INFORMATION AGENCY IN THE LAW
UNITED LEGAL SUPPORT SERVICE
0800-21-3222

Informational-legal investigation can be defined as activities of the specialists in the field of law, which consist of documenting, collecting, researching, evaluating, verifying and using evidence attesting to facts of intentional legislative norms violation, which results in violations of the rights of individuals and legal entities. The purpose of the investigation is to identify the causes and their negative consequences, establish causal links and ways to overcome them.

Stakeholders: VAT payers, public organizations, associations acting in the interests of VAT payers, the Verkhovna Rada of Ukraine Committee on Taxation and Customs Policy (the Special-Purpose Committee of the Verkhovna Rada of Ukraine), the Cabinet of Ministers of Ukraine (CMU), Ministry of Finance of Ukraine (MoF), State Fiscal Service of Ukraine (SFS), State Regulatory Service of Ukraine (SRS).

Problem statement: SFS authorities are suspending the registration of VAT invoices/adjustments calculations on the grounds that are not set forth by the regulatory act. The above leads to an unlawful violation of the VAT payers' rights, unjustified material expenditures of economic entities and authorities during a judicial appeal against the unlawfulness of the SFS actions.

The purpose of the investigation is to establish or refute the facts of violation of the law by public authorities in the field of public finances. Establishing negative consequences including material, causal relationship. Making appropriate suggestions.

PRESENTING MAIN MATERIAL

The suspension of the registration of tax invoices/adjustment calculations in the Unified Register of Tax Invoices as a new mechanism for combating abuse in the field of VAT turnover was launched in 2017.

Due to the massive number of taxpayer complaints regarding abuses by SFS bodies and the recognition of actions unlawful by court in December 2017, the current mechanism was repealed by law No. 2245-VIII dated 07.12.2017, and it was determined that the registration of a VAT invoice/ adjustment calculation in the Unified Register of Tax Invoices may be suspended in accordance with the procedure and on the grounds determined by the Cabinet of Ministers of Ukraine.

The adopted law instructed the Cabinet of Ministers of Ukraine to determine the suspension procedure of the registration of VAT invoices/adjustment calculations by March 01, 2018, to adopt the regulatory acts necessary for the implementation of this Law, to bring its normative legal acts in compliance with this Law and to ensure that the central executive authorities review and bring their regulatory acts in accordance with this Law.

At a meeting of the Government on February 21, 2018, a Resolution was adopted “On Approval of Suspension Procedures of the Registration of a VAT Invoice/Adjustment Calculations in the Unified Register of Tax Invoices”, registered under No. 117 (Resolution 117).

According to experts Oleksandr Nechytailo (expert of the lawyer association “LNM”), Anton Polianychko (Chairman of the Scientific Council of the Tax Advisers Association), the state actually introduced a preliminary audit of economic operations, that is, the control over the correctness of the VAT subject definition yet before the tax accounting data compilation, which can not be effective. Cautions against the unlawfulness of the CMU resolution No. 117 in connection with the absence of regulatory stipulated reasons for suspension of tax invoice/adjustment calculation are set out in the analytical article “Blocking of tax invoices: the second edition, supplemented, but is it improved? " (Source: Yurliha. Liha: Law)

According to the findings of the subject matter experts of the United Legal Support Service (hereinafter the Service), the determination of the reasons to suspend the VAT invoice by state authorities other than the Cabinet of Ministers, as defined by the Tax Code, creates legal risks of unreasonable suspension of registration of a tax invoice/adjustment recalculation, which would lead to a violation of the taxpayers' rights and the corresponding recognition of SFS actions unlawful by court. The specified risks have been reported to the Service by the Special-Purpose Committee of the Verkhovna Rada of Ukraine, the Cabinet of Ministers of Ukraine, the Ministry of Finance, the SFS. (Source 3222.ua “The suspension procedures of the registration of a VAT invoice/adjustment calculation were adopted, but no grounds for such a suspension were found”).

On March 21, 2018, the State Fiscal Service of Ukraine, in agreement with the Ministry of Finance of Ukraine dated March 22, 2018, specified: the taxpayer's risk criteria, the transaction risk criteria; a list of indicators for determining the taxpayer's positive tax history (Criteria). At that, by letter No. 26010-06-10/7849 dated March 22, 2018, the Ministry of Finance informed the SFS that it agreed to the Criteria, provided that they would be reviewed within a month.

According to the findings of the subject matter experts of the Service, the SFS document, which defined the Criteria, is not a regulatory act, is not approved by the Order, in addition, it does not have a definition of the type of document intended to document the managerial information of the SFS in accordance with the Instruction on the record keeping in the State Fiscal Service of Ukraine. (Source 3222.UA “Problematic issues of suspension of the registration of a VAT invoice/adjustment calculation).

