Risks related to adoption of the Tax Code, – documentary field unscheduled tax audits
Despite the fact that the analytical material was written by the version of the draft Tax Code dated 2 August 2010, the most part of it remains relevant for the current version of the document dated September 22, 2010. We have changed the numeration of the Articles in accordance with the current version of the document.
- considerable extension of list of grounds for conducting unscheduled tax audits;
- cutting the terms during which a taxpayer might provide a feedback;
- elimination of judicial supervision over conducting tax audits, grounds for which are not directly stated in the Tax Code
This issue is dedicated to analysis of Article 79 “Documentary Field Unscheduled Tax Audit” of Section ІІ of the draft Tax Code as compared with the effective laws governing the issues related to conducting unscheduled tax audits.
Currently these issues are governed by Article 111 of the Law “On the State Tax Service in Ukraine” and, in respect of some audits, – by the Law “On Corporate Profit Tax” (in case of declaring losses within 4 consequent reporting periods) and the Law “On Value Added Tax” (auditing VAT amounts claimed for refund).
At first glance provisions of Article 79 of the draft Tax Code seem to be quite similar to the respective provisions of the mentioned Laws. But that is only at first glance. In fact, there is a shocking number of implicit “hooks” planted in the draft. And they make it possible to conduct unscheduled tax audits at the discretion of the tax authorities, including recurrent re-audits of the tax periods which have been audited already.
According to the draft Tax Code:
“ 79.2. Documentary field unscheduled tax audit shall be conducted provided that at least one of the following circumstances appears:
79.2.1) as a result of tax audits of other taxpayers or receipt of tax information the facts are revealed, that evidence POSSIBILE violation by the taxpayer of tax, currency control or other legislation, adherence to which shall be subject to control by the tax authorities, unless the taxpayer provides explanations supported by respective documents upon written request… ”.
While according to laws as effective (part 6 of Article 111 of the Law “On the State Tax Service in Ukraine»):
“Unscheduled field tax audit shall be the audit which is not included into the work schedule of respective tax inspection and which is conducted in case one of the following circumstances appears:
1) as a result of tax audits of other taxpayers the facts are revealed, that evidence that the taxpayer violated the laws of Ukraine on taxation, currency control regulations, unless the taxpayer provides explanations supported by respective documents upon mandatory written request… ”
While currently the ground appears in case of revealing facts of violation as a result of tax audits of other taxpayers, and that is all, according to the Tax Code new self-sufficient circumstance is added – “ or receipt of tax information”. The meaning of it could be found in Article 38 “Receipt of Tax Information by the Tax Authorities”, which lists almost everything that is filed to tax inspection. For example, based on clauses 38.2 and 220.127.116.11, mere receipt of tax return, calculation or other report from the taxpayer shall be treated as receipt of tax information. Thereby respective grounds appear even in case when a tax inspector assumes anything just out of tax return filed by a taxpayer. However such ground might know no bounds!
According to effective law the right for unscheduled tax audit, if “the facts are revealed that evidence that the taxpayer violated…”, while according to the draft Tax Code – “the facts are revealed, that evidence possible violation by the taxpayer …”. That means that under the effective law it is necessary that the fact of violation should be ascertained, while under the draft Tax Code mere assumption that there might be violations is sufficient.
According to the effective law the discussed audits are allowed in case the facts are revealed that evidence violation of (1) the laws of Ukraine on taxation or (2) currency control regulations.
In the draft Tax Code the wording “and other legislation” was added, while the wording “the laws of Ukraine on taxation” was replaced by “tax legislation”. The definition of the latter could be found in para. 3.1. of Article 3 of Section І of the Tax Code. It includes, inter alia, for example, regulatory and legal acts of the Cabinet of Ministers of Ukraine, which, without any doubt, do not have the status of the “the laws of Ukraine on taxation”.
Thus, even in this case the boundaries were moved so that to provide more space to the tax authorities.
Finally, in the version of the draft of Tax Code dated 2.08.2010 the requirement that written request should be “mandatory” was deleted from the provision. Does that mean that under the draft Tax Code sending to a taxpayer such a request is not required anymore?
In comparison with the version of the Tax Code of Ukraine dated August 2, 2010, in the current version of the document – dated September 22, 2010 – the rule about the mandatory written STA request for an unscheduled tax audit was returned.
