Is it real to obtain from a tax authority reimbursement of damages, inflicted to a taxpayer as a result of illegal decisions?
For example, a considerable amount of VAT refund was reduced to the company with reference to such popular now “void agreements”. A taxpayer refers to the court, spends a lot of resources and time on court litigation without a possibility to obtain VAT reimbursement belonging to him while the dispute lasts. Is it worth for a taxpayer to hope for reimbursement of all damages, inflicted by results of such tax audit?
If to believe the statements of authority, the answer to this question is yes. Particularly, mass media revealed recently a new that “Mr. Janukovych allegedly demands to punish all initiators of ungrounded taxpayers’ audits and to deliberate a “legislative mechanism of reimbursement of damage, inflicted to taxpayers on account of guilty officials”. That is why Mr. Azarov entrusted to the Minister of Revenue and Duties Mr. Oleksandr Klimenko to turn out a department and to provide execution of budget revenues “not on account of pressing of taxpayers but on account of cooperation”.
Thus, public agents recognize themselves that tax authorities inflict damage to taxpayers and this damage should be reimbursed. However one should not expect that the state would punish itself and would begin on its own initiative to transfer to taxpayers’ accounts amounts as a reimbursement of damage caused by tax authorities. Accordingly, a taxpayer should take the initiative in his own hands.
Below we would consider, on what can a taxpayer, who was inflicted damages by tax authorities, count and in what way and on which ground can he apply for reimbursement of damage.
It is worth mentioning that it is not about damage in form of costs for legal assistance regarding challenging tax notifications-decisions (hereinafter – “TND”), what we have already mentioned in a few publications (see newsletter series “Reimbursement of expenses as method of struggle against tax lawlessness”), but about material damages: inflation, interest for the illegal use by the state of taxpayers’ funds, lost profit and moral damage: damage inflicted to business reputation.
In this context it is worth to draw a parallel with the Resolution of the Supreme Court of Ukraine No. № 29/639-25/35-А-61/204-55/137-2012. It is about dispute between a depositor and a bank regarding among other a reimbursement of damage caused by the bank as a result of illegal usage by the last of a deposit during the period of court litigation. The court came to a decision in favor of a depositor and defined as grounded the charge from the bank of inflation index, 3 per cent yearly of the amount, which was a subject to reimbursement during the court litigation.
Same thing we see in a considered case, while the court litigation lasts (as the practice shows, this could last three years and more), the state “legally” and gratuitously uses the VAT amount, which was to be reimbursed, during the long court litigation. Some kind of free of charge voluntary-compulsory crediting of the state, while a taxpayer could use this amount both for the purpose to cover operating costs and for the purpose of investment the production etc.
That is why it seems completely logical, that in case of illegal “withdrawal” of VAT refund by the tax authorities a taxpayer has right to count not only on refund of VAT amount, belonging to him, but as well for reimbursement of illegal usage of this sum, taking to account the inflation index, rates for the period of court litigation.
As a confirmation of the taxpayer’s right for reimbursement of damage inflicted by tax authority there is provision of Article 56 of the Constitution of Ukraine, one should refer to its provision of a direct action: “Everyone has right for reimbursement on account of the state or authorities of local government of material or moral damage, caused by illegal decisions, actions or inactions of body of State Authority, authorities of local government, their officers and officials when exercising their power”.
As an additional strengthening there is a provision of Article 1173 of the Civil Code of Ukraine: “Damage, caused to an individual or legal entity through illegal decisions, actions or inactions of state jurisdiction, government authority of Autonomous Republic of Crimea or authorities of local government when exercising their power is to be reimbursed by the state, Autonomous Republic of Crimea or authority of local government regardless the guilt of these authorities”. Thus, the damage itself and its amount are defined within respective provisions of the Civil Code of Ukraine.
To illustrate the fundamental possibility to recover from tax authority damage there is a Resolution of the Supreme Economic Court of Ukraine as of June 05, 2013 in the case No. K-4962/09, in which the taxpayer succeeded in obtaining decision on withdrawal from tax authority of material damage, caused by illegal TND and tax detention3. Also the Decision of the Supreme Administrative Court of Ukraine as of March 26, 2013 in the case No. K-13316/09 is worth mentioning, according to which from tax authority in favor of a taxpayer both material and moral damage for TND illegally passed by tax authority are withdrawn.
It is worth to be attentive in this issue, within which type of court proceeding one should apply a demand on reimbursement of damage, caused by tax authority as a result of illegal TND.
The answer is provided by a provision of part 2 of Article 21 of the Code on Administrative Proceedings of Ukraine (hereinafter – “the CAP of Ukraine”), according to which: “Demands on reimbursement of damage, caused by illegal decisions, actions or inactions of authority or by any other breach of rights, freedoms and interests of agents of public law relations, are handled by administrative court if they were applied in one proceeding with a demand to resolve a public dispute. Otherwise demands on reimbursement of damage are resolved by courts in civil or economic proceeding”.
Thus, the CAP of Ukraine accurately differentiates two options of application to the court with the purpose of reimbursement of damage, caused by tax authority:
- within administrative proceeding, if demands on reimbursement of damage are applied together with the main demand (for example, regarding cancellation of TND);
- within economic or civil proceeding, if demands are applied separately. Herewith whether it would be an economic or civil proceeding, it depends on a plaintiff (an individual – in civil proceeding, a legal entity – in economic proceeding).
It is worth mentioning, that in other procedural codes there is no direct indication on the jurisdiction of cases with such matter of dispute (see Article 12 of the Economical Procedural Code of Ukraine, Articles 108-114 of the Civil Procedural Code of Ukraine). However such shortcoming is indemnified by the mentioned para. 2 of Article 21 of the CAP of Ukraine.
As a practical confirmation of this can be established court practice, particularly the Resolution mentioned above as of 05.06.2013 in the case No. 29/639-25/35-A-61/204-55/137-2012, delivered in economic procedural order, since the demands regarding reimbursement of damage were applied separately.
At the same time the same category of cases was handled also by administrative courts – by simultaneous application of both the main demand (cancellation of TND, for example) and of demand regarding damage compensation. As an example we can provide Resolution of the Supreme Administrative Court of Ukraine as of 14.09.2011 in the case No. K/9991/63552/12 and Resolution of the Supreme Administrative Court of Ukraine as of 02.10.2013 in the case No. K/9991/63552/12.
Thus, application to the court with the purpose of reimbursement of damage of both material (lost profits, inflation index, interest for illegal usage of assets) and moral (business reputation) nature, caused by tax authorities is another method of struggle with tax lawlessness.
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.