Thresholds of criminal liability for tax evasion (Article 212 of the Criminal Code of Ukraine) in 2016 – deceived expectations for increase of thresholds by half (as promised by law)

Necessity of legislative increase of thresholds

25 January, 2016 Newsletters

І.

1.

Article 212 “Tax evasion” of the Criminal Code of Ukraine prescribes the liability for tax evasion of certain amounts – in considerable (part 1 of Article 212), large (part 2 of Article 212), and especially large amount (part. 3 of Article 212).

These amounts are determined in the note to Article 212 of the Criminal Code of Ukraine and are related to the quantity of “tax-free minimum incomes”. It means that 1000 tax-free minimum incomes is considered to be a significant amount, 3000 tax-free minimum incomes – large amount, 5000 tax-free minimum incomes – especially large amount.

Therefore, the factual meaning of these amounts depends on “interpretation” of tax-free minimum incomes and in which size it is established for such purposes.

2.

Para. 5 of subsection 1 of Section XX “Transitional Provisions” of the Tax Code of Ukraine determines that for a criminal offense qualification the amount of tax-free minimum incomes shall be equal to the tax benefits specified in the subpara. 169.1.1 of the Tax Code of Ukraine.

That is the amount of tax benefits has significant meaning for qualification under Article 212 of the Criminal Code of Ukraine. In its turn, the historical aspect sets this amount as follows:

When entering into force of the Tax Code of Ukraine in 2011, subpara. 169.1.1 establishes that the social benefit is equal to 100 % of the minimum poverty line for employable person. However, in para. 1 of Section XIX “Final Provisions” is found that in such form the rule takes effect only on January 1, 2015. By that time the social benefit would be equal to 50 % of the minimum poverty line.

Accordingly, even if minimum poverty line remains constant, the Tax Code of Ukraine has actually fixed double increasing  of the limits of criminal liability for tax evasion since January 1, 2015.

In other words, approving the Tax Code of Ukraine at the end of 2010, the legislator programmed double increasing of limits of criminal liability in 2015. Accordingly, in the years 2011-2014, the taxpayers had legitimate expectations of a significant increasing of the limit for qualification “intentional tax evasion” from 2015, and in 2015 – at least from this 2016 year, which would enable still in such a way to reduce the pressure on the entrepreneurs of the investigative units of the fiscal authority.

However, nothing of the kind.

First, by the Law of Ukraine as of 28.12.2014 No. 71-VIII, “January 1, 2015” was changed into “January 1, 2016” in the provision mentioned above. That is double increasing of limits was actually delayed for a year.

On the eve of a new year 2016 by the Law as of 24.12.2015 No. 909-VIII the amendments were put to the subpara. 169.1.1 of the Tax Code of Ukraine: it was established that the amount of the tax benefits shall be set “in the amount equal to 50 % of the minimum poverty line for employable person (per month), prescribed by the law as of January 1 of the tax year – for any taxpayer”.

Newly established procedure for determination of the amount of social benefits has no time limit and now without a time limit such amount will constitute only 50 % of the minimum poverty line, set in the law on the state budget.

That is to say the legitimate expectations for double increasing of the limits of criminal liability from January 1, 2016 are deceived again. And now it is not a postponement of such increase, but it is “forever.”

3.

Thus, in 2016 the amount of tax-free minimum income for crime qualification purposes under Article 212 of the Criminal Code of Ukraine constitutes 50 % of UAH 1378 (minimum poverty line for employable person as of January 1, 2016 under Article 7 of the Law of Ukraine “On the State Budget on 2016”), that means UAH 689.

Hence, the marginal amounts of qualification for intentional tax evasion in 2016 are as follows:

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By comparison, in case if the amendments to the Tax Code of Ukraine mentioned above had been not introduced and the tax-free minimum income had been applied in the amount of 100 % of minimum poverty line, then the limit for qualification would have been increased twice and constituted:

  • UAH 1 378 000,
  • UAH 4 134 000 and
  • UAH 6 890 000 respectively.

And that would have significantly scaled back the number of criminal proceedings automatically opened in relation to tax dispute arisen for a substantial sum.

ІІ.

1.

In the context of legislator’s refusal from the concept of double increasing of tax-free minimum income we should note that historically the amount of tax-free minimum income did not increase in proportion to the change of other appropriate economic indicators.

