Amicable settlements in court disputes in respect of the tax losses of past periods: suggested practical measures and draft letter to the tax authorities with an offer of amicable settlement
As we have warned earlier, the adopted amendments to the Tax Code of Ukraine, which supposed “to settle the issue of eligibility of inclusion of negative value of the object of taxation of the 1st quarter of 2011 to the expenses of the 2nd quarter of 2011 in full” nothing has been really decided.
Generalized tax consultation on incorporation of negative value of the object of taxation on corporate profit tax, approved by the order of the State Tax Service of Ukraine as of July 5, 2012 No. 575, which was supposed to settle the issue of ongoing court proceedings on past tax losses, in fact, contains no explicit provisions or guidance on ways of their solution (discontinuing the case as well).
We are to note, that as it follows from the publications of some print media on the subject matter, the initial version of such generalized tax consultation directly addressed the issues related to lawsuits on tax losses. In particular, in the draft of such consultation the tax authority ordered to follow (1) the provisions of the Law No. 4834-VI as of 24.05.2012 (which amended the Final Provisions of the Tax Code of Ukraine) and (2) this generalized tax consultation advice in ongoing proceedings of administrative or judicial appeal of their decisions on inclusion of the “past” tax losses in 2011. But in its final version nothing is mentioned about the future of the ongoing trials on the past tax losses.
On July 5, 2012 the Head of the State Tax Service of Ukraine, Mr. Klymenko, during the thematic meeting with the representatives of the taxpayers assured that, as for court disputes, where the tax losses of past periods have been rightfully generated, the tax authorities are ready to amicable settlement. Thereby, he has also clearly stated that the task of the tax authorities is stopping of such court disputes either by recognition of the claims by the tax authorities or the conclusion of the amicable agreements between the parties, since only under such conditions it is possible to talk about reaching a compromise.
However, the local tax authorities (in particular, their employees, who represent the interests of the tax authorities in court), refuse from amicable settlements in court cases on tax losses carry forward, stating “consultation of the State Tax Service of Ukraine, which does not contain the rule of law, and the personal opinion of Mr. Klymenko are not the guidance for undertaking the real procedural action on the case …“.
Therefore, despite of the amendments to the Tax Code of Ukraine, approved generalized tax consultation and verbal assurances of key official of the State Tax Service of Ukraine, the issue of court disputes on tax losses of past periods remains open.
In view of this situation, and in case of court dispute of your company on the tax losses carry forward, we suggest the following pattern of actions to stop it:
- send a letter to the tax authorities with an offer of amicable settlement in a court case (pro-forma of the letter for filling in with various options to be selected depending on the facts of the case);
- demand this from the Head of the local Tax Inspection during personal meetings;
- refer to generalized tax consulting of State Tax Service of Ukraine, proceeding from which legitimacy of the taxpayers’ approach on the issue of reflection of the tax losses incurred before January 1, 2011 in the II quarter 2011 is recognized;
- pay special attention to the verbal assurance of the Head of State Tax Service of Ukraine, Mr. Klymenko, that discontinuing of the court disputes, in which the tax losses of previous years were rightfully generated, is the task of the tax authorities;
- if the order of formation of tax losses of past years has not been confirmed by previous field documentary audits (usually, by scheduled audits of 2008-2010), alternatively, in a letter of reconciliation it is possible to mention readiness of the company to provide the tax authorities with the relevant documents confirming the order of formation of the “disputed” tax losses. If it is deemed necessary, in this letter you may also mention that the company has no objection to carrying out documentary audits in respect of the order of forming the tax losses of previous years that became the subject of dispute. However, in this case, you should accurately monitor the grounds for appointment of such audit and its limits – it should deal exclusively with the issue of tax losses of previous periods, which is the subject of the court dispute. In view of this, based on Part 2 of Article 136 of the Code of Administrative Procedure of Ukraine to bring a petition on provision of time to the parties for amicable settlement (actually the time for auditing lawfulness of the formation of tax losses). As a result, the court shall issue the ruling on stopping of proceedings on the case until the expiry date, which the parties declare in the petition (para.4 of Part 1 of Article 156 of the Code of Administrative Procedure of Ukraine).
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.
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