During an interview with UA-Times online publishing house, Deputy Business Ombudsman Yaroslav Gregirchak shared the problems of entrepreneurs with administrative appeal procedures, the incomplete disclosure of information by the tax authorities and the difficulties in confirming the VAT tax credit.
You can also read the first part of the interview: “The traffic police should be guided solely by a risk-oriented approach in conducting inspections.”
– What problems for business from the point of view of tax administration do you consider trendy?
– If we talk about appealing the conclusions of the tax authorities, there are two stages of this performance. One is to appeal the conclusions contained in the tax audit report. And the second is an appeal against the tax notices-decisions.
In the classical sense, an administrative appeal is only the second. Why? Because in general it is possible to appeal what is already properly formalized and entails certain legal consequences. For example, a tax notices-decision. This is a document that is an official decision.
And the conclusion contained in the act is not considered to be finalized. Therefore, when you file your objections, it is not considered a classic administrative appeal. After all, the conclusions contained in the act – they are not binding.
To understand: there is the requirement of “pay” only in a tax notices-decision. And the act contains a description of how the inspection took place, what they checked, what conclusions they came to.
However, there is a mechanism where taxpayers receive the text of this act in advance. Therefore, they can file their objections. This is done so that in the final version of the document, these comments, where possible, were considered by the tax authorities.
We support this practice because it is good for business. This makes it possible to settle a dispute at an early stage, so to say, “in its incipience “, with minimal amount of time and resources, without involving in the process of its settlement or a higher-level tax authority or the courts. Sometimes this happens not only in the form of a written objection, but also in the form of meetings that take place at the traffic police site, or through video conferences.
We are in favor of maximizing the significance of this stage in order to provide maximum opportunities for business. This is especially important at a time when the point of view of the tax is not yet “canonized”. Then these conclusions, which consider the arguments of entrepreneurs, claim to be more balanced and objective.
Therefore, we want the State Tax Service to work on this shell, which is called – the taxpayer’s objections to the preliminary conclusions contained in the act of tax audit. This is important because not all local taxpayers are ready to make full use of this tool.
In addition, additional difficulties arose during quarantine, when the tax authorities were not ready to organize meetings or video conferences, where it was possible to fully discuss all the arguments being put forward in the objections to the act. Under such conditions, the consideration of objections can become a formality, with minimal chances of success for taxpayers. We would not like that.
– And what are the problems in the topic of the classic administrative appeal?
– Let’s take a closer look. There is a tax notices-decision. It is a legally binding document that embodies the final vision of the tax authority (the main department of the State Tax Service of a certain region, or the Office of Large Taxpayers) regarding the violation of tax legislation and the need to pay a certain additional amount of taxes and fines to the budget. But this document can still be reviewed out of court. It can be appealed to the highest level of the tax authority – the State Tax Service of Ukraine. This is an extremely important procedure, the last barrier before the case goes to court. And we would like this procedure to work a little better.
– How exactly to improve it?
– We have a lot of suggestions on how such an appeal should be organized. But they mainly concern not only the tax sphere, but in general such an institution as an administrative appeal. We have issued a separate, special report on this issue, which deserves a separate discussion. Now let’s focus on the specifics of the tax sphere. And so, the appeal of a tax notices-decision took place. There is a result – either positive or negative for the complainant. And here it is important that the State Tax Service, firstly, substantiates its decisions in detail as a result of the appeal, and secondly – systematically publishes them. This is not the case now. Therefore, taxpayers do not have enough confidence in the administrative appeal procedure. They often do not feel that the review was objective, and that the payer was indeed heard. In our opinion, an increase in transparency can change this. There could be a Register of such decisions, so you can look, study the practice of decision-making. This would help standardize the processes of such administrative appeals and promote uniformity of law enforcement practices.
In addition, it is very important to see an objective picture of what ultimately happens to tax authorities’ decisions, and what assessment they receive as a result of an administrative appeal and in the courts. There should be a mechanism in place to ensure that specific units and individuals in the tax authorities who systematically make materially incorrect decisions (which are subsequently revoked) are identified and measures are taken to improve their performance and, in certain severe cases, their replacement by more qualified personnel.
