Primary documents are lost or located in the war zone: what about confirmation of tax accounting data?
The time is coming for submission of tax reports for reporting periods after the imposition of martial law. This raises questions for many taxpayers regarding compliance with para. 44.1. of Article 44 of the Tax Code of Ukraine (the Tax Code) in the context of the obligation to keep records of indicators on the basis of primary documents and other documents.
Sub-paragraph 2 of the para. 44.1 of Article 44 of the Tax Code provides:
“Taxpayers shall be prohibited from compiling the tax reporting indicators and customs declarations on the basis of data that is not supported by documents as described in sub-paragraph one of this paragraph”.
In this review we will try to analyze the issue regarding confirmation of tax reporting data in case of loss of primary documents or finding such documents in war (combat) zone.
In para. 44.5 of Article 44, the Tax Code provides a standard procedure for the taxpayer in case of loss, damage or early destruction of documents. In particular, the taxpayer shall notify the controlling body within five days about such circumstances, with provision of evidencing documents:
“44.5. In the case of loss, damage or early destruction of the documents mentioned in para. 44.1 and para. 44.3 of this Article, the taxpayer shall, within five days of the event, notify in writing (with provision of documents executed according to the law confirming the case/event that led to such loss, damage or early destruction of the documents)the controlling body in the place of the entry into records under the procedure set by this Code for filing the tax reports, and the controlling body which carried out customs processing of relevant customs declaration, granted authorization according to the Customs Code of Ukraine or permission to apply special simplifications (including transit)”.
However, in the current situation, this standard procedure is quite difficult to use.
First of all, even if there is information about the destruction or loss of documents, in the absence of access to the place of the enterprise it is not possible to record the date of such an event and to prove it documentary. Thus, it’s quite possible that under circumstances that took place in late February and early March, the evidencing documents, for example, documents of the State Emergency Service of Ukraine on fire at the taxpayer’s location, are still not available.
According to the standard procedure, the sub-para. 2 of para. 44.5 of Article 44 of the Tax Code provides the taxpayer’s obligation to renew the lost documents within 90 days: “The taxpayer shall be obliged to renew the lost documents within 90 calendar days that follow the day on which the controlling body receives the notice”.
In view of the current situation, it is difficult in practice to ensure the fulfillment of such obligation within such a period.
Of course, today there is a suspension of deadlines set by the tax law, as may be seen directly from para. 69.9 of Subsection 10 of section XX “Transitional Provisions” of the Tax Code: ”For taxpayers and controlling bodies the time limits set by tax legislation and other legislation, the control over the observance of which is entrusted to the controlling bodies, is suspended”.
At the same time, it is quite difficult to predict approach of the controlling bodies to the application of para. 69.9 of Subsection 10 of section XX “Transitional Provisions” of the Tax Code in the framework of the general formulation of such provision.
The standard procedure under para. 44.5. of Article 44 of the Tax Code does not cover issues on how to deal when there is no access to the primary documents, which are available, but located in the territories where active fighting or temporary occupation take place.
As we understand it, in particular in connection with such issues, the Law of Ukraine has been recently adopted “On Amendments to the Tax Code of Ukraine and other legislative acts of Ukraine on the administration of certain taxes during the martial law, state of emergency” No. 2173-IX. The amendments under the Law No. 2173-IX are called to resolve issues on how to deal in case of loss of primary documents or impossibility of the taxpayer’s access to such documents.
The respective law came into force on April 16, 2022. For our part, we would like to note that significant part of destruction cases of primary documents occurred in late February and early March, before April 16. So, the question is whether new amendments will apply to the procedure for the loss of primary documents due to circumstances that occurred before April 16?
As a general rule, laws have no retroactive force, except in cases where they mitigate or annul the responsibility (Article 58 of the Constitution of Ukraine). That is, the provisions of the Law may apply to legal relations that have arisen after the entry into force of such provisions.
At the same time, the amendments of the Law No. 2173-IX on how to deal in case of loss of primary documents or impossibility of the taxpayer’s access to such documents indicate that such provisions (para. 69.28 of Subsection 10 of section XX “Transitional Provisions” of the Tax Code) apply:
“…to taxpayers/tax agents who carried out activities in territories where fighting take (took) place and in territories temporarily occupied by armed forces of the Russian Federation, and cannot show primary documents…”.
Therefore, we assume that the legislator intended to extend the possibility of applying new procedure for lost documents to cases that occurred before April 16. This intention of the legislator seems logical, because we do not imagine how taxpayers, whose premises with all documents were completely destroyed, can use the standard procedure under para. 44.5. of Article 44 of the Tax Code and notify of loss or destruction of documents with provision of evidencing documents in the manner and within the time limits provided in para. 44.5. of Article 44 of the Tax Code.
Next, we analyze the amendments regarding the procedure in case of loss of primary documents.
Thus, para. 69.28 of the Subsection 10 of section XX “Transitional Provisions” of the Tax Code provides an exemption from the application of provisions of Article 44 of the Tax Code and special rules for confirming tax reporting data.
The grounds for application of special rules are based on the impossibility of showing primary documents because of: “the loss (destruction or damage) of primary documents or finding them in territories where fighting take (took) place and in territories temporarily occupied by forces of the Russian Federation, in case it is impossible to take them out or their taking out is connected with a risk for life or health of the taxpayer, individuals or is impossible because of administrative obstacles established by the authorities”.
