Tax Ruling Concept - A Risk Management Tool
Ukraine's tax legislation in many instances lacks certainty and can be ambiguous. A tax ruling could be an important instrument for managing risks of tax exposure. Following changes to the Tax Code (effective 6 August 2011), the legal framework for tax rulings is developing in a positive direction. Taxand Ukraine highlights the main features of the tax ruling and comments on how businesses can benefit from the tax ruling concept, avoiding heavy fines.
According to Ukraine's Tax Code, (article 52) the tax ruling (the code uses the term "tax consultation") is understood as a written or electronic document with respect to the application of specific norms of the tax legislation. At present, the most typical ruling is an tax ruling in paper form (i.e. letter signed by the executive of a relevant controlling body) addressed to specific taxpayer.
The tax ruling is issued at the request of a specific taxpayer and accordingly it applies to that taxpayer. General tax rulings are issued at the initiative of a central controlling body in respect of issues that relate to a considerable number of taxpayers or material tax liabilities. The general tax ruling must be approved by the order of the relevant controlling body.
Statutory terms and conditions
It is an obligation of the controlling body to issue the tax ruling within 30 calendar days from the date of receipt of the taxpayer's application. The scope of the tax ruling can cover any tax issues within the jurisdiction of the relevant controlling body. Controlling body means:
(i) local tax inspection office or local customs office where the taxpayer is registered
(ii) superior tax or customs office
(iii) central tax or customs office
The taxpayer is free to apply to either the local or central controlling body. However, practice shows that tax rulings issued by local bodies may be revoked if they conflict to the position of the higher-level authorities.
A non-resident entity that has no registration in the Ukraine cannot apply for the tax ruling.
There is no certainty as to whether the tax ruling is legally binding on the controlling body. However, the Tax Code stipulates that if the taxpayer believes that the tax ruling contradicts the legislation, it can appeal the tax ruling in a court. There are several recent cases where the administrative courts have accepted such claims from taxpayers and issued resolutions regarding positions stated in the tax rulings. This implies that tax rulings may be treated as legally binding subject to future court practice.
The controlling body is free to revoke the tax clarification if there is a valid reason. No court authorisation is required. If the controlling body revokes a tax ruling, no practical defence is available.
Release from responsibility
The Tax Code provides that the taxpayer shall be released from responsibility if it acted based on written (electronic) tax ruling. In particular, this is applicable in cases where the tax ruling (individual or general) has been revoked.
Release from responsibility shall mean that no fines or sanctions under administrative or criminal law shall apply if the taxpayer acted based on the tax ruling for the term of the ruling. However, if the tax ruling is revoked, the controlling body will be in a position to claim from the taxpayer the amount of relevant tax liability that could arise in case of a tax assessment subsequent to the revocation of the tax ruling.
The above rules have practical importance for taxpayers since considerable fines (25% - 50% of the tax assessment) can be avoided.
Historically, letters issued by controlling bodies provided important guidance in relation to the application of tax rules. The Tax Code reinforces the role of the tax rulings due to better wording of the clause for release from responsibility. In turn, taxpayers should consider disclosing in the application specific circumstances for which the ruling has been requested to ensure that release from responsibility is not jeapordised. Thus, if there is a need to initiate the tax ruling, the taxpayer should conduct careful analysis and planning to mitigate undesired consequences.
As a matter of risk management, investors operating in Ukraine should monitor:
- Public tax rulings
- Court cases in relation to the various tax rulings.
The tax ruling concept may be of use if there is a need to manage risks arising from ambiguity of legislation. For instance, using the tax ruling it may be possible to establish a court case, which would support the taxpayer's position.
The Tax Code does contain a conflict of interest clause (art. 56.21), which provides that the dispute shall be resolved in favour of a taxpayer if there is an ambiguous or contradictory provision in the tax legislation. Conflicting tax rulings may serve as evidence of ambiguity or conflicts in tax rules. In case of dispute, such evidence is a vital argument for application of the conflict of interest clause in a manner beneficial to the taxpayer.
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