Verification of compliance with tax laws
How does the tax authority verify compliance with the tax laws? Does this vary for different taxpayers or taxes?
The tax authority verifies compliance with the tax laws by means of tax audits. The tax authority may also address written requests for information to taxpayers in the cases exhaustively established by the Tax Code of Ukraine. Under the Tax Code, there are the following types of tax audits:
A desktop audit is performed automatically for all tax returns and tax invoices normally and regularly submitted by taxpayers. Conducting such an audit does not require the prior notification of a taxpayer, or an order from the head of the tax authority. The audit is carried out solely on the basis of data specified in the tax returns and data from the electronic administration system. The subjects of the desktop audit are the correctness of calculations, the compliance with other formalities applicable to tax returns, the timeliness of registration of tax invoices and the timeliness of payment of taxes.
A documentary audit is the most general tax audit of taxpayer activity, which is conducted under an order from the head of the tax authority. The subject of such audit is the timeliness, reliability, completeness of accrual and payment of all taxes and fees provided by the Tax Code, as well as compliance with currency and other legislation, control over which is entrusted to the tax authorities, compliance by the employer with legislation on employment contracts, employment relations with employees. A documentary audit is carried out on the basis of tax returns, financial, statistical and other reporting, registers of tax accounting and accounting, primary documents used in accounting and tax accounting and related to the calculation and payment of taxes and fees, as well as on the basis of the other documents and tax information received by the tax authority in the manner prescribed by the law. The audit is divided into several types: scheduled or unscheduled tax audit, on-site or off-site tax audit.
Scheduled tax audit
A scheduled tax audit is performed based on the list of taxpayers subject to the scheduled tax audit. This list is prepared in advance for the next year and published on the official website of the State Tax Service of Ukraine. This list can be amended twice a year.
Unscheduled tax audit
An unscheduled tax audit may be performed only in the exhaustive list of cases directly established by the Tax Code. For example, in cases when the tax authority receives the information, which shows possible violations of tax legislation, and such information is not disproved by the taxpayer in response to a prior written request from the tax authority.
An on-site audit is carried out at the location of the taxpayer. An off-site audit is carried out at the location of the tax authority.
An actual audit is performed at the place where the taxpayer performs its business activities, under an order from the head of the tax authority, with no prior notification of the taxpayer. This audit may be performed in the limited list of cases exhaustively defined in the Tax Code. The subject of such audit is taxpayer’s compliance with the legislation on cash circulation regulation, cash transactions, licences, certificates, including the production and circulation of excisable goods, compliance by the employer with legislation on employment and arrangement of labour relations with employees.
Tax return review procedure and limitation periods
What is the typical procedure for the tax authority to review a tax return and how long does the review last? What limitation periods apply?
Tax returns are subject to desktop audit, which is based solely on the information submitted in such tax return.
The desktop audit of the tax return shall be carried out within 30 calendar days following the tax return submission deadline, and, in case the tax return was submitted later – within 30 calendar days after the submission.
The desktop audit of tax return is usually technical, analyzing compliance with submission deadlines, absence of mathematical and other errors, completeness of data filled in.
Tax authority requests for information
What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?
The tax authority may receive information from taxpayers in the following cases:
- within the tax audit; and
- under the respective written request in the cases established by the Tax Code.
In both cases, the tax authority may request the provision of the following documents: primary documents used for accounting and tax accounting purposes, financial, statistical and other reporting connected with calculation and payments of taxes and fees, registers of tax accounting and accounting. The list of documents laid down in the Tax Code is not exhaustive, and the tax authorities may request any information or documents directly related to the data reflected in accounting or tax reports.
Also, within the tax audit, the tax authority has the right:
- to receive written explanations from officials of the taxpayer on issues related to the subject of audit, and their documentary confirmation; and
- to receive explanations from employers or their employees, or persons whose work is used without documentary arrangement, during audits on compliance by the employer with the legislation on the conclusion of an employment contract, arrangement of employment relations with employees, compliance with the legislation on taxation of wages paid.
Taxpayer failure to provide information
What actions may the tax authority take if the taxpayer does not provide the required information?
