Additional charge of income tax and VAT on the "unreal" transactions

A huge amount of claims to the State Fiscal Service of Ukraine is related to receiving of tax notices about additional accrual of income tax and VAT on “unreal” transactions.

In this article we try to give practical advice which is formed on the basis of experience in these trials and you will be able to:

  • Rate your chances for the positive decision in your favor;
  • Form controversial transactions in a way that will prevent additional accrual of tax or to increase your chances for court defeating.

Most of our Clients and people who call on us with requests to provide service in this sphere are sure that it is enough to confirm exes for conduction of business operations only with usual financial documentation. It is a big mistake.

Certainly, tax reporting is formed through the financial documentation. However, you should pay attention to other moments for preventing additional accrual and also for effective defeating in the court:

  • confirmation real conduction of business operations with other documentation;
  • defining an economic reasons for conduction of business operation;
  • filling in financial documents correctly.

Now let’s look through every moment of them.

On the reality of business operation

Every business operation is characterized with certain features for operations of the same type. For example, supply of goods demands to have own transport or attract carriers, if there is a long-term storage of goods then there must be a storage, agreement about rent or agreement about responsible for storage.

Distribution of booklets demands to have agreements with printing house which products these booklets while providing advertising service.

These circumstances are confirmed and accompanied by the usual financial documentation (agreements, acts, receipts etc.), documents on ownership.

If the circumstances are not confirmed then usual financial documentation doesn’t make a sense for forming exes and tax credit for the State Fiscal Service of Ukraine and for courts.

If payer of tax confirms only his payments for services then the State Fiscal Service of Ukraine and courts don’t suppose it like absolute confirmation of operations. 

On the defining an economic reasons for conduction of business operation

There are exes for legal, accounting and consulting services which are bigger than economic reasons of these operations and which are put in exes.

In these cases it is difficult to justify reasons for exes with object difficulties of documental confirmation. That’s why additional accrual of income tax and VAT and fines are happened very often.

We won’t examine the detail procedure of filling in documents. It is obvious that all usual financial documentation must have bank details, signatures and seals.

Courts support the position of the fiscal bodies on the incorrect filling in documents. They made a conclusion that financial documentation was formed without a real conduction of business operations by contractors.

As a result courts stated that it had been unfounded tax profit for companies.

At the same time, following all above-mentioned recommendations may leads you to cancellation of tax notices even if contractor is belonged to “tax holes”.

But it is not enough to have “tax holes” for withdrawing companies’ exes or tax credits.

This conclusion may be justified with this.

According to the Article 204 of the Civil Code of Ukraine there is presumption of agreement’s legality. It means that agreement is legal if its invalidity isn’t defined by law or by court.

According to practice of the European Court of Human Rights liability must be enforced to the company which abuse “tax holes” in the system of taxation but not to other companies which don’t abuse it (the Decision of EUHR “Intersplav against Ukraine” dated the ninth of January 2007).

Practically, term “abusing rights” is interpreted as a matter of reality of business operation, its connections with business activity of company, its economic reasons.

Despite the fact that a criminal investigation was conducted, there are explanations of the contractor’s head about his non-participation in company’s activity and other similar facts, as follows, company has big chances to cancel tax notice about additional accrual if company confirms reality of agreement and its economic reasons with documents.

In these cases courts very often take side of tax payers. They make a decision that if contractors offend the tax laws then he must be responsible for that. That’s why complainant (tax payer) keeps his right to put exes to gross expenditures and tax credits.

So if company wants to be sure in legality of putting exes to tax credits then it should not only fill in financial documents correctly but also provide other proofs of agreement’s reality, its economic reasons and connections to the company’s business activity.

Publication date: 12/12/2013
Volodymyr Gurlov

About author

Name: Volodymyr Gurlov

Position: Partner

Education: National Academy of the Security Service of Ukraine

Knowledge of languages: Russian, Ukrainian, English

Email: [email protected]

Founding partner of Law firm "Pravova Dopomoga".

More than 10 years of work for governmental agencies and private companies allowed Volodymyr to gain significant experience in the field of corporate and tax law. Since 2008 he has been heading a quickly developing and successful practice related to recovery of debts.

Also he is the Head of the Department of Access to the medical services and control of unfair advertising of the All-Ukrainian Council for Patients’ Rights and Safety.

Today Vladimir has been developing his brand for more than 10 years, the purpose of which is to make the solution of any legal issue simple, safe and effective.
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