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Decriminalization of Art. 205 of the Criminal Code of Ukraine and changes to Art. 212 of the Criminal Code of Ukraine – increasing of taxes non-payment thresholds that may lead to criminal prosecution
What are the practical implications for current cases?

26 September, 2019 Newsletters

Today (September 25, 2019) the Law of Ukraine “On Amendments to the Criminal Code of Ukraine and the Criminal Procedural Code of Ukraine on Reducing the Pressure on Business” as of September 18, 2019 No. 101-IX, better known as the “The Law on Decriminalization of Sham Business Activity” has entered the legal force.

By above-mentioned Law the Article 205 “Sham Business Activity” was excluded from the Criminal Code of Ukraine and amendments to Article 212 on increasing taxes, evasion of which leads to criminal liability, were also introduced.

Please note, that criminal proceedings under Article 212 of the Criminal Code of Ukraine were declared as a tool for fighting against conversion centers and sham transactions aimed at illegal tax minimization. However, in practice such criminal proceedings were used not for bringing to liability for sham business activity, but for creation of so-called “issue preclusion” of non-recognition of tax implications occurred due to transactions with “sham” companies and, therefore, applying pressure to normal taxpayers, who was “lucky” to deal with mentioned companies.

On the one hand the qualification of “sham business activity” under Article 205 of the Criminal Code of Ukraine was performed with regard to further business activity as an indicator of the taxpayer’s intents. However, elements of a crime “Sham Business Activity” are deemed to be completed at the moment of establishment/purchase of business entity, i.e. further business activity was not covered by this Article and was subject to assessment on other grounds.

In practice director or formal owner of a “sham” company was brought to liability rather formally, i.e. with a non-sufficient fine accrued (as a rule, UAH 8 500). However, later such court decisions were used by controlling authorities as a tool for applying pressure on bona fide taxpayers, namely by creation of hard hitting evidence in administrative disputes between tax authorities and such taxpayers, and with regard to the legal opinion of the “old” Supreme Court being supported in some cases by the “new” Supreme Court which concerns the following: “sham business activity” status is incompatible with legal business activity even providing formal confirmation by primary documents”1.

For more details please find our newsletters and analytics prepared by KM Partners specialists, in particular:

How to evaluate the inaction of the tax authority regarding the termination of shady contractors in the light of disputes over “sham transactions”;

“The fifth wheel to the coach”, or what is Art. 205 of the Criminal Code in practice for?;

The real goal of verdicts under Article 205 of the Criminal Code: are there any purposes of this article?;

To prove guilt impossible to convict. Whether the taxpayer is liable for his contractor’s violations;

The opposite positions of the Supreme Court regarding the consequences of Art. 205 of the Criminal Code concerning the contractor: who is right?;

The consequences of Art. 205 of the Criminal Code regarding supplier in the practice of new Supreme Court: why so disappointing to find out?;

The first working results of the new Supreme Court: have the expectations of taxpayers been fulfilled?;

Іnterrogation protocol of the contractor’s director ≠ Proof of the “unreality” of transactions;

With regard to the fact that a number of tools fighting against artificial formation of tax indexes, in particular for the purpose of VAT, starting from preventive tools (such as SEA VAT, Risky Tax Invoice Monitoring System) and ending with brining to criminal liability under Article 212, 364, 366 of the Criminal Code of Ukraine, which actually cover the respective activity, and with regard to the foreign experience of solving such issues (the Russian Federation and the Republic of Kazakhstan), the idea of decriminalization of Article 205 of the Criminal Code of Ukraine was advanced in due course time. For instance, among others, we were those who initiated this discussion in several business communities (brief conclusions on discussion of the American Chamber of Commerce are available by following the link).

However, the former parliament had not enough politics will to resolve this issue. Therefore, there are cheering news that at least now this issue has been resolved through exclusion of Article 205 from the Criminal Code of Ukraine.

With regard to the amendments to Article 212 of the Criminal Code of Ukraine on bringing to liability for tax evasion:

To begin with let us remind that according to the statistics data on pre-trial and court investigation of tax evasion crimes during consecutive years, the investigations of crimes under Article 212 of the Criminal Code of Ukraine were extremely inefficient. Results of investigations show that due to large number of criminal proceedings initiated, only insufficient number of criminal proceedings were completed, and in most cases such criminal proceedings were closed due to absence of elements of a crime.

Respective statistics data evidenced on the urgent necessity of legislative and institutional changes in work of fiscal pre-trial investigation bodies, as we mentioned in our newsletter – “Statistics of criminal proceedings under Art. 212 of the Criminal Code of Ukraine for the first half of 2019”.

