More companies willing to litigate tax disputes

Before last year, tax litigation was considered an extreme option among businesses who wanted to avoid formal conflicts with government authorities. But now, such challenges are “an integral part of tax management,” said Dmytro Fedechko, general counsel for LG Electronics Ukraine.

The reason is two-fold: The government’s growing thirst for revenue leads to heavy-handed inspections and steep fines and, along with that, its desire to pull Ukraine’s gray economy out of the shadows. One way to do that is to identify and go after any potential tax evaders.

In the end, what might emerge is an improved tax system – from one that is a nightmare to one that is merely difficult. But this transition is sparking more conflict, as companies become more vigilant in defending themselves from overzealous inspectors or unjustifiably excessive assessments.

“Tax authorities are becoming more aggressive in their actions and interpretation. Some is understandable and even acceptable, but sometimes it’s outrageous and makes tax litigation a necessary solution,” argued Rob Shantz, senior partner for tax and legal services at PwC Ukraine, at a recent seminar organized by the auditing giant.

The conflicts may tempt companies to surrender by handing over an envelope with the proper amount of cash inside. But experts argue against this approach.

Given the lack of accountability for tax inspectors and Ukraine’s notoriously corrupt courts, Fedechko said, it is easy to throw up one’s hands and admit defeat. “But that’s an easy excuse,” he asserts