It should be noted that many people are involved in the formation of the position of the State Tax Service on a tax issue. These are the auditors-inspectors who conducted the inspection. And their leaders at the regional level, who finally agreed on the result of the inspection, and before that – considered the objections of the payer (if any, of course, submitted). And employees of the highest-level body – the State Tax Service of Ukraine – which conducted an administrative appeal (if such, again, happened). Well, and finally – lawyers of State Tax Service who provided judicial support to the case. And, of course, the top management, which coordinated and controlled all these activities. In our view, it is possible to try to apply certain KPIs in terms of how the performance of these people is assessed after the decisions they have made, agreed upon or upheld have passed an administrative and judicial appeal. Such KPIs can be formed by the Ministry of Finance in such a way that this efficiency can be seen not only at the level of the State Tax Service as a whole, but also in terms of individual territorial bodies, departments and even individual officials.
– Will this help solve the above problems in the topic of administrative appeals?
– I am sure that this would be a step in the right direction. But here it is important to consider certain nuances. It often happens that if a taxpayer does not receive a positive decision, then he goes to court. And the courts often take their side. According to our observations, if we talk about our complainants, whom we supported, but the State Tax Service remained on its own – the payers will eventually win at least 70-80% of such cases in court. And this is still a very careful assessment. But if we look at the statistics published by the State Tax Service, everything there is not so clear. Why so? Sometimes we get the impression that the authors of these statistical reports have thought carefully about which indicators to include and which not, and how to compare certain figures with each other to make the overall picture look a little better. It is not about the inaccuracy of the data, but about the fact that only certain fragments of them are shown in a certain light.
It is important that the tax authorities honestly and fully disclose information about the future fate of their decisions in court. And at the same time gave information objectively. We should not try, for example, to mix completely different categories of cases – say, cases of recovery through the court of an existing and confirmed tax debt (this is not a dispute at all, but a purely technical lawsuit in which the tax authority’s chance of victory is close to the absolute) with cases of appeals against the tax notices-decision (which are, in fact, real disputes where there is real competition and real intrigue). Other small statistical tricks that we all see and understand perfectly are not appropriate. I’m talking, for example, about quoting only absolute figures (without interest), or quoting only the number of disputes won without their amounts, or vice versa – depending on what will look better in a situation.
In general, we should understand that the disclosure of information by the tax authorities is an important mechanism of mutual responsibility and an opportunity for all of us to see what the situation in the State Tax Service really is. Tax authorities must provide an objective picture of the situation. And provide it in a way that is convenient for understanding and analysis by the public, at least experts. They do not always manage to do it properly. Because the data that are published can be provided in different formats. That is, something is provided in PDF, something – in Excel, etc. The problem is that there is no umbrella system software that allows the user to search for data by keywords, subject, popularity.
– Is there a problem with different interpretations of data during the completion of integrated taxpayer cards?
– The main problem here is that information about the tax debt can be recorded, sometimes it is not justified at all. Why? Classic case: received a tax notices-decision, initiated an administrative appeal. And the tax authorities did not see it. Therefore, consider the amount specified in the PPR as a tax debt. But what is written in that document is not yet agreed. Therefore, there is no tax debt yet. Why is this important? Because having a tax debt is not just a card entry. This record can be seen by contractors (there is a special public service for this). Based on this record, the tax may require the seizure of accounts and property. Or may refuse to return overpayments from the budget. These are serious things. Therefore, from our point of view, it is extremely important that the integrated taxpayer card accurately and accurately reflects the data on the presence of tax debt, and incorrect data – immediately corrected.
There is another problem. Imagine that a person came to court, received a court decision. The document reads: to declare unfounded and cancel such a requirement to collect the tax debt. However, the text may not contain a direct indication that the information in the integrated taxpayer card needs to be changed. Such a court decision in practice may not put an end to the dispute. After some time, the taxpayer may receive a new claim for payment of the same debt. And it all starts again.
We are, of course, against business having to go to court indefinitely on the same issue. We believe that if the court in fact found no tax debt – the tax authority should recognize this and adjust the data in the integrated card. But the tax authorities are not always willing to do so, unless a court decision explicitly obliges them to do so.
– And what questions does the business ask your team when it comes to VAT administration?
– The old problem in the issue of VAT can be called the lack of predictability, which is the reason for a flurry of criticism from business. Our team is most worried about two things. The first is problems with the practical application of the principle of indisputability of the tax credit. The second is non-enforcement of court decisions.
Let’s talk about the indisputability of the tax credit. Since January 2017, when the Tax Code was amended, the idea has been introduced that if the seller has successfully registered a tax invoice through the electronic VAT administration system and tax invoice compliance monitoring system, the buyer has indisputable right to a tax credit.
If the invoice has already passed through the sieve of these tax instruments, then such a right to a tax credit is considered indisputable. Why? Because the State Tax Service introduced these tools to respond to anticipation. That is, the tax authorities decided to beat their hands even before all the consequences for the budget from fictitious entrepreneurs arose and it is very difficult to react to them post factum at the stage of control and verification measures. Accordingly, the emphasis has shifted by the state from tax audits to the preventive ideology of blocking those who look questionable.
