Novelties in the Case-Law of the Supreme Court of Ukraine as to VAT Credit: Changes in the Tax Payer’s Fair Practice Presumption Doctrine

The Supreme Court of Ukraine has expressed its opinion on the concept of the fair payer and formation of the value added tax credit. And it is not for the payers’ benefit. What business risks does this decision pose?

When resolving tax disputes, administrative courts are normally governed by the tax payer’s fair practice presumption doctrine which stipulates that a tax payer may not be liable for tax offences of its contracting parties on the grounds of their defective legal status (in particular, attributes of the fictitious status).

In order to bypass this presumption, controlling authorities had to prove the tax payer’s awareness of the illegal nature of operations of its contracting parties, which is the most complicated task for the representatives of the State Fiscal Service. The evidential base may only be special investigative data, testimony of witnesses as to direct contacts between the officials of the payer and the fictitious contracting party, a criminal verdict as to the founder or head of such company, or other data confirming the tax payer’s awareness of the illegal operations of its contracting parties.

As controlling authorities rarely have the given scope of evidence, they usually submit to the administrative court a criminal verdict (mainly, on closing the proceedings on the non-rehabilitating grounds), which states that the certain person has never performed any activity as to establishment of the company and has signed no primary documents.

Administrative courts “critically” assess such arguments of controlling authorities as the nominal director’s failure to perform real operations does not confirm that the tax payer was aware thereof.

One of the companies has found itself in a similar situation. In September 2014 they filed a claim to the court on rendering illegal and invalidation of tax assessment notices. The decisions of the three instances for the benefit of the claimant conformed to the common case-law.

However, the Supreme Court came to a conclusion that “as the case which was being examined contained the data that the founder and the director of the contracting party denied his participation in establishment and operation of such contracting party, in particular, in signing any primary documents, verification and establishment of that circumstance was of significance for correct settlement of the dispute”. At the same time the Supreme Court of Ukraine made a reference to its decision dated March 05, 2012 in case No. 21-412a11 which contained a legal opinion according to which “tax invoices which were used as a basis for formation of the tax credit and issued on behalf of the persons denying their participation in establishment and operation of the tax payer’s contracting parties, in particular, in signing any primary documents, may not be considered to be reporting documents duly executed and signed by the authorised persons, confirming the fact of purchase of the goods, works or services, so inclusion of the VAT amounts specified therein to the tax credit shall be unsubstantiated”.

Therefore, the ground for cancelling the decisions of three instances and sending the case for re-examination was the need to verify the circumstances which did not demonstrate any violations by the actual tax payer.

This decision of the Supreme Court of Ukraine is a bright example of the fact that neither the established case-law of the specialised court nor the case-law of the ECHR (in particular, the decision on Intersplav v. Ukraine) are of no meaning for it.

What consequences shall be expected from this decision? First of all, it is compulsory for the lower-instance courts, so controlling authorities will definitely demand from the judge to take into account the opinion of the Supreme Court of Ukraine. Secondly, this decision obliges the court to verify and evaluate the circumstance of the nominal director’s failure to immediately direct the fictitious company. And the most unpleasant thing for management of real companies is that the Supreme Court of Ukraine has confirmed its opinion that formation of the tax credit on the basis of tax invoices issued by the persons denying their participation in establishing the tax payer’s contracting parties and signing primary documents is unsubstantiated as such invoices may not be deemed to have been duly executed. In fact, this decision of the Supreme Court of Ukraine eliminates both the tax payer’s fair practice presumption doctrine and the reality and substance over form prevalence doctrines as it has not taken into account the evidence of actual transfer of assets and chosen improper execution of the document over the substance of the transactions performed.

Therefore, tax payers shall take additional measures to avoid being charged value-added tax liabilities due to the opinions of the Supreme Court of Ukraine.

Associate of MORIS GROUP LAW COMPANY

Vasyl Andrusiak