In such a case, the taxpayer or tax agent may submit a notification to the controlling body on the loss or impossibility of taking out primary documents. Such notification should be signed by the Chief Accountant and indicate the following information: “circumstances leading to loss and/or impossibility of taking out primary documents, tax (reporting) periods, as well as a general list of primary documents (if possible, with details)”.
That is, in case of lack of access to primary documents in connection with hostilities, the taxpayers will be able to submit such notification on the impossibility of taking out primary documents.
It should be noted that the List of territories where fighting take (took) place shall be determined by the Cabinet of Ministers of Ukraine. Such List, which is essential for the application of the procedure under para. 69.28 of the Subsection 10 of section XX “Transitional Provisions” of the Tax Code, has not been approved yet.
If the taxpayer files a notification on impossibility of taking out primary documents, the following shall be ensured:
- data and indicators of tax report for the relevant tax (reporting) periods cannot be questioned only on the basis of the lack of primary documents;
- without a contractual, settlement, payment and other primary documents, which are obligatory according to the rules of accounting and tax assessment, the taxpayer still retains the right for:
– costs (including costs related to the acquisition of securities/corporate rights) and/or negative value of object of taxation by income tax (including negative financial result for securities/corporate rights transactions);
– value added tax credit and/or amounts of negative value added tax of prior tax (accounting) periods;
- a moratorium is applied on documentary tax audits of the respective periods (regarding which the notification was submitted).
It should be noted, that the tax reports for the periods indicated in the notification are not subject to the adjustments which directly follows from the provisions of para. 69.28 of the Subsection 10 of section XX “Transitional Provisions” of the Tax Code: “In the tax (reporting) periods, specified in the relevant notification, cannot be revised the increasing of the amount of tax obligations on taxes and duties declared in the tax returns for the specified tax (reporting) periods, the increasing of the amount of the negative value of the object of income tax declared in the tax returns/calculations for the specified tax (reporting) periods, the increasing of the amount of the budget refund of value added tax declared in the tax returns for the specified reporting periods”.
The legislation also defined the procedure in the situation when after the submission of a notification on the impossibility of taking out documents, the taxpayer becomes aware of the loss of these documents.
In this case, the taxpayer shall also submit a notification. The relevant notification of loss of primary documents should also indicate the information on the loss of documents with the circumstances leading to such loss.
If such a notification is submitted, the taxpayer cannot be audited by the controlling body for tax (reporting) periods specified in the notification, including after the end of martial law.
That is, lost documents are literally subject to an indefinite moratorium on tax audits. Such a provision would be quite effective except for one thing.
Provisions of para. 69.28 of the Subsection 10 of section XX “Transitional Provisions” of the Tax Code provide that the loss of documents that is not linked to fighting taking place in the respective territories does not entitle the taxpayer to apply special provisions. There is also a note: “It shall be the responsibility of the controlling body to prove that there is no basis for the application of this subparagraph”. However, in practice the efficiency of this construction is highly questionable. This assumption is based on the long-standing practice of applying, or rather outrageous disregard, by the tax authorities of their obligation to prove the legitimacy of accrued taxes under tax notification-decisions.
Therefore, we assume that the burden of proving the connection of the losses of documents with fighting will again be shouldered by the taxpayers. The comparison comes to mind with tax disputes over the unreality of transactions, which raises the rhetorical question: how many documents and how many witnesses shall the taxpayer provide to confirm that the documents were lost in connection with fighting?
This issue is a big urgent problem, because if special provisions are applied by the taxpayer “without any ground”, so the taxpayer “shall be deemed to be evading tax and shall bear responsibility, stipulated by this Code and other laws of Ukraine”. That is, if the taxpayer cannot prove that the loss relates to fighting, it is presumed that the taxpayer intends to evade taxes. Here the logical question comes to mind: how does this relate to the presumption of innocence and other basic constitutional principles of bringing to responsibility?
Accordingly, in the absence of any clearness (in what way the connection with fighting or its absence would be considered as proved), in fact, tax authorities will be “armed” with discretionary argument and on the basis of any assumptions will argue on groundlessness of the taxpayer’s application of provisions of para. 69.28 of the Subsection 10 of section XX “Transitional Provisions” of the Tax Code, and will bring to justice on the basis of such assumptions.
Certainly, the procedure provides that “in case of the refusal to apply the provisions of this sub-paragraph, the controlling body shall issue a reasoned decision indicating the grounds and evidences for such refusal no later than one month from the date of receipt of the corresponding notification from the taxpayer/tax agent”. However, only time will tell whether such a decision will be really motivated or there still be the practice of “motivation” typical for the answers to the objections of the taxpayer and decisions of the State Tax Service on the results of the consideration of complaints.
Like other decisions of the controlling body, such a decision will be subject to appeal in administrative or judicial procedure. A moratorium on all tax audits of these tax periods will apply for the duration of such an appeal.
As we can see, special rules have been introduced to confirm data in the tax reports in case of loss of primary documents or impossibility of taking out primary documents in connection with fighting in the respective territories. However, despite the positive nature of such legislative changes, in general the construction and legal language of such changes unfortunately raise many questions.
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.
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