Many unfortunate companies who have experienced an audit inspection by the Ukrainian tax authorities did not know what to expect, their legal rights, or the possible results. In fact, the imposition of penalties or the sudden non-recognition of VAT credit by the tax inspection often has no legal grounds. Nevertheless, once the tax inspection has made its decision, the taxpayer will receive a corresponding notice-decision concerning an outstanding tax amount with penalties or a decrease of VAT credit. So what does a company do now?
We suggest that the aggrieved taxpayer does not rush to “negotiate” or discharge any dubious obligations before all evidence has been analyzed because, in the majority of cases, there are sufficient legal grounds for an appeal. If a company is successful in following the prescribed process and employing the available legal procedure described below, then the tax penalties or the decrease of VAT credit can often be cancelled altogether or, at a minimum, significantly decreased. Admittedly, the appeal procedure can be quite lengthy, but if the issue involves a significant amount of money, then the action is worthwhile. For your convenience, immediately below we will provide a general overview of the administrative procedure for appealing decisions of the Ukrainian tax authorities.
Once a tax inspection has been conducted, the tax authorities must execute a so-called Inspection Act in the specific form established by the Ukrainian State Tax Administration. Pursuant to point 86.7 of Article 86 of the Tax Code of Ukraine, in the event that the taxpayer or its authorized representative disagrees with the conclusions of the Tax Inspection or the facts/information contained in the Inspection Act, the taxpayer has the right to submit its objections within 5 (five) working days from the date of receipt of the Inspection Act.
After the actual receipt of the tax body’s decision, the taxpayer may proceed with an appeal. The law provides for two methods of appeal: administrative and judicial. An administrative appeal entails the sequential submission of appeals to the higher standing tax bodies in the order of hierarchy. On the other hand, the administrative appeal procedure is considered a pre-judicial dispute resolution procedure. Article 55 of the Tax Code of Ukraine stipulates that a tax notice-decision on the determination of an amount of a taxpayer’s monetary liability may be appealed to the controlling bodies at higher levels. The administrative appeal of a tax body’s decision is comprised of two levels.
The appeal procedure is based on the appeal’s consideration by a higher body, which evaluates the arguments of the appeal and the actions of the tax body which took the initial decision subject to the appeal. The higher body, as the controlling body, will hand down an impartial decision based on the results of its review. If the taxpayer is fully confident in its position, then it will be interested in pursuing the quickest consideration of its appeal and the passing of the corresponding decision.
Article 55 of the Tax Code of Ukraine defines “controlling bodies of the highest level” as the State Tax Administration of Ukraine of the State Tax Services in the Autonomous Republic of Crimea, all regions and the cities of Kiev and Sevastopol, which in their turn are the controlling bodies of a higher level than local state tax inspections. In other words, appeals regarding the lowest state tax inspections’ decisions must be submitted to the state tax administrations in the Autonomous Republic of Crimea, all regions and the cities of Kiev and Sevastopol. Appeals that challenge the state tax administrations’ decisions in the Autonomous Republic of Crimea, all regions and the cities of Kiev and Sevastopol must be submitted to the State Tax Administration of Ukraine on the national level.
The grounds for an appeal may be:
- the controlling body in question incorrectly determined the sum of the tax obligation;
- the controlling body in question adopted a decision which is in contradiction of the law; or
- the controlling body in question adopted a resolution which is beyond the authority of the controlling body prescribed by the Tax Code of Ukraine or other legislative acts.
The terms for the submission and consideration of appeals under the administrative procedure are as follows:
- term for submission – 10 calendar days after the date of receipt of the relevant tax notice-decision;
- term for consideration – 20 calendar days from the date of receipt of an appeal (with the possible extension of the term to 60 calendar days upon mandatory notice to the taxpayer prior to the expiration of the initial 20-day term).
The date of submission is deemed the date of the actual receipt of the appeal by the corresponding tax body. If the appeal is sent by mail, the date of receipt is deemed the date of receipt by the relevant postal department as marked on a notice of receipt or on the parcel containing the appeal.
An appeal must be submitted in writing and meet the requirements established for the execution, submission and consideration of appeals as set forth by law. In its Decree No. 1203, dated November 19, 2012, and registered with the Ministry of Justice on December 7, 2012, the Ministry of Finance of Ukraine confirmed the “Regulations on the Procedure of the Submission and Consideration of Taxpayer Appeals by the State Tax Service Bodies”, which sets forth the requirements for the substance, submission and consideration of taxpayer appeals.