The Ministry of Finance of Ukraine by its letter No. 26010-06-10/10502 dated 16.04.2018, informed the Service that “the preparation of a regulatory act is being finalized, which will properly approve the taxpayer's risk criteria, the transaction risk criteria, the indicators by which the taxpayer's positive tax history is determined” (letter from the Ministry of Finance of Ukraine by reference, source 3222.UA).

In addition, at the request of the Service, the State Regulatory Service of Ukraine stressed to the Ministry of Finance of Ukraine and the State Fiscal Service of Ukraine on the need to bring regulatory activities in line with the requirements of the Law.

In particular, in its letter the SRS declares that the letters of the ministries and other central executive authorities are not regulatory acts, they are only of informational nature and do not establish legal norms, and, therefore, the question arises about the legal validity and objectivity of state regulation mechanism application in terms of the established by the SFS Criteria that were approved only by the SFS letters. (letter of the State Regulatory Service by reference, source 3222.UA).

The Service has sent a letter to the State Fiscal Service of Ukraine with proposals to take urgent response measures and to designate and conduct an official investigation with regard to the legality of Criteria approval (“According to the Ministry of Finance data, Criteria for suspension of a VAT invoice/adjustment calculation has not yet been approved”, source 3222.UA).

The Ministry of Finance of Ukraine by its letter No. 26010-06-10/14202 dated May 24, 2018, (letter from the source, source 3222.UA) informed the Service that the State Fiscal Service was instructed to develop a draft order on approval of the taxpayer's risk criteria, the transaction risk criteria, indicators by which the taxpayer's positive tax history is determined, for its further state registration in the Ministry of Justice, however, the said draft order has not been issued to date.

In connection with this, on May 29, 2018 the Service informed the regional SFS (letter by reference, source 3222.UA) about the possible legal risks of liability, including criminal liability, in case of causing material losses to VAT payers by illegal actions, and it was proposed to contact the SFS of Ukraine regarding the urgent legal settlement of this issue.

According to the results of the answers received, it was established that some regional SFS have submitted the information to the central office of the SFS of Ukraine. This indicates the awareness of SFS bodies of the existence of legal risks. (“Informing about the results of consideration of the report on legal risks in the activities of SFS bodies”, source 3222.UA)

Possible material losses for VAT payers and their counterparties:

The Supreme Court in the composition of judges of the Economic Court of Cassation in the case No. 908/76/18 came to the conclusion that the inability to include VAT amounts in a tax credit, as well as, accordingly, to reduce tax liability by the specified amount, is actually a loss to that person. (Source: Protocol. Legal Internet resource)

Judicial practice:

The legal position of the First Appellate Administrative Court in case number 805/3956/18-a involving a lawsuit of Limestone Most Trade LLC.

“The court believes that the approval of the Criteria by the Ministry of Finance of Ukraine subject to their revision within a month indicates that the said Criteria contained deficiencies that should have been eliminated within the timeframe set by the Ministry of Finance of Ukraine and approved again in the prescribed manner. Such conditional approval of the Criteria indicates that they could not be applied to taxpayers until their re-approval and promulgation in the prescribed manner.”

A similar legal position was expressed by Kyiv District Administrative Court in case 810/2575/18 involving a lawsuit of Beveridge Trading Company LLC. It should be noted that the rights of this taxpayer during the suspension of VAT invoices in the absence of legal grounds are violated repeatedly (case No. 810/4123/18).

In the legal position of Dnipropetrovsk Regional Administrative Court (case number 160/7455/18) it is noted that on the day of consideration of an administrative case, the taxpayers' risk Criteria exist solely in the form of a letter of the SFS of Ukraine No. 959/99-99-07-18 dated March 21, 2018, “Risk Criteria of the Taxpayer", not approved by any Order of the State Fiscal Service of Ukraine and not registered with the Ministry of Finance of Ukraine. The State Regulatory Service in its letter No. 3890/0/20-18 dated April 19, 2018 noted that the drafts of such documents must be agreed upon, and the letters are only informational and do not establish legal norms. The SRS stressed the need for regulatory procedures. The letter states that the SFS letters N 959/99-99-07-18 and N 960/99-99-07-18 dated 21.03.2018 approved the taxpayer's risk criteria, the transaction risk criteria, and a list of indicators, by which the taxpayer's positive tax history is determined accordingly without compliance with the regulatory procedures. Thus, the letters from the Ministries are not regulatory acts and are of a purely informational nature.

In all cases of appeals against decisions of the first and appellate instance by the State Fiscal Service bodies, a court fee from a property dispute must be paid, which is a significant monetary expense for a public authority that is supported by budget funds.

In addition, the Circuit Administrative Court of Kyiv is considering case 826/12108/18 on the recognition of certain provisions of the above-mentioned CMU Resolution dated February 21, 2018 № 117  concerning the delegation of the right to determine the grounds for suspending VAT invoices to the State Fiscal Service, unlawful).