Two scenarios are possible if a taxpayer does not provide the requested information as follows:
- non-provision of information requested during the tax audit will be considered an offence of tax legislation and subject to a fine. Also, documents that were requested from a taxpayer but not provided are deemed to be absent, which leads to negative tax implications; and
- non-provision of information requested outside of a tax audit under the respective written request, or failure to provide such information in full or within the established time limits may lead to an unscheduled tax audit of this taxpayer.
Collecting overdue payments
How may the tax authority collect overdue tax payments following a tax review?
First, the tax authorities can file a claim to a court regarding overdue payments (tax debt) recovery. In such a case, the debt can be forcibly recovered from the taxpayer’s accounts.
The property of a taxpayer who has a tax debt is subject to a tax lien. The lien is imposed over the property owned by the debtor in proportion to the amount of the debt. If the amount of the debt is lower than approximately €98, a tax lien is not applicable. A special official of the tax authority (a tax manager) is appointed in order to describe the property subject to tax lien, and to sell the property in order to recover tax debt (if the taxpayer does not have enough monetary funds to repay the tax debt). The property on lien can be sold via an auction or through trade organisations. If the debt is recovered any time before the conclusion of the sales agreement, the sale must be cancelled.
An administrative arrest of the property is an additional mechanism for enforcing tax payments. It is applied in exceptional circumstances, inter alia, if a taxpayer:
- violates the rules on the alienation of the property on bail;
- refuses to conduct an inspection regarding the condition of the property on bail; or
- does not admit the tax manager to describe the property subject to bail.
Administrative arrest provides for a prohibition or a significant limitation on the possibility of the taxpayer to exercise ownership rights over the property. The legality of administrative arrest shall be reviewed by the court within 96 hours of its imposition.
Penalties – scope of application
How are penalties calculated?
There are two basic types of penalties: fixed amount or in percentage terms. Fixed penalties can be determined directly in the Tax Code in Ukrainian hryvnias or can be calculated as a certain amount in subsistence minimums.
Fixed penalties are imposed, for instance, for failure to file a tax return or transfer pricing report, for mistakes in tax returns or late payments of tax.
Penalties are usually calculated in percentage terms in cases where the tax authorities unilaterally determine the amount of tax liabilities, or additionally assess tax or reduce the tax credit. In some cases, the penalties are calculated in percentage terms by setting their maximum amount as a specific number of subsistence minimums.
What defences are available if penalties are imposed?
The imposition of penalties can be challenged, just like any other decision of the tax authorities, at the State Tax Service of Ukraine or in a court.
In what circumstances may the tax authority impose penalties?
Penalties can be imposed on a taxpayer for an offence related to tax. The full list of tax offences is defined in the Tax Code. To qualify as a tax offence, the action or inaction shall be unlawful and, for certain offences directly provided in the Tax Code of Ukraine, there must be guilt on part of the taxpayer.
Penalties are most commonly imposed if the tax authority unilaterally determines the amount of the liability in tax. In addition, penalties are provided for the alienation of property on tax bail without the consent of the tax authorities; delay in making tax payments; delay of submission of tax returns or registration of tax invoices; violation of the rules on the accrual; withholding and payment of taxes on the part of the tax agent, among others.
Can criminal consequences arise as a result of tax non-compliance? Are these different for different types of taxpayers?
If the additionally assessed tax liability is in excess of approximately €100,000, this might indicate the existence of tax avoidance as a criminal offence. Based on such facts, a criminal investigation can be initiated.
Individual taxpayers or officials of business entities are subject to criminal liability for tax avoidance. The penalties may include fines, prohibition on certain activities or confiscation of property.
What is the recent enforcement record of the authorities?
According to the official statistics of the State Tax Service, during the first quarter of 2021, nearly €13 million of taxes was additionally accrued by the tax authorities in the course of audits. However, a big percentage of additional assessments are subsequently challenged by taxpayers, often successfully.
For instance, during the first five months of 2021, 3,800 cases related to additional accrual of taxes were reviewed by courts, concerning nearly €1 billion. Forty-two per cent of cases were decided in favour of taxpayers. Approximately 31.5 per cent of additional tax assessments or other decisions challenged before the State Tax Service were invalidated in full and the other 6 per cent were partially annulled.