A taxpayer appeal must indicate the following:
- the name of the legal entity taxpayer, its place of location and the address to which the decision on the appeal must be sent;
- the state tax body which issued the tax notice-decision which is subject to appeal, including its date, number, type of tax or penalty (financial sanctions) and the amount of the penalty;
- the essence of the issue, request, or claim and a substantiation of the taxpayer’s disagreement with the amount of the tax obligation determined by the state tax body in the tax decision-notice or its contradiction with another state tax body decision;
- notice or failure of notice of the relevant state tax body on the submission of an appeal to a higher state tax body;
- the signature of the taxpayer’s authorized representative, affixed with the seal of the taxpayer legal entity;
- the list of documents and calculations annexed to the appeal.
At the same time the taxpayer submits its appeal to a higher state tax body, it is obliged to inform in writing the controlling body which took the initial tax decision regarding the appeal of its tax decision-notice. Appeals, which do not meet the above requirements and do not grant the opportunity to review the appeal in its essence, are returned with a corresponding explanation no later than 5 (five) days from the date of receipt of such appeals.
If the taxpayer deems it necessary, it should include certified copies of all documents, calculations and evidence along with the appeal. If the taxpayer does not provide documentary evidence, the higher state tax body authorized to consider the appeal may demand photocopies of the relevant documents from the lower state tax authority whose decision is subject to appeal.
Importantly, a duly submitted appeal will suspend the taxpayer’s performance of the tax obligations set forth in the tax notice-decision for the period until the administrative appeal procedure is completed. During this term the tax body’s tax claims for the appealed amount may not be sent to the taxpayer and the monetary obligation will be considered contested and not agreed upon by the taxpayer.
The considering state tax body must hand down a substantiated decision and send it within 20 calendar days from the date of receipt of the appeal to the taxpayer’s address by mail with notice of receipt or against signature. However, the head of the state tax body or his deputy may decide to prolong the consideration process for a term of no more than 60 calendar days. In such case, written notice must be sent to the taxpayer prior to the expiration of the initial 20-day term. The decision will be deemed sent (delivered) to the taxpayer legal entity if it is delivered to a company official against signature or sent by mail with notice of receipt to the address indicated in the appeal.
Please note that if a decision on the appeal is not sent to the taxpayer within the 20-day term (or prolonged term), the appeal will be deemed fully satisfied in favor of the taxpayer from the date following the last day of the required term for deciding on the appeal. The appeal is also considered fully satisfied in favor of the taxpayer if the decision of the head of the tax body (or his deputy) to prolong the term for consideration of the appeal is not sent to the taxpayer prior to the expiration of the initial 20-day term.
In case the relevant state tax body renders a decision fully or partially against the taxpayer, such taxpayer has the right to appeal to a higher state tax body with another appeal within 10 calendar days from the date of receipt of the decision on the results of the consideration of the appeal.
The administrative appeal procedure will end on:
- the day which follows the last day of the term provided for the submission of the appeal against the tax notice-decision or any other decision of a controlling body if the appeal was not submitted in a timely fashion;
- the day of receipt by the taxpayer of the decision of the relevant controlling body on the full satisfaction of the appeal;
- the day of receipt by the taxpayer of a decision of the State Tax Administration of Ukraine at the national level;
- the date of the taxpayer’s appeal to the controlling body with a request to defer the tax obligations which were subject to appeal.
Of course, if the taxpayer agrees to the tax obligations demanded by the tax authorities at any time, the administrative appeal procedure will come to an end.
Any decision issued by the State Tax Administration of Ukraine at the national level in relation to a taxpayer’s appeal is deemed final and binding and is not subject to further administrative appeal. However, the taxpayer may still submit an appeal to a court of law. This confirms once again that it is not always wise to immediately rush to a court of law with an appeal against the tax authorities; having exhausted the time allotted for administrative appeal process, the taxpayer still has a chance to resolve its tax issues later at the judicial level. Thus, the administrative appeal process, at a minimum, provides the taxpayer with additional time to contemplate and prepare for the protection of its interests in a court of law.
Overall, the administrative appeal procedure is usually quite effective when there is ample evidence of errors on the side of the tax authorities, especially now that there are significant precedents of successfully arguing against such errors in judicial practice. If the administrative appeal procedure proves to be unsuccessful for the taxpayer, then the taxpayer may still appeal to a court which is capable of effectively protecting the taxpayer’s rights. Unfortunately, the topic of full blown litigation with the tax authorities requires substantial attention that is beyond the limited scope of this article.
In summary, every taxpayer has the opportunity to assert its opinion and choose a legal avenue for defending its rights. However, both the administrative and judicial avenues for appeal require knowledge and experience in order to efficiently use such opportunities. Knowledge of the process alone is not sufficient; the taxpayer also needs experience with the taxation system and an understanding of its own strengths and weaknesses to properly assess the probability of a successful appeal. Careful legal analysis and evaluation of all aspects and peculiarities of each case can result in specific approaches designed to positively resolve problems with the Ukrainian tax authorities.