CONCLUSIONS OF THE INVESTIGATION

- The Ministry of Finance of Ukraine did not comply with the requirements of the Tax Code regarding the normative determination of the grounds for suspending the registration of VAT invoices, thus violating the requirements of Part 2 of Article 19 of the Constitution of Ukraine, clause 201.16, and Article 201 of the Tax Code of Ukraine, when drafting a regulatory act.

- Remarks and warnings from the Ministry of Justice, the State Regulatory Service of Ukraine during the development of the Government Resolution draft were not taken into account by the Ministry of Finance in February 2018, which indicates a deliberate failure by the authority to comply with the requirements of the law.

- The possible negative risks as a result of violation of the law were highlighted in the mass media and reports of United Legal Support Service Information Agency, which were forwarded to the Ministry of Finance and the SFS from March 2018, as well as in informing the State Regulatory Service of Ukraine up to the Ministry of Finance and the SFS in April 2018, indicating awareness of authorities about possible negative consequences.

- The Ministry of Finance officially in February and April 2018 informed the State Fiscal Service of the need to develop and submit a draft regulatory act for further approval in the established manner, which indicates the Ministry of Finance's awareness of the need to comply with the requirements of the legislation.

- The State Fiscal Service has not met the Ministry of Finance requirements in their entirety; in its turn, the Ministry of Finance has not taken measures to control this case, indicating a violation of the provisions of the Regulation on the Ministry of Finance of Ukraine and the Regulation on the State Fiscal Service of Ukraine.

- VAT payers and their counterparties incur material losses in the event of an unreasonable suspension of the registration of a VAT invoice/adjustment calculation. The conclusions are confirmed by the legal position of the Economic Court of Cassation.

- Regional SFS in May 2018 were warned by Information Agency about legal risks of liability, including criminal liability, in case of causing losses to VAT payers by illegal actions. Some regional SFS have brought the information to the central office of the SFS of Ukraine. This indicates the awareness of SFS bodies about the existence of legal risks.

- The position of the judicial authorities confirms the absence of regulatory grounds for suspending the registration of a VAT invoice/adjustment calculation. The unlawfulness of the SFS actions and violations of the value added tax payers’ rights have been established.

- During a lawsuit, the SFS bodies spent significant budget funds as a court fee, with the main burden being placed on the regional SFS units. In turn, recognition of the actions of regional SFS and the SFS of Ukraine as illegal directly depends on the illegal actions of the Ministry of Finance, which can testify to the presence in the actions of the Ministry of Finance officers of signs of an administrative offense under Article 164-12 of the Code of Administrative Offenses “Violation of Budget Legislation”, that is, issuance of the regulatory acts that reduce budget revenues or increase budget expenditures in contravention of the law.

- In the event of an increase in the amount of anticipated unjustifiably spent budget funds by the SFS authorities for appeal to reach the amounts of UAH 1,762,000, the actions of officials of the Ministry of Finance responsible for the development and adoption of a regulatory act may be grounds for charges under Article 211 of the Criminal Code of Ukraine, that is, the publication of regulatory or executive orders that change the budget revenues and expenditures in contravention of the law, the investigation of which is attributed to the National Anti-Corruption Bureau of Ukraine.

Suggestions

In order to put an end to the violation of the taxpayers’ rights, to reduce unlawful expenditures of budget funds, to level the risks of bringing public servants to administrative or criminal responsibility, according to the results of the investigation, we suggest that United Legal Support Service Information Agency makes a specific request to:

The Cabinet of Ministers of Ukraine - to take measures for the implementation of Clause 7 of Section II “Final and Transitional Provisions” of Law No. 2245-VIII, namely: to adopt the regulatory acts necessary for the implementation of this Law; bring its regulatory acts in compliance with this Law; to ensure the revision and bringing by central executive bodies of their regulatory acts in compliance with this Law.

The Ministry of Finance of Ukraine - to ensure the development of a normative document (regulatory act), which will determine the legal grounds for suspending the registration of VAT invoices/adjustment calculations in the Unified Registry of Tax Invoices.

The State Fiscal Service - not to commit unlawful actions associated with the suspension of registration of a VAT invoice/adjustment calculation on the basis of Criteria that are not legally effective until there is a regulatory definition of the grounds for suspending the registration of VAT invoices/adjustment calculations in the Unified Registry of Tax Invoices.

The State Regulatory Service of Ukraine - to take measures in accordance with the Law “On the Principles of State Regulatory Policy in the Field of Economic Activity”.

The Committee of the Verkhovna Rada of Ukraine on Tax and Customs Policy - to ensure parliamentary control over observance of the requirements of the Constitution of Ukraine, the Tax Code of Ukraine, and other regulatory acts by the Cabinet of Ministers of Ukraine and state authorities.

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Output data of the Information Agency:

Name: United Legal Support Service Information Agency

Information about the founder (co-founders): via the link

Author: Denys Osmolovskyi - director of the іnformation аgency

Full name of the person responsible for the issue: D.Yu. Osmolovskyi

Serial number of the issue and the date of its release: 16/12-18 dated 07.12.2018

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