Thus, for example, in 2011 tax-free minimum income was UAH 470,5. As of 2016 tax-free minimum income has increased to UAH 689, that means it has changed only on UAH 219 or by a factor of 1,46.

At the same time, from 2011 the national currency has significantly fallen from UAH 8 to UAH 24 for USD 1 that means by a factor of 3.

At the beginning of 2011 the limit for qualification under Article 212 of the Criminal Code of Ukraine was at the level of USD 59 095 (UAH 470 500), now, as of the beginning of 2016, it is equivalent to USD 28 708 (UAH 689 000) accordingly to the official currency rate of the National Bank of Ukraine.

Therefore, from 2011 the limit just not failed to increase, but in fact it decreased in half (considering that tax-free minimum income has been slightly increasing as it is stated above) in solid currency equivalent. As we can see, namely double increasing of tax-free minimum income base as prescribed in the law could “fence” such decreasing of limits in response to slowly growing of tax-free minimum income in comparison with the depreciation of national monetary unit.

In practice we see that qualification characteristic of crime component under Article 212 of the Criminal Code of Ukraine – significant amount of non-receipt of funds to the budget, factually “has become closer” to the taxpayer.

2.

The amount of transactions in monetary terms is increasing in a view of the change of price and currency parameters even without increasing of transactions in natural meaning. Therefore, the factual approach to determination of criminal liability limits in monetary terms has led to substantial increasing of quantity of the taxpayers who potentially fall under criminal liability, and to increasing of quantity of investigations on these matters. Yet earlier the minimum sum of taxes in disputes as for criminal investigation had to comprise nearly USD 60 000 and now the amount less than USD 29 000 is enough to fall under the “risk envelope”.

Thus, as the result, factual decreasing of limits causes significant growth of quantity of cases.

Such situation is unfavorable for development of entrepreneurship and investment climate in Ukraine, inasmuch as the work principles of investigation subdivisions of fiscal body remained unchanged – almost every fact of additional charge of tax over established limit leads to automatic opening of criminal proceeding. It goes so according to (a) the methodical recommendations of the State Fiscal Service of Ukraine as of sending respective notifications to investigation bodies and (b) provisions of the Code of criminal procedure of Ukraine as of automatic opening of proceeding in case of receiving such notifications.

Even if respective investigation does not result in transmission of a case to the court, as a rule, it creates itself unfavorable consequences for the taxpayer through the factual pressure on it and real obstruction of its business activity.

For example, rather typical step in investigation is considered to be the application of investigator for obtaining of temporary access to the documents of the taxpayer, which are related to the taxes accrued. Such requests are considered by the investigating judge and almost always are approved. The decisions of the court on granting temporary access to documents of the taxpayer are in public access in the Electronic Register of Court Decisions. According to Article 131 of Code of Criminal Procedure of Ukraine provision of temporary access to documents is referred to enforcement measures of criminal proceedings. And the part 3 of Article 132 of the Code of Criminal Procedure of Ukraine establishes that the implementation of enforcement measures of the criminal proceedings is not allowed if the investigator, the prosecutor cannot prove that there is a reasonable suspicion of committing a criminal offense. Thus, when the judge delivers the decision on granting temporary access, third parties reasonably perceive this as evidence that there is already reasonable suspicion against the relevant taxpayer of committing tax evasion based on enough number of evidences from the side of prosecution which have convinced investigating judge. So the taxpayer is considered to be potentially problematic contractor, and economic relations with it are significantly restricted or ceased at all. Such cases are not rare in practice. So the opening of criminal proceeding and actions in the framework of such proceeding inflict damages to business entities affected by them.

Accordingly, decreasing of such proceedings by increasing the limits of criminal liability would reduce the unnecessary pressure on the economy, promote the investment and business climate in whole.

In addition, it would have saved money of the taxpayers to finance such investigations which do not provide a positive economic effect.

3.

OECD Guidelines on transfer pricing as of 2010 contain inter alia review of practice of OECD member countries on measures to ensure the proper payment of taxes. Para. 4.20 of Section 4 “Administrative approaches” of the given document states in particular that the criminal sanctions in almost all cases are assigned actually to cases on extra large evasions and they usually involve very heavy burden of proof by the party that claims the existence of such evasion (i.e. by Tax Administration). Criminal sanctions do not refer to the main tools for ensuring compliance with the tax legislation in any member countries of the OECD. Civil (or administrative) penalties are more common tool.