Thereafter in the Tax Code:
“79.2.2) Taxpayer failed to file within the established term tax returns or calculations provided that the law requires that such tax returns or calculations should be filed.”
It looks like the cited provision is similar to the one mentioned in the effective Law “On the State Tax Service in Ukraine“.
However we should keep in mind what is understood as failure to file tax return under the Tax Code as it was discussed in Legal Alert II and II.I!
Moreover, the definition of tax return has been changed considerably, and according to the Tax Code it is wider than the definition given by the Law No. 2181-ІІІ (see Article 1):
“1.11) tax return, calculation (hereinafter – “tax return”) – is a document which is filed by the taxpayer to the inspecting authority within the terms established by the law and which is the basis for assessment of tax liabilities and/ or payment of tax, duty (mandatory payment)”.
According to the Tax Code (Article 46 of Section ІІ):
«46.1. Tax return, calculation (hereinafter – tax return) – is a document, which is filed by the taxpayer (including by branch establishments in cases, mentioned herein) to inspecting authorities within the terms established by the law and which is the basis for assessment and/or payment of tax liabilities, or a document, that verifies the amounts of income, accrued (paid) in favour of taxpayers – physical persons, amounts of withheld and/or paid tax.
Custom declarations shall have the status of tax returns for the purposes of assessment and/ or payment of tax liabilities. Annexes to tax return shall be its inalienable part”.
We have marked what was added: and we can see that there are many additions. For example, under the Tax Code reports on amounts of income accrued (paid) in favour of physical persons, as well as on other amounts of assessed or paid tax (for example, in respect of income of non-residents) have the status of tax returns, though they may not be viewed as the documents, based on which tax liabilities are assessed and/ or paid.
Thus, by extending the definition of “tax return” and providing for a wider understanding of what is meant under “failure to file” tax return, the scope of applicability of the discussed provision and its real meaning were considerably expanded in comparison with the Law «On State Tax Service in Ukraine».
According to the Tax Code:
“79.2.3) taxpayer files to the tax inspection adjustment to tax report on respective tax for the reporting period which was audited by the tax inspection”.
It is a new rule, there is no such a rule in the effective law.
According to the Tax Code dated August 2, 2010 there was:
“79.2.4) inconsistency is revealed between the data indicated in tax returns (calculations or reports), filed by the taxpayer, provided that such tax returns (calculations or reports) are required to be filed by the law, unless the taxpayer provides explanations supported by respective documents upon mandatory written request of the state inspection within five working days after receipt of the request”.
While in the Law “On the State Tax Service in Ukraine” (part 6 clause 111):
“3) false data indicated in the tax returns filed by the taxpayer are revealed, unless the taxpayer provides explanations supported by respective documents upon mandatory written request of the state inspection within ten working days after receipt of the request”.
In the version of the Tax Code dated September 22, 2010 the para. 79.2.4 (in comparison with the version of the document dated August 2) the rule of the current legislation was returned.
We have already stressed in clause B that the definition of tax return was extended and, thereby, the scope of applicability of the rule expanded. However, that was too little for the authors of the Tax Code, and they added calculations and reports to tax returns. Will that mean that now, for example, even a financial report of an enterprise (which is not a tax return), filed to the statistics agency, may give grounds for tax audit?
Probably, the key difference: according to the effective law it is said about the revealed false data indicated in tax returns, while in the Tax Code – about inconsistency between the data indicated in filed tax returns, calculations or reports.
Our practical experience reveals that the tax authorities on many occasions tried to use the discussed provision in the current version, for example, in cases where gross income indicated in the corporate profit tax return was not equal to the amount of taxable transactions indicated in VAT return (which may be the case, for example, when capital assets are sold). In such cases the tax inspectors were held back – such approach is not in line with the law, there is no unreliability of data, while inconsistency appears due to differences in estimating tax base for the purposes of different laws.
While in the draft Tax Code we may see the effort to give the right to conduct audit, if there exist any discrepancies between the data of different tax returns, calculations or reports.
According to the effective law taxpayer has ten working days to reply to the request, while according to the Tax Code half as long – 5.
We will continue our analysis in further issues.
And the above part of our analysis evidences that the version of the draft Tax Code, which has been published lately, is too far from the existing laws and has a direction towards fiscality, expands powers and authorities of tax inspectors and limits the range of legal tools for protection of taxpayers.
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.
Newsletter available in Ukrainian and English.