Dispute Resolution

Valentyn Gvozdiy ,

Born in Svyatets, Theofipolsky District, Khmelnytsky Region. He graduated from Yuriy Fedkovych Chernivtsi National University, Law Faculty. Career: GOLAW (known previously as Gvozdiy & Oberkovych Law Firm), Managing Partner since 2003; Klara Margulyan Attorneys-at-Law, Legal Assistant since 1999. Valentyn Gvozdiy has held the post of Deputy Head of the Bar Council of Ukraine since 2012. He was officially admitted to the German Federal Bar in July 2015 as a foreign counsel. Primary practices: Litigation, Taxation, Compliance management.

The Revolution of Awareness

“According to clause 56.21 of the Tax Code of Ukraine, in the event of the existence of a ‘conflict of interests’ of the taxpayer and the oversight body, a resolution should be adopted in favor of the taxpayer”, Valentyn Gvozdiy, Managing Partner with GOLAW, notes

— The year 2015 was marked by the reorganization of both tax and judicial systemsin Ukraine. Did those reforms have any impact on the practice of consideration of such disputes?

Of course, the reforms of the tax and judicial systems have affected the practice of consideration of  tax disputes. In the first place, the reforms resulted in an improvement of the overall quality of justice. It is recognized that judges began to review in a more scrupulous manner the circumstances of cases, tax audit acts, source documents submitted by taxpayers, and the key aspects of their business activities.  


— What trends exist in current court practice that are applicable to tax disputes? Did the courts modify their key approaches to the resolution of tax disputes?

It is pleasant to note that the courts have been increasingly active in rendering assistance to  taxpayers in asserting their rights and interests. This is evidence of transformation of justice and its transition from the former administrative and sentencing system to a progressive and fair model of  disputes resolution.

A major reform seen by Ukrainian businesses is that from 2015 taxpayers received the opportunity to challenge not only the outcomes of tax audits, but also the grounds for their conduct. In other words, from now on they can challenge not only the resolutions of the tax authorities on accrual of extra tax liabilities, but also the orders on the conduct of tax audits as such. For example,  representatives of the tax authorities have been claiming for a long time that if a tax inspector is granted actual access to an audit, the taxpayer is unable to challenge the results of the audit in the future. In doing so, the tax officers referred to the Resolution of the Supreme Court of Ukraine on Case No. 21-25а10 dated 24 December 2010, in which the Court determined that a taxpayer who believes that the procedure and the grounds for a tax audit have been violated, obtains the right to defend personal right by way of preventing an audit by tax officers. However, once  access to the audit is granted, then only the substance of any offences identified during the audit may be considered in court.

At the same time, preventing an audit by officers appears to be a questionable line of defense. First, it does not work in case of non-field audits. Second, it brings the risk of attachment of property, in particular, of the current accounts of the subject company (according to clause 94.2.3 of Article 94 of the Procedural Code of Ukraine). The above practice was amended in 2015. For example, on 22 January 2015, the Supreme Court of Ukraine, on the basis of the results of consideration of the appeal submitted by the Budgarantinvest-55 company, passed a resolution saying non-compliance by the tax authority with mandatory conditions for the conduct of an audit gives grounds for recognition of the audit and its consequences as illegal. Therefore, even if the taxpayer allows the auditors to commence the audit but the auditors fail to present the order on such audit for review by the taxpayer, or if the auditors commit other violations during the audit, then the results of the audit should be recognized as illegal.


— Should the taxpayer initiate a separate tax dispute requesting cancellation of the results of the tax audit results in such a situation?

Generally, it would be logical to presume that if a court cancels an order on conduct of the tax audit and respective actions in connection with its conduct, than the tax notification-resolution issued based on the results of such audit shall be void. In fact, the Supreme Court of Ukraine came to the same conclusion in its Resolution dated 27 January 2015, although the above Resolution does not contain any explicit statements in this respect. At the same time, the taxpayer needs to challenge the respective tax notification in court. In practice, such processes take place in parallel. Furthermore, the court award voiding a resolution on the conduct of the tax audit has pre-judicial meaning within the scope of a case on cancellation of tax notification and attests to the illegality of such a resolution.


— What other innovations in court practice should taxpayers take into account within the scope of their disputes with the tax authorities?

First of all, the taxpayer should take into consideration the changes in approach taken by the courts when reviewing the source documents of taxpayers. From now on, formal mistakes on the part of the accounting department do not represent decisive evidence of non-commodity (fictitious) nature of business transactions.

Furthermore, the taxpayer should bear in mind that the norms of tax legislation do not limit the period of presentation of required source documents. In other words, if an accountant forgets to make available any documents within the scope of a tax audit, nothing prevents him/her from correcting such an oversight in court. The right to present objections against the conclusions of the tax authority and to add to the case materials any evidence supporting such objections is granted to the taxpayer at all stages of the tax control, as well as at the stages of the judicial proceedings, during which the parties are allowed to present additional evidence. A similar conclusion was made by the Supreme Administrative Court of Ukraine in its Resolution on case No. К/9991/39128/12 dated 8 April 2015.

Another positive change is that in 2015 the presumption of the legality of a taxpayer's position was  finally put into practice. I would remind that, according to clause 56.21 of the Tax Code of Ukraine, in the event of the existence of a "conflict of interests" between the taxpayer and the oversight body, resolution should be adopted in favor of the taxpayer. The above practice did not work in the past, and resolutions were adopted in favor of the fiscal authorities.

This trend was overridden by the Resolution of the Supreme Administrative Court of Ukraine on Case No. К/800/39896/13 dated 23 September 2015, where the Court clearly emphasized the criterion of good faith of the taxpayer. The court underlined that in the sphere of tax relations any actions on the part of the taxpayer are legal unless they are challenged in accordance with the established legal procedure. In its turn, this precludes the opportunity of imposing sanctions on the taxpayer, in particular, those in the form of deletion of the data declared by the taxpayer from electronic databases.


— What advice could you give today to a taxpayer on choosing a correct line of defense in a tax dispute?

Currently, taxpayers have a great deal of options and opportunities for defending their interests in disputes with the tax authorities. To gain a victory, you only have to be scrupulous when preparing the case-based reasoning and defining a legally sound position when challenging each illegal act (resolution) taken by the fiscal authorities.

Practice shows that taxpayers should be active in the course of disputes with fiscal authorities. Furthermore, taxpayers should take into account not only established legal doctrines, but also refer to the latest trends in their application by the courts.