That is, seeing the experience of OECD, the criminal liability should not be considered as one of key tools to ensure tax legislation compliance.

Criminal liability should only be applied in case of evasion in especially large amounts.

But is it possible to consider, even psychologically, the amount of tax surcharges equivalent to the cost of a middle class car (less than USD 29 000) as especially large amount?

4.

Part 2 of Article 11 “The concept of crime” of the Criminal Code of Ukraine states the following: “2. An action or inaction although formally having signs of any offense under this Code, but because of insignificance does not make danger to the society, that means has not caused and could not have caused significant damage to natural or legal persons, society or the state, does not considered as a crime”.

Hence, the determination of the appropriate limit at the legislative level is very important to determine the margin beyond which begins the actual crime.

Should it be in case of tax evasion UAH 1 … or UAH 10 … or UAH 100?

How to determine properly this margin?

Probably there is no absolute answer. However, due to the excessive number of criminal investigations under Article 212 (a few thousand for a year at current limits), the existing limits seem to be too low.

As a reference point it may be offered to consider at least double increasing of existing qualifying limits for Article 212 of the Criminal Code of Ukraine.

That means to fulfill those expectations-promises that have already been incorporated into the law by the planned implementation in 2015 or (subject to postponement at the end of 2014) 2016.

Honestly, it seems that the Verkhovna Rada of current convocation has caused more harm via its actions on this issue (the actual cancellation of increasing criminal liability limits already prescribed in the law) than if it would have done nothing on this issue!

Therefore, the proposed double increasing would be only the restoration of the state which was broken by the Verkhovna Rada itself. And such double increasing would be only the returning (not even improving!) to those levels that we had, when converted into dollars, when introducing the Tax Code.

ІІІ.

1.

For the sake of completeness:

In the Section IX of Coalition Agreement of deputies’ factions in the Verkhovna Rada of Ukraine of VIII convocation it is stated the following:

“3.5. Refusal of punitive model of tax control:

3.5.1. double increasing (from 1000 to 2000 of tax-free minimum incomes) of significant amount of factual non-receipt of taxes, revenues, unified social tax and insurance payments for retirement insurance for the presence of essential element of criminal offence prescribed in Article 212, 2121 of the Criminal Code of Ukraine”.

That is the necessity for changing criminal liability limits at least regarding part 1 of Article 212 of the Criminal Code of Ukraine is fixed by the deputies in the Coalition Agreement. Though the Coalition Agreement remains silent as of the limits for part 2 and 3 of Article 212 of the Criminal Code of Ukraine.

It is clear that the provision on limit’s increasing does not appear for any reason, but because the business and taxpayers are fed up with enormous pressure and the threat of a “stick” on criminal proceedings on tax issues, the marginal amount of which has been always reducing.

2.

The practical implementation of this provision of the Coalition Agreement predictably should be provided by the Draft Law No. 3448.

This Draft Law envisages double increasing  of the limit for part 1 of Article 212 of the Criminal Code of Ukraine from 1000 to 2000 tax-free minimum incomes.

However, for part 2 and 3 of Article 212 of the Criminal Code of Ukraine the Draft Law No. 3448 does not ensure the returning to the situation which should have been according to the Tax Code of Ukraine from January 1, 2015 (2016), if there is no changes made by the Verkhovna Rada of Ukraine at the end of 2015 (2015). The Draft Law No. 3448 in present version prescribes increasing of the limits for part 2 and 3 of Article 212 of the Criminal Code of Ukraine not by two times, but on 1000 tax-free minimum incomes, that means from 3000 to 4000 and from 5000 to 6000 respectively. The increase is only by 33 % for part 2 of Article 212 and by 20 % for part 3 of Article 212.

Let’s hope that during further work with this Draft Law after all there will be amendments as of double increasing of existing limits in tax-free minimum incomes for part 2 and 3 of Article 212 of the Criminal Code of Ukraine as well. When approving the draft law No. 3448 in the very version, we will get at last all that was promised with the approval of the Tax Code of Ukraine in 2010. Indeed we have legitimate expectations on this matter.

APPLICATION 1. Change of qualification limits of criminal liability under Article 212 of the Criminal Code of Ukraine from 2011 till 2016.

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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, 2016

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