Tax dis­putes trig­ger crim­i­nal in­ves­ti­ga­tions — cur­rent threats for tax­pay­ers


Kyiv Post Legal Quarterly - - News -

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.

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