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

21 March, 2019 Newsletters

Unfortunately, the issue of using of verdicts and other court rulings in criminal proceedings under Article 205 of the Criminal Code of Ukraine regarding officials of the companies-contractors (Fictitious entrepreneurship) is still relevant within the tax disputes.

Following our newsletters “Should we trust the verdicts and other decisions in criminal proceedings under Art. 205 of the CC of Ukraine?” and “On the issue of possible tactics and updating approaches to court proceedings regarding “sham transactions”, we suggest to consider whether the existence of a verdict or other court rulings in criminal proceedings under Article 205 of the Criminal Code of Ukraine regarding the contractor’s director/founder should bring negative consequences to the taxpayer.

Please note, that controlling bodies apply penalties to the taxpayers due to the accruals for so-called “void agreements” with “fictitious” contractors, performed upon results of the tax audits.

Meanwhile, the analysis of the nature of penalties, imposed under the Tax Code of Ukraine in terms of criteria applied by the European Court of Human Rights (hereinafter – the “ECHR”) to the definition of the “criminal accusation”, results in conclusion, that such penalties are of criminal sanction nature (for more details please find our newsletter “Criminal liability under the Tax Code”).

In other words, while determining the legality/illegality of imposing of such penalties by the controlling bodies, first of all it is worthwhile to prove a guilt of such a taxpayer, while to the penalties under the Tax Code of Ukraine the rules, determined for criminal sanctions, shall be applied.

In this context it is interesting to make a note of the Resolution of the Supreme Court represented by the Chamber of judges of the Cassation Criminal Court, where judges put an increased focus on the proving of the individual’s guilt:

“… to deal with the issue of presence or absence of elements of crime in their actions, … it is necessary to establish a casual relationship between actions of each individual(violation of rules …) and consequences, that occurred in that regard, to investigate the nature and sequence of violations committed by each individual …, to determine the individual who created a dangerous … situation …, i.e. to find out the degree of participation of each individual in causing of a malfeasant consequence. Herewith, the criminal liability of an individual who forcedly violated the rules, due to creation of a dangerous situation by another individual… … is excluded …”.

In other words, the Supreme Court, while determining the legality of bringing the individual liable for criminally punishable act, focuses on necessity to prove a guilt of each individual, who was involved in the commission of a criminal offense. According to the abovementioned position of the Supreme Court an individual may not be brought to the criminal liability provided that such an individual acted in good faith, but violated the law forcedly, due to illegal actions of another individual, which the first mentioned individual could not foresee and did not have a possibility to foresee.

Thus, in the mentioned Resolution the Supreme Court noted:

“Given the specific circumstances of the case, that INDIVIDUAL 2 could not avoid …, such an individual may not be blamed for, as this individual was not obliged to assume the gross violation … committed by another individual …; INDIVIDUAL 2 did not foresee and did not have a possibility to foresee …”.

Based that the court practice is deemed to be unified, we expect that the similar approach will be applied by the courts in tax disputes.

The taxpayer, which did not anyhow breach the law, acted in a good faith and reasonably expected a similar behavior from his contractor, may not be liable for violation of the law by such a contractor. It means, that the courts while considering tax disputes on taxpayer’s transactions with “fictitious” contractor, first of all should determine a degree of participation of each contractor in the offence, as well as find out whether actions of a certain taxpayer were directed at violation of the law, or such a violation was committed by a taxpayer forcedly due to illegal actions of his contractor, which the taxpayer did not foresee and did not have a possibility to foresee.

This approach fully corresponds with general principles of taxpayer’s individual responsibility stipulated in Article 61 of the Constitution of Ukraine, which provides that only that individual shall be liable, who committed a violation.

We hope that this court practice and prove guilt principle, as well as liability degree assessment principle in regard of each particular individual will be implemented in tax disputes in the future.

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, 2019

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