Tax disputes trigger criminal investigations — current threats for taxpayers
Senior Partner, Attorney at Law
TaxPartner, Attorney at Law
dispute after tax audit is not the worst thing which faced by a taxpayer. If additional tax assessments exceed a minimal threshold (currently UAH 609,000 now about $ 25,500) set by Article 212 (Tax Evasion) of the Criminal Code, then a criminal investigation will likely be opened. Internal regulations of the fiscal service require making submissions to investigation body, which under the Code for Criminal Proceedings shall open criminal investigation automatically. Since July of last year, such submission shall be done under this regulation after administrative appeal procedure is passed. Earlier it was due just after issuance of ab assessments-notification to a taxpayer.
Due to this practice, tax authorities, the tax militia and the militia ( police), currently handle thousands of tax-related criminal cases, which in reality are bubbles and have no real basis for investigation. As a result, less than 5% of overall tax-related criminal cases go to courts. This percentage show that criminal investigations against business are mostly used by authorities as a means of pressure, rather than fighting real crime. For instance in March 2014, the General Attorney’s Office reported closing as groundless 23 criminal investigations for tax evasion that had been opened against the Roshen group of companies. Therefore, this issue is known even to the current President personally, due to his link to this group of companies.
In 2014, we see practically some relief of this matter. Moreover, the issue was noted even in the Coalition Agreement of the current majority in Parliament signed November 2014. Section 3.5 of the Coalition Agreement declared refusal from punitive model of tax control, which shall be achieved, inter alias, by (subpara 3.5.6.) prohibiting at legislative level of criminalization of tax matters at least until additional tax assessments are finally confirmed through due process.
Yet, the above remains merely promises for the moment. In practice in 2015, we see return of the old practice. Virtually any substantial tax dispute automatically triggers criminal investigation launch on tax evasion.
Launching of criminal investigations in such cases is almost inevitable. But it does not mean that it not painful and cause no problems for businesses. To start, there is harassment of the businesses by calling officers of the company for interrogations, demanding provision of documents, etc. This makes businessmen nervous. Nobody is happy if a criminal investigation is in progress.
Even the fact of a criminal investigation may cause real problems for businesses. For instance, provision of documents in the course of criminal investigation under the Code for Criminal Proceedings shall be done normally based on approval of the respective court. Court resolutions allowing access to documents are public, available in electronic register of court awards. It becomes already routine procedure for businesses to check this electronic register for any negative information on potential counterparts. Court resolution allowing access to documents of a company for criminal investigation is considered negative information on the company. Under the Code, permission may be granted by the court only if the investigator proves that there are sufficient grounds to believe that the crime has occurred. Some companies have faced issues with potential clients or creditors (banks) who denied keeping contracts with the companies in respect of which the procedural awards were served due to such negative information.
That’s not the end of the story. The main risk is that nobody can clearly predict where the investigation will rule finally. Tax police have their own interests in demonstrating ‘achievements.’ If the taxpayer loses a case in administrative court and pays assessments, chances are high that the case may end in criminal court. In such case, tax police often suggest to business to plead guilty to tax evasion and be relieved by the court of criminal responsibility, by virtue of para. 4 of Art. 212 of the Criminal Code due to payment in full before formal notice of suspicion is served. This brings ‘points’ to the tax police as one more 'evasion’ disclosed, but it deteriorates the reputation of the taxpayer. And the next time, a tax dispute arises, tax authorities may say that the taxpayer already has a record and therefore cannot be viewed up as good taxpayer.
It is not easy to fight in such situations and to mitigate risks even if it is obvious that there is no evasion but rather a common tax dispute. Instruments include relevant legal actions applying to various bodies, but mainly trying to defend the taxpayer on the substance of the tax dispute.
This criminal investigations-related environment looks dangerous for business. As experts, we spend hours scrutinizing tax laws related to VAT or CPT of basic transactions of big multinationals in every day activity (marketing of imported goods, registration of a tax voucher in VAT Electronic Administration System etc.). Is it possible for an accountant, who makes thousands of operations in such conditions, not to make a mistake? However, even if there are no mistakes, the risk of criminal investigation still exists, due to different interpretations of the Tax Code by tax authorities.
Is there any recipe for Ukraine to help business forget the nightmare of criminal pressure? We believe that liquidation of tax police and decriminalization of tax disputes may significantly ease the issues. Yet, these steps are hardly possible in Ukraine, without pressure from business on the government. There is already a point existing for such a pressure: the Draft Law #3448 “On Amendments to the Tax Code of Ukraine regarding Peculiarities of Criminal Process in the Cases related to Taxes and Charges”.
This Draft Law aims to settle problems from automatic initiation of criminal proceedings and application of plea agreements. To settle such issues, the Draft Law would narrow the scope of fiscal authorities to make illegal pressure o taxpayers. This would make a great contribution to developing Ukraine’s business environment. More specifically, the Draft Law requires immediate the closing of tax evasion investigations if relevant assessments are not agreed by due legal procedure, or, if agreed, are paid in full, with applicable penalties, within terms of the Tax Code.
In Ukraine, registration of a draft law in the Verkhovna Rada of Ukraine does not mean that the instrument is on track to adoption. Thus, we call on representatives of foreign business to use all possible measures, including the International Monetary Fund, to make maximum pressure on the government and Verkhovna Rada to adopt Draft Law #3448.
This will really help to improve Ukraine’s business climate.