leaders do not show yet any real readiness to change fundamental approaches and to eliminate practice of transformation of almost every large-scale tax dispute into criminal proceeding with respective pressure on business. It is also confirmed documentary by the answer of the Ministry of Revenues and Duties on Request of the KM Partners LLC regarding Methodical Recommendations No. 948 and further detailed answer of the Ministry of Revenues and Duties on the same request.

We hope that such situation is caused by lack of time and by tense situation in the country upon so-called transitional period. Therefore we hope that raised issues would be substantially resolved soon. And business finally would be able to do actually business rather than work on protection.

We have great expectations that the new President also would draw his attention to the aforementioned issues. Nevertheless not that long ago his own business suffered substantially from tax audits and tax militia as well as from initiation of criminal proceedings on ‘tax’ article without proper grounds (see the presentation “Problems of vagueness of “Tax evasion, slide 13). So he is familiar with these issues even from his own experience.

 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.


1 “Leaders of the Ministry of Revenues and Duties were encouraged for bad work” // Ekonomichna pravda. – Electronic resource: http://www.epravda.com.ua/columns/2014/06/5/462657/ 

2 “The government raises a monster”// Ekonomichna Pravda. – Electronic resource: http://www.epravda.com.ua/columns/2014/06/10/462564/

3 Top-10 legal events of the week for business “The Ministry of Revenues and Duties asked to close criminal cases, opened to pressure business” // LigaZakon. – Electronic resource: http://jurliga.ligazakon.ua/news/2014/4/4/108456.htm

4«Vladimir Khomenko: “Small and medium-sized business should feel safe”» // Official portal of the Ministry of Revenues and Duties of Ukraine. – Electronic resource: http://minrd.gov.ua/ru/media/news/153631.html

5 Same source. – http://minrd.gov.ua/ru/media/news/153631.html

Kind regards,

© TOV "KM Partners", 2014

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