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What else is happening around the “Philip Morris” Settlement Agreement on tax dispute resolution,
is it worth taking for granted the statements on legislation compliance
and what is to be done in this case?

29 October, 2019 Newsletters

Posted on October 11, 2019 (Sections 1, 2)

Updated on October 28, 2019 (Sections 3, 4, 5)

Updated on October 29, 2019 (Sections 6, 7, 8).

In late September and early October 2019, issues around Philip Morris Settlement Agreement on tax dispute resolution reappeared on the front pages of news media. For example, the reports of September 20 (in the periodicals of “Podrobytsi” and “KP v Ukraini“) refer to the continuation of searches and seizure of documents in the company, the government, the Ministry of Justice and the State Fiscal Service last week, summons for interrogation of the involved persons, and also on the renewal of criminal proceedings against the top management of the company for tax evasion.

The comments regarding this made by the company and the Ministry of Justice as persons involved in the abovementioned didn’t delay. On September 23, the reports (in the periodicals of “Novyny v Ukraini“, “Podrobytsi“, “KP v Ukraini“) on the statement of the company’s foreign relations department with the recurring “mantra” that all involved state bodies acted within the framework of the current legislation while concluding the agreement have appeared. The same reports contain information that the Deputy Minister of Justice of Ukraine, Mr. Ivan Lishchyna, stated that he could not comment on this situation, because he was bound by the non-disclosure agreement. It was also noted that thie mentioned agreement was approved from the side of the Ministry of Finance by Ms. Oksana Markarova, who was acting Minister of Finance of Ukraine at that time (she holds the post of Minister of Finance in the current government) who did not comment on this.

A little later, the report as of September 26 contained the position of the Ministry of Justice, represented by Mr Ivan Lishchyna, articulated in more detail (see link), and a letter from the Ministry of Justice signed by Mr Ivan Lishchyna on coercion to sign the Agreement (see link). It is worth paying attention to the first three paragraphs above the second sheet of the letter, which include possible actions of the company in the field of public statements and “promoting” the creation of a proper impression on the investment climate in Ukraine in case of non-signing of the Agreement (for convenience we provide them here):

“At the said meeting, the Ministry of Justice of Ukraine found out that the State Fiscal Service of Ukraine had set indicative dates for signing the Settlement Agreement twice – 14.12.2018 and 27.12.2018 – however each time the State Fiscal Service of Ukraine canceled its meeting with representatives of Philip Morris Group companies. The representatives of Philip Morris Group companies provided copies of letters from the State Fiscal Service on that (attached).

On January 9, 2019, the Ministry of Justice of Ukraine received an attorney’s request from attorney at law O.A. Alekseyenko, Philip Morris Group companies’ Representative, as of January 2, 2019 (attached), where concern was expressed on behalf of companies regarding the ongoing non-signing of the Settlement Agreement.

The representative of the companies states in the mentioned request that non-signing of such Agreement before the beginning of the World Economic Forum in Davos on January 22, 2019 will lead to the measures taken by the Philip Morris Group companies, including raising the relevant issue at the forum, and considering the option to file an investment claim against Ukraine in accordance with international of agreements on promotion and mutual protection of investments by the companies… ”.

Later, on October 7, the information on the expressed position of the Minister of Justice (the publication is available via the link), who believed that everything was right in that respect, has appeared.

The aforementioned publications of September 23 also contain the information with reference to unnamed representatives of the American Chamber of Commerce on the monitoring of it’s the development of described situation from its side and expecting for decision on the matter. It should be noted that the company is represented in the Chamber, and in particular Mr. Mykhaylo Polyakov, an employee of Philip Morris Ukraine PrJSC (whose position is, reportedly, the fiscal regulation manager) holds the position of co-chairman of the tax committee at the American Chamber of Commerce now.

On October 4, at a business meeting with Prime Minister of Ukraine Mr. Goncharuk, the President of the American Chamber of Commerce, Mr. Andriy Gunder, expressed his concern about current status of the Settlement Agreement and urged to fulfill it as signed in compliance with international and Ukrainian legislation (see publications in “Unian”, “Economichna Pravda”).

2.

Thus, on behalf and in support of Philip Morris Ukraine PrJSC, we repeatedly hear the assertion like mantra that the Agreement was allegedly signed in accordance with international and Ukrainian legislation. Should we put on their honor, as in the popular joke, that if “gentlemen believe bare word”, then “here I was lucky”, or is it better to check and analyze facts independently, based on at least the already publicly available information?

