Tax Practice

Senior counsel, KM Partners

New social VAT contract

The right of a taxpayer – buyer of goods/services for a tax credit arises only if the supplier's VAT invoice (VI) is registered in the Unified Register of VAT Invoices. Since July 2017, for the purposes of combating fake VAT at the stage of VI registration, the system of preliminary risk control was established, which provides for a mechanism to suspend VI registration.

At the same time, the provisions of clause 201.10 of the Tax Code came into force, according to which the VI, drawn up and registered after 1 July, 2017, is sufficient basis for the buyer of goods/services to charge the tax amounts related to a tax credit and does not require any other additional confirmation.

In other words, with the introduction of this system, risk transactions should be inspected at the stage of VI registration. In the event that VI registration is suspended, the supervisory authority, on the basis of documents and information provided by the supplier, actually conducts a remote document inspection of a separate transaction and assesses the supplier as a whole and, in accordance with the results obtained, adopts a decision to register or to refuse registration of VI.

Accordingly, if a VAT invoice passed registration (and, therefore, preliminary inspection by the supervisory authority), further verification of the tax credit and the amounts of budgetary compensation of the buyer for this transaction is not required.

However, do the mechanism of VI registration suspension and possibility to influence in such a manner VAT amounts payable to the State Budget correspond with the Constitution of Ukraine and principles of the rule of law (i.e. to such an element as legal certainty)?

According to the Constitution of Ukraine, "everyone shall be obliged to pay taxes and levies in accordance with the procedure and to the extent established by law" (Article 67), "...The rule of law shall be recognized and effective in Ukraine. The Constitution of Ukraine shall be regarded as the supreme law of the land. Laws and other regulatory legal acts shall be adopted on the basis of the Constitution of Ukraine and shall conform to it." (Article 8).

With regard to taxes, these provisions of the Constitution of Ukraine, taking into account the practice of the European Court of Human Rights, should be understood in such a way that, based on the analysis of the relevant laws and personal planned actions, the taxpayer should be able to clearly assess what taxes and in what amount he or she should pay. In other words, this cannot depend on the decision or actions of other persons.

With the introduction of the system under consideration, a buyer, based only on the law and his own actions, cannot determine whether he will have the right for accounting of VAT already paid to the supplier in order to determine the amount of the tax (VAT) payable. After all, tax credit depends on the availability of a registered VAT invoice, and its registration depends on the actions of the supervisory authority.

Therefore, the system of preliminary risk control may be regarded as a social contract in exchange for the expected release of bona fide taxpayers from further control by the supervisory authorities (the practice of "void transactions") and timely VAT refund.

It is too early to say to what extent the assumed social contract is observed by its parties, and whether the weak points of the mechanism for suspending VI registration are excessive for taxpayers. There is currently no indication that the system of preliminary risk control really exempts taxpayers from further control by the supervisory authorities.

Analysis of the Tax Code’s provisions and existing practice lead to the opposite conclusion:

— in future, buyer's tax credit can still be contested by the supervisory authorities, for example, in the case of error in the goods/services codes, the correct identification of which cannot be verified by the system at the stage of VI registration;

— the amounts of budgetary compensation can also be checked and contested by the supervisory authorities even if there are no grounds established by clause 200.11 of the Tax Code. This is done by checking the negative value of the reporting period in the amount of more than 100,000 UAH (based on sub-clause 78.1.8), which, among other things, is claimed for budgetary compensation.

Thus, the questions as to whether there really is the same understanding by the parties to the assumed social contract of the expected consequences of the implementation of preliminary control system and how it will work in practice, are still in the process of being tested.