Taxes

Risk criteria of taxpayers: what’s new?

The State Fiscal Service of Ukraine updated the risk criteria of taxpayers for suspension of registration of tax invoices/adjustment calculations (hereinafter – TI/AC). This time the stigma of “risky” taxpayer was removed with regard to VATable newcomers (registered less that three month ago). What are other things worthy of attention?

Background

The mechanism of risk criteria application is determined, as before, by Procedure for Suspension of Registration of Tax Invoice/Adjustment Calculation in the Unified Register of Tax Invoices No. 117 of February 21st, 2018 approved by the Cabinet of Ministers if Ukraine. According to its requirements certain tax invoices and adjustment calculation are not monitored. These TI and AC (except for reducing AC) are freely registered in the Unified Register of Tax Invoices (hereinafter – URTI) even if they meet one of the negative criteria specified in i.3 of Procedure No. 117. Even risky taxpayer may have the chance to survive pre-monitoring scrutiny, while TI and AC which do not have such a privilege are monitored whether they meet:

  • taxpayers risk criteria;
  • transactions risk criteria;
  • favorable tax history criteria.

Abovementioned criteria as well as favorable tax history of VAT-payer are determined by the State Fiscal Service of Ukraine (hereinafter – SFSU) and become effective after approval by the Ministry of Finance (i.10 Procedure No. 117). This procedure satisfies both the SFSU and the Ministry as it provides opportunity to update risk criteria at any time without state registration at the Ministry of Justice.

The updated risk criteria are published at the SFSU official website. While the appeal is still being under consideration the SFSU has determined the criteria for freezing TI/AC by letters and not the legal act:

  • risk criteria of taxpayer and transaction registered at the SFSU No. 1962/99-99-29-01-01 of August 7th, 2019;
  • indicators that determine taxpayer’s favorable tax history registered at the SFSU No. 1963/99-99-29-01-01of August 7th, 2019.

These criteria are approved by the Ministry of Finance No. 26010-06-5/20111 of August 6th, 2019 and became effective of August 8th, 2019.

Let us remind that the District Administrative Court of Kyiv in its decision of April 26th, 2019 on the case No. 640/1240/19 ruled that the risk criteria laid down in SFSU Letter No. № 4065/99-99-07-05-04-18 of November 5th, 2018 were illegal and ordered the SFSU to revoke its letter. A bit later this court in its decision of June 5th, 2019 on the case No. 826/12108/18 declared that provisions of subpara. 10, 20, 21 Procedure No. 117 were illegal and invalid.

July 18, 2019 the SFSU submitted an appeal to the Sixth Administrative Court of Appeal of Kyiv. Accordingly, the abovementioned provisions of Procedure No. 117 are effective until the court makes its decision on the appeal. Thus, the SFSU continues to suspend registration of TI/AC based on risk criteria adopted independently.

So, starting August 8th, 2019 the SFSU monitors TI/AC submitted by the VAT-payers for registration in the USR based on new risk criteria. How do they differ from the previous criteria?

Risk criteria of taxpayers

The “risky” status is the worst thing that may happen to a VAT-payer. If he/she is recognized as risky all the TI/AC submitted for registration are suspended (i.6 Procedure No. 117) regardless of whether they meet risk criteria. Still they may be lucky to receive “immunity” during pre-monitoring scrutiny.

One can verify whether the VAT-payer is risky in the account.

There are six criteria. But to be recognized as risky VAT-payer it is sufficient to meet one of them.

First five criteria remained unchanged. Let us remind that they relate to suspicious (fictitious) payers who have the following specifics:

  • a VAT-payer is registered (re-registered):
    • using invalid (lost) and forged documents;
    • by the physical entities with the further transfer (registration) of ownership or management to non-existent, deceased or missing persons;
    • by the physical entities that didn’t intend to conduct financial and economic activities or realize their authority;
    • without notification and consent of founders and legally appointed chiefs;
  • court’s guilty verdict became effective and the VAT-payer’s official(s) conviction is not removed or expunged under art. 205 of Criminal Code of Ukraine “Sham business”

The sixth criterium is the most dangerous for the taxpayers. It enables the SFSU regional commissions to recognize a taxpayer as risky based on suspicion. In addition, the receipt received by the payer does not contain any explanations that justify the suspension of registration and the SFSU regional commission does not provide a copy of the decision on entering the payer to the list of risky taxpayers.

This time the lucky ones are the newcomers who registered less than three months ago. The SFSU do not apply term “risky” payer to them. So, their chances to register TI/AC are high. Of course, if they do not meet the criteria mentioned on i.1.6 of Risk criteria of taxpayer and pass all other stages of scrutiny.

Given the updated criteria, those VAT-payers who meet at least one of the following conditions can be recognized as risky:

  • a VAT-payer’s chief and/or chief accountant and/or duly authorized signatory are, according to information provided in the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations of Ukraine, registered in temporarily occupied territories of Donetsk and Luhansk regions. This condition was updated. Previously it regarded only the VAT-payer;
  • a VAT-payer is a legal entity that does not have any opened bank accounts;
  • an official and/or founder of a VAT-payer was an official and/or founder of business entity subject to bankruptcy procedure during last three years;
  • a VAT-payer did not submit to the controlling authority the reporting on VAT for two last reporting periods;
  • a VAT-payer who pays income tax did not submit to the controlling authority the financial reporting for the last reporting period;
  • if the receipt for suspension of TI/AC registration does not contain proves that transaction conducted is risky and a taxpayer does not have access to the tax information, then the payer either accepts the taxman decision or takes legal action.

The SFSU authorities have tax information that became known in ongoing operation during performance by the controlling authority of its tasks and functions that determine the riskiness of the business transaction identified in the submitted TI/AC. Previously this condition went like this: “the available tax information proves the conduction of risky transactions by a payer”. To determine payer’s “risky” status it was sufficient to have a suspicion that the payer conducts risky transactions. Now the SFSU completed this condition and specified that the “risky” status is affected only by the transaction indicated in the TI/AC. However, in our opinion, this condition is still the most dangerous. If the receipt for suspension of TI/AC registration does not contain proves that transaction conducted is risky and a taxpayer does not have access to the tax information, then the payer either accepts the taxman decision or take legal action.

If VAT-payer does not pass the pre-monitoring scrutiny and meets at least one of the abovementioned conditions, all TI/AC he submitted are suspended. In such case there is no remedy that can reverse the process.

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