3.

(updated on October 28, 2019)

As a possible approach for verification, a process may be offered as it defined, for example, in the standard ISO 9000:2015, as confirmation based on the submission of objective evidence that the requirements have been met.

The relevant requirements for public authorities and their officials at the fundamental level are formulated in Part 2 of Art. 19 of the Constitution of Ukraine, namely that public authorities, their officials “are obliged to act only on the basis, within the powers and in the manner provided by the Constitution and laws of Ukraine.”

Therefore, to verify that the involved public authorities and officials acted in accordance with applicable legislation, it is sufficient to verify the existence of objective evidence that the involved state authorities and officials acted on the basis, within the powers and in the manner provided by the s p e c i f i c provisions of the Constitution and relevant laws of Ukraine.

4.

From the point of view of such approach, let’s consider firstly the circumstances under which the notification on the investment dispute was made, how further development took place, whether there are any provisions and what they are and of what specific laws of Ukraine, that would establish the grounds and appropriate order of action.

According to public information, the notification on investment dispute was made in January 2018.

At that time, the dispute with tax authorities was pending: as early as May 19, 2017, the decision of the court of first instance was delivered, which rejected the lawsuit of Philip Morris Ukraine PrJSC, and the company filed an application with the court of appeal. The expert panel examination was appointed by the court of appeal. The proceedings were stopped until the results of the examination had been received.

Expert panel findings (particular aspects related to that are worthy of a separate commentary) were received by the court of appeal on November 30, 2018, as it stated in the Ruling of the court of appeal as of December 06, 2018, which had also renewed proceeding.

In fact, at the same time (after receiving the expert panel findings by the court of appeal), on December 5, 2018, the decree of the Cabinet of Ministers No. 946-p for approval of the draft Settlement Agreement with Philip Morris Ukraine PrJSC was signed. In accordance with that decree, the Agreement should be signed by the Head of the State Fiscal Service of Ukraine.

Previously we have set out in detail the procedure for the implementation of the Settlement Agreement (amicable settlement) regarding the disputes pending in court. In particular, Art. 190 of the Code of Administrative Procedure of Ukraine (hereinafter – the CAPU) stipulates that the conditions of amicable settlement shall not (i) contradict the law or (ii) go beyond the competence of the public authority, (iii) violate the rights or interests of third parties or (iv) be unfulfilled.

It is appropriate to note that these conditions are seen to be sufficiently uniform and applicable to Ukraine in whole, including investment disputes.

As we discussed in the previous material, the dispute was not terminated in order established by the CAPU, for the implementation of the Settlement Agreement (amicable settlement).

This means that the arrangements regarding termination of the dispute did not pass mandatory review by the court for compliance with the requirements of the law, as mentioned above (i) – (iv) and therefore, such objective evidence of the lawfulness (?) of the Settlement Agreement approved by the decree of the Cabinet of Ministers, namely, a court decision, is absent in this regard.

Avoiding this procedure also means actually concealment of the conditions of amicable settlement. After all, when amicable settlement is approved by the court, the terms of amicable settlement shall be approved by a court ruling, which is to be published in the register of court decisions, that is, they are publicly available. As they say, good things are always outside. And what about bad ones?

One more point: no supplementary agreement approved by the Cabinet of Ministers is required to close the proceedings on the grounds and in accordance with the procedure stipulated by the CAPU, but consent of the parties to the dispute (i.e., tax authority and Philip Morris Ukraine PrJSC) is enough (of course, if the CAPU requirements (i) – (iv) mentioned above are met).

If it wasn’t done, then can it be regarded as objective evidence that the approved model assumed things that did not comply with the requirements for a principled possibility of amicable settlement established by the legislation (in particular, Art. 190 of the CAPU)? In particular, if the approved model was not fulfilled, does it mean that it was unenforceable in principle under the law and therefore did not meet the requirement (iv) as mentioned above?

5.

Therefore, at present it can be rather said that there is no objective evidence that the arrangements between the state authorities and the relevant officials with the Company were based on the legal grounds and implemented in accordance with the procedure established by the current legislation.