We are pleased that provided analysis and respective materials were used among others for grounding and explanation of proposed legislative amendments to article on brining to liability for tax evasion. Just for comparison please find what was stated in our newsletter and explanatory note to the Daft Law:

Statistics of criminal proceedings under Article 212 of the Criminal Code of Ukraine for the first half of 2019 Explanatory note to the Draft Law No. 1080
Traditionally let us refer to statistics of the General Prosecutor’s Office of Ukraine regarding initiated criminal proceedings. According to such data 653 criminal proceedings on tax evasion were registered for the first half of 2019. In comparison with previous years, annually we see a slight decrease of such indexes. For instance, comparing with analogous period of the previous year (the first half of 2018), the number of initiated criminal proceedings has decreased by 18,8%. ……. Dynamics of completion of pre-trial investigation is still at rather low level. According to statistics of the State Fiscal Service of Ukraine for the first half of 2019 the investigation in 376 criminal proceedings on tax evasion is completed. However, we consider this index as a rather low and the one evidencing on non-efficiency of work of pre-trial investigation bodies. It is grounded by the fact that index of 84% of completed criminal proceedings consists of closed criminal proceedings due to absence of elements of a crime (241 criminal proceedings) and those transferred with petition on release from criminal liability (118 criminal proceedings). According to statistic of the General Prosecutor’s Office of Ukraine regarding initiated criminal proceedings, 653 criminal proceedings on tax evasion were registered for the first half of 2019. Herewith, the dynamics of completion of pre-trial investigations confirms the trend on using Article 212 of the Criminal Code of Ukraine as a tool for applying pressure on business. Thus, for the first half of 2019 the investigation is completed in 376 criminal proceedings on tax evasion. At the same time among them 241 criminal proceedings were closed due to absence of elements of a crime, and 118 – due to transfer of petition on release from criminal liability (i.e., overall 84% of completed criminal proceedings). Therefore, in rare circumstances the pre-trial investigation is completed by transferring of indictment to the court.

 

 

 

 

We hope that process of improvement of Article 212 of the Criminal Code of Ukraine will not be limited to the review of qualifying thresholds for bringing to criminal liability for tax evasion.

This issue requires a comprehensive review due to several structural problems in current version of Article 212 of the Criminal Code of Ukraine (for more details please find our newsletters – “No to article 212 of the criminal code as a way of pressure on business”, “Draft Law No. 3448”, “Pre-investigation on the tax evasion (Art. 212 of the Criminal Code of Ukraine): is it now only about the deputies and the authorities?”, “The plea agreements under Article 212 of the Criminal Code of Ukraine. The main trends”, “Statistics of criminal proceedings under Art. 212 of the Criminal Code of Ukraine for the first half of 2019” and others), since due to absence of such a review and despite the increase of thresholds, the improvement of efficiency of tax evasion investigation will be more technical and ensure only temporary “improvement” of the relevant statistics.

So what to expect now?

Due to the fact that the Law of Ukraine “On Amendments to the Criminal Code of Ukraine and the Criminal Procedural Code of Ukraine on Reducing the Pressure on Business” has entered the legal force, we also expect that respective changes will affect the criminal proceedings under Article 205 and 212 of the Criminal Code of Ukraine.

First of all, due to decriminalization of the “sham business activity” the current criminal proceedings under Article 205 of the Criminal Code of Ukraine are subject to be closed due to the fact, that law which cancels criminal liability for committed action as stipulated by para. 4 of part 1 of Article 284 of the Criminal Procedural Code of Ukraine, has entered the legal force.

Due to increase of qualifying thresholds for bringing to criminal liability for tax evasion we also expect the respective effect on criminal proceedings under Article 212 of the Criminal Code of Ukraine. Thus, several criminal proceedings are subject to be changed in the context of criminal qualification (review of respective part of Article 212 of the Criminal Code of Ukraine, which is charged within respective criminal proceedings) following the procedure provided by Article 284 of the Criminal Procedural Code of Ukraine. Thus, as regards to criminal proceedings under Article 212 of the Criminal Code of Ukraine where the evasion amount is less than increased minimum threshold for tax evasion, there are grounds for closure of the criminal proceedings due to the absence of event of a criminal offence, i.e. a ground stipulated by para. 1 of part 1 of Article 284 of the Criminal Procedural Code of Ukraine.

Furthermore, we expect that entering the legal force by the Law will affect the tax disputes, where materials of criminal proceedings under Article 205 and 212 of the Criminal Code of Ukraine were used as a grounding for additional tax accruals. In particular, due to the circumstances stated above, materials of criminal proceedings are subject to be considered as inappropriate evidence that cannot ground additional accruals performed by tax authorities. We hope that respective changes will be taken into account during consideration of the tax disputes by courts.

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.

Footnotes:

1Resolution of the Supreme Court of Ukraine as of December 01, 2015 in case No. 826/15034/14 is available by the link.

Kind regards,

© WTS Consulting LLC, 2019

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