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Guidance for Courts in Transaction Tax Disputes


The letter of the Higher Administrative Court of Ukraine (HACU) of 2 June 2011 sets directives to administrative courts regarding application of Tax Code rules in tax disputes. The letter focuses on issues relevant to proving reality of transactions. Effectively the HACU suggests that administrative courts follow substance over form approach. Taxand Ukraine looks at this challenging move in a business environment where 'form over substance' has traditionally prevailed.

Substance Over Form?
HACU promotes the position that where there is evidence of unreality (fictitiousness) of a transaction, underlying documents should be viewed void. Accordingly, it instructs courts to look at substance and facts relevant to specific transactions rather than make judgement regarding correctness of paperwork.

Legal Defects of the Supplier's Tax Status
The HACU instructs courts to verify the existence of guilt in taxpayer's actions regarding validation of legal defects of the supplier's tax status such as lack of tax registration, competence of company executives to sign primary and tax compliance documents.

Missing Entity in The Supply Chain
Courts should evaluate direct relations between parties of the transaction. While considering relevant disputes, validity of the last transaction in the supply chain (as well as deduction claimed by the last buyer) should not be affected by existence of missing entity in the supply chain.

Agreements Detrimental to the State Interests
The tax authorities are entitled to apply to challenge validity of an agreement between
business entities on the basis of the Civil Code (agreements detrimental to the state interest).

The HACU points out that in order to treat an agreement void on such a basis it should be proved that there were intentional actions aimed at violations of the state interest (this
include abstraction of the state funds by way of tax evasion). Statutory period for application to the court with such a claim is 6 months from the date when violation of the state interests was revealed.

Read the full article from Taxand Ukraine here.

Taxand's Take

The tax authorities are likely to apply position of the HACU in the most fiscal way. It is expected that the tax authorities will pay more attention to substance of transactions and quality of evidence that support the tax assessment.

Foreign investors operating in Ukraine are advised to focus risk management efforts on
transactions that in practice attract scrutiny of the tax authorities. These include cross
border transactions/intra-group transactions such as cost sharing structures, management
and consulting services, royalty/license fees, provision of personnel, various re-invoicing arrangements.

Your Taxand contacts for further queries are:
Vladimir Didenko
T. +380 44 492 8282

Oleksandr Maydanyk
T. +380 44 492 8282

Taxand's Take Author