Based on information available in the public domain, it can be concluded that, following the verification (confirmation) approach, as stated above, the actions of public authorities and officials to reach and implement arrangements with the Company regarding termination of the tax dispute in a court are not confirmed to be in compliance with the legislation.

There is a certain analogy of how to act in situations that cause uncertainty: when questions about possible violations during a telephone conversation between the President of the USA Mr. Trump and the President of Ukraine Mr. Zelensky have appeared, the content of this conversation was made public under consent of the parties to allow an unbiased analysis of the relevant issue. Why can’t we apply this approach in described case as well: if there are data that (provided that the statement of compliance with the law is true) can eliminate the negative assumptions, why can’t it be disclosed to the world (if any)? Moreover, the investment agreement between Ukraine and the United States of America contains the obligation to publish the relevant administrative practice, and the Company has already disclosed certain elements (in particular at press conferences) about some elements of the arrangements (in particular, the cancellation of tax notice decisions) when the Company believed that such disclosure is in its favor.

Legal rules are certain. The court decision shall not be lawful when it is justified with simple phrase “in accordance with the applicable law”. Similarly, the resolution of a dispute should be based on certain provisions that can be applied in specific circumstances and to a particular subject.

Based on the public information available, the dispute is substantially a tax dispute. In the previous material we stated that, in fact, such tax issue cannot be the subject of an investment dispute. The Cabinet of Ministers does not have the legal authority to oblige the State Fiscal Service of Ukraine to cancel tax notice decisions, etc.

Therefore, publicly available information leads to the conclusion that probably there are arrangements outside the legal framework that they try to cover via common references and inappropriate tools. There is no objective evidence of another.

6.

(updated on October 29, 2019)

The applicable dispute resolution procedure depends on the assessment of the dispute. In fact, tax dispute generally is not covered with the scope of investment disputes. As we have considered in the previous material, cases where tax-related dispute can move into the non-tax field (in particular, the category of investment dispute) may be caused by defects of a fundamental nature applied in a specific case of tax law (for example, actual direct or indirect confiscation covered by, allegedly, taxation), or non-compliance with the general principles of law or violation of the tax provisions of international agreements. Such circumstances are absent in this case.

The absence of queues in international arbitration regarding tax disputes with Ukraine is the evidence of understanding and recognition of the described above as well; considering the fact that there are a lot of enterprises with foreign investments in Ukraine, and they have many disputes with tax authorities, and the statements on the unsatisfactory conditions of trial in the courts of Ukraine are standard.

So, it would be desirable to hear/see what factors, at the time of application were actually claimed by the Company to qualify a dispute, which according to available information does not go beyond the ordinary tax dispute, despite a large amount, as a qualification of this case in within the framework of investment agreements. And why these statements were so undisputably accepted by the government officials involved (despite the fact that Ukraine has good experience and mostly positive practice of disputes in international arbitrations, including investment ones). Such a “giveaway game” is surprising, in particular, because of the absence of documented public information that would make possible the assessment of the dispute as subject to investment agreements.

If there are no any reasons for such assessment, then applied procedure for the resolution of an investment dispute is inappropriate, therefore its results do not comply with either the investment agreements (because the dispute is not subject to the scope of them), or the national legislation.

Ordinary tax disputes are subject to settlement in national courts (where the dispute was pending). In the present case we see rather the unlawful interference with the jurisdiction of the courts and the conduct of a trial in the absence of real legal grounds for doing so.

7.

Much depends on the recognition of whether there was a breach of tax law by Philip Morris Ukraine PrJSC or not. If such a violation of tax law (not of some general principles of law or something that could be the basis for transferring a dispute to another area of law) took place (publicly available information leads to such conclusion), then neither the Cabinet of Ministers, nor the Ministry of Justice, nor the Ministry of Finance have the competence under the Constitution or the laws of Ukraine to forgive (issue indulgences) violation of tax legislation and write off the surcharges.

Therefore, when a violation of tax legislation is recognized, the actions of the aforementioned state authorities and their officials involved aimed at “forgiveness and cancellation” of tax surcharges and sanctions, clearly go beyond the powers granted to them by the law (we remind that under the Constitution of Ukraine tax issues are governed solely by the laws of Ukraine). What is that, if it is not a violation of law?

