LLC “P” appealed to the court with an administrative claim to the Office of Large Taxpayers of the State tax Service of Ukraine, demanding to declare illegal and cancel tax notices-decisions (hereinafter – TND), issued as a result of a documentary scheduled on-site inspection, which increased the company’s tax liabilities from income tax and value added tax (hereinafter – VAT). The plaintiff argues that the disputed business transactions were not fictitious sale. Le’ts consider the case law on this issue.
Case resolution
In view of the circumstances of the case, the trial court dismissed the claim on the basis of the findings and legal position of the Supreme Court of Ukraine and concluded that the plaintiff’s disputed transactions were fictitious. The Court of Appeal upheld the claims. The cassation appeal was considered by the Supreme Court of Ukraine.
Considering the case, the court took into account the following:
- the court of first instance justified its decision by the fact that the Supreme Court of Ukraine in its rulings (rulings of the Supreme Court of Ukraine of February 20, 2018 in case No. 809/117/13-a, of March 22, 2018 in case No. 815/3666/16 and of April 10, 2018 in case No. 815/24/17) concluded that the lack of proof of the actual implementation of the business transaction deprives the primary documents of legal significance for the purposes of tax benefit, even in the presence of properly executed in appearance and form, but unreliable and in this regard, legally defective primary documents, if the movement of funds is not provided in connection with the economic activities of the participants in these operations. At the same time, the lack of a business purpose is also a ground for refusing to provide a tax benefit. And according to the findings of the Supreme Court of Ukraine (hereinafter – the Supreme Court), set out in the decision of March 05, 2012 in case No. 21-421a11, the Supreme Court indicated the groundlessness of the reflected amounts of VAT tax credit on the basis of tax invoices issued on behalf of persons objecting their participation in the creation and operation of taxpayer counterparties (front parties);
- the appellate court took into account that prior to sentencing in criminal proceedings, the protocol of pre-trial investigation may not be considered appropriate evidence in administrative proceedings, referring to the legal position of the Supreme Court in the decision of November 06, 2018 in case No. 822/551/18. The Supreme Court also concluded that the court could base its findings only on testimony that it had taken directly during the trial in the criminal case. The court is not entitled to substantiate court decisions with testimony given to the investigator, prosecutor, or to refer to them;
- Article 61 of the Constitution of Ukraine enshrines the principle of individual character of legal responsibility of a person. Given the approaches of the European Court of Human Rights set out in the cases in Business Support Center v. Bulgaria, Bulves AD v. Bulgaria, Intersplav v. Ukraine, the taxpayer cannot be held liable for possible wrongful acts of other legal entities;
- entry into force on September 25, 2019 of the provisions of Law of Ukraine No. 101-IX of September 18, 2019 will have an impact on the consideration of tax disputes, where the materials of criminal proceedings under Art. 205, 212 of the Criminal code of Ukraine were used for the substantiation of tax surcharges. In particular, due to the relevant circumstances, the materials of such criminal proceedings are inadequate evidence that cannot substantiate the additional charges made by the tax authorities.
Judgment by the Supreme Court of Ukraine of April 28, 2021 in case No. 160/3364/19: the court should not take into account any sentence given by the supervisory body. The judgment must relate to the relationship between the taxpayer and the counterparty. Refer the case to the Grand Chamber of the Supreme Court of Ukraine.