But, probably, it is logical that when the tax invoice has passed checks through all services, the right of the buyer to the tax credit should be indisputable. That is, the entrepreneur must have the right to compensation, without spending energy within the legal system in pre-trial or court proceedings, etc.
We are sorry to state that there are departmental letters at the level of the State Tax Service that question this principle. For example, the tax authorities can come to the exporter with a check and, in fact, reduce the amount of tax credit. By the way, this affects everyone, regardless of the size of the business. This gives an argument that we also do not accept.
Let’s say there may be such a case. Your transaction, where you bought it, is real. There is no doubt that you bought grain. But the problem is that when your seller accumulated the required amount of goods for sale, he did so from ten even smaller suppliers, in relation to which he was the buyer. Some of them, in turn, could buy grain for cash, and form their tax credit on fictitious transactions, transferring the funds received from their buyer in cash. Accordingly, the state lost there.
The person finds himself in a situation where the right to compensation is challenged. In relation to the entrepreneur there are control measures. During these inspections, it is determined that three or four generations earlier – during previous resales of goods, about which a person may not even know anything – there were some dubious transactions, whether counterparties were risky, or could not find the end point of origin of goods (manufacturer) . And who do you think is being punished for this? Very often – virtuous companies that end up buying this product, and, say, export, without even imagining that somewhere within three knees of them there were some machinations. Why punish them? Sometimes it seems to us – only because they are easier to find, and it is easier to collect certain amounts from them than from those who stood behind illegal schemes.
However, not everything looks so bad when the Business Ombudsman Council begins to be involved in the process. When we enter discussions with the State Tax Service of Ukraine on such issues, a balanced and rational approach often prevails in the end, and “accrued” charges are canceled. But the problem is that the whole ideology of changing relations with business in terms of VAT administration, which took place in the context of 2017-2018, when tax invoice compliance monitoring system and other services were introduced, is the subject of fierce criticism. After all, if the system missed tax invoices, why does the State Tax Service question these data. How then to build a relationship between business and tax?
– What to do business in this situation?
– Situations of a criminal nature may arise when it is later established that an act has taken place that should be prosecuted. Suppose a tax fraud is revealed, and it becomes obvious that there was no real transaction on which the tax invoice was drawn up. But this tax invoice is already registered! And this allows unscrupulous persons who have drawn up such fictitious papers, to talk about the indisputability of the tax credit that arose on their basis. Therefore, there is a risk that the institution of indisputability may be distorted in favor of fraudsters. We understand that. That is why we are in such a double attitude, because defending the interests of business, we cannot ignore the interests of the state. On the one hand, the expediency of amending the legislation can be studied, where it should be written that the principle of indisputability is not absolute. Therefore, the amount of the tax credit can be reduced if, for example, the criminal nature of the actions of persons who drew up documents and issued invoices for certain transactions is proved. But, on the other hand, we cannot ignore the fact that the current state of legislation is as it is. Therefore, the tax authorities, based on tax audits, currently do not have the right to reduce the amount of tax credit, given the absolute principle of indisputability.
We do not dispute the right to conduct inspections as such. But, according to our recommendations, given the current state of legislation, which speaks of the indisputability of the right to a tax credit in the circumstances when the tax invoice is registered, we say that the results of tax audits cannot reduce the amount of tax credit. Therefore, the departmental letters of the State Tax Service, which say that this right is not so indisputable – they should be abolished.
– You also have comments on the generalized tax consultations. What needs to be fixed here?
– Summarizing tax advice is a fantastic tool. This document is formed at the level of the Ministry of Finance, where the relevant Expert Council should function. First, it is a tool to ensure the homogeneity of law enforcement practice, which provides answers to systemic questions regarding the interpretation or application of tax law. By the way, the council itself has a professional staff – it includes representatives of government agencies and business associations.
But, unfortunately, there are problems with the activity of the Expert Council. Therefore, if the council does not meet, the expert staff should be updated. In addition, the Ministry of Finance should conduct an inventory of issues that may be the subject of this expert group. It is also necessary to make a work plan of the Ministry of Finance for the issuance of generalized tax advice. It is important to increase the frequency of board meetings so that they discuss the issue at least once a quarter. In addition, more issues need to be addressed in such discussions than at present. At least 5 topics per meeting should be worked on. These are all our recommendations to the Ministry of Finance.
Translation: Liudmyla Lozhevych