Ukrainian courts may now award recovery of VAT refunds directly from the state budget, according to a February 2019 Supreme Court ruling.

Disputes over VAT refunds are a major issue in Ukraine, particularly for export traders who declare an excess of input VAT on a regular basis and are, therefore, frequently entitled to a refund. To recover VAT, the current process involves the taxpayer filing an application with tax authorities, who then verify the amounts claimed before the treasury transfers the refunds.

In practice, however, during the verification stage tax authorities either fail to take action or misuse their powers by refusing VAT recovery. Taxpayers then go to court to obtain a repayment of the illegally withheld VAT refund. However, until the Supreme Court's February judgment, taxpayers often did not receive their refunds even after a successful challenge.

This was because courts could not instruct the treasury to transfer the VAT refund to the taxpayer's bank account. They could only instruct tax authorities to take appropriate action who, frequently, failed to comply with court ruling.

The Supreme Court reasoned that any illegal actions (or inactions) of the tax authorities constitute a violation of the right of a taxpayer to recover VAT, and that the court must choose an effective mechanism for protecting that right. Awarding recovery of contested VAT directly from the state budget is, the court held, such a mechanism.

It is hoped that this decision will be a turning point for resolving cases of disputed VAT refunds, though there remains a risk that the judgment will be interpreted restrictively. The tax authorities may argue that the principle underlying the decision may be applicable only to limited cases, specifically where taxpayers claim so-called old VAT relating to the VAT recovery procedure effective from 2014 to 2016.

However, we believe the judgment may prove to be the basis on which taxpayers are able to directly recover VAT in all cases where the tax authorities are found to be abusing the refund process.