It is interesting to note that the conclusions of expert panel findings on the issues raised by the court (received by the Court of Appeal on November 30, 2018, as mentioned in the ruling of the Court of Appeal cited above) have been already available as of December 05, 2018 (the date of the resolution of the Cabinet of Ministers approving the draft Settlement Agreement).

Philip Morris Ukraine PrJSC clearly did not like what and how was put to the analysis of the expert panel, and tried to procedurally delay the examination of the raised questions (as we see from the publicly available court decisions in the case) and to influence it, including by appealing up to the Supreme Court (denied by the ruling of the Supreme Court as of January 15, 2019).

The following questions were raised for the examination (in the final version, as set out in the aforementioned ruling of the Supreme Court):

“1. Are the conclusions of the Act of the Head Department of the SFS in Kharkiv region as of May 24, 2016 No. 248/20-14-12-07/00383231 “On carrying out documentary unscheduled on-site audit of compliance with the requirements of the legislation of Ukraine on issues of state customs affairs, in the part of declaring goods in the customs regime “processing at the customs territory”, imported into the custom territory of Ukraine by Private Joint Stock Company “Philip Morris Ukraine” for the period from 01.03.2015 to 29.02.2016.” proven by documents in respect of the tax liabilities of Philip Morris Ukraine PrJSC in the amount of UAH 445 124 046,41 including: the import duty – in the amount of UAH 19 456 378,62; additional import duty – UAH 129 392 696,95; on value added tax – in the amount of UAH 296 274 970,84?

2. Did Philip Morris Ukraine PrJSC maintain a separate accounting of transactions carried out in the customs regime “processing at the customs territory”, as stipulated by Section V of the Tax Code of Ukraine? If so, in what forms (registers) of primary accounting (accounting and tax) is this reflected?;

3. Are the conclusions of the Act of the Head Department of the SFS in Kharkiv region as of May 24, 2016 No. 248/20-14-12-07/00383231 “On carrying out documentary unscheduled on-site audit of compliance with the requirements of the legislation of Ukraine on issues of state customs affairs, in the part of declaring goods in the customs regime “processing at the customs territory”, imported into the customs territory of Ukraine by Private Joint Stock Company “Philip Morris Ukraine” for the period from 01.03.2015 to 29.02.2016” proven by documents?

If the conclusions of the expert panel examination are more positive for Philip Morris Ukraine PrJSC, then they would probably be reflected somewhere as evidence in favor of, probably, abscense of breach. Although the conclusions of the panel examination do not have a pre-established absolute force for courts, this factor cannot be neglected.

If not and the expert panel was more inclined to confirm the violations, then it turns out that the decision of the Cabinet of Ministers as of December 5, 2018 in form of a decree on obligation of the tax authority to cancel the tax notice decision was made in the presence of such additional evidence of tax violations? Therefore, such a decision didn’t comply with the current legislation because of this as well, and this can be considered as an aggravating factor.

8.

Based on the available public information (as previous), it appears that the decision at the government level to “grant an indulgence” to Philip Morris Ukraine PrJSC and the obligation of the siscal service to cancel tax surcharges and sanctions was made not by recognizing the absence of tax law violations, but by some other factors (currently not publicly recognized) that we do not currently see within the legal framework.

Did they just make concessions to “lobbying” influence? But what about law and its rules for other companies, who didn’t find such “approach”?

Another note: court decision of the court of first instance contains conclusion that actions of Philip Morris Ukraine PrJSC were aimed primarily at evasion of payment of additional import duty, the timing of which in fact coincides with the using by Philip Morris Ukraine PrJSC special scheme which resulted in a tax dispute. We remind that the additional import duty was introduced as a temporary measure (in accordance with Article XII of the General Agreement on Tariffs and Trade 1994) to stabilize the balance of payments of Ukraine by the law adopted at the end of 2014, in order to facilitate the way out of the formed difficult situation. Thus, it turns out that the Company, unlike other taxpayers who were “stupid enough” to pay this additional duty, has decided not to assist Ukraine in getting out of this difficult situation, including in this way. It is interesting, was this ”political” factor taken into account by the government while adopting Settlement Agreement? After all, each relevant factor shall be considered. And here comes the question of ”forgiveness” even in terms of the ordinary fairness of the approach.

(Some other specific issues and lessons related to the Philip Morris Ukraine PrJSC Settlement Agreement will be discussed later in a separate article)

Kind regards,

© WTS Consulting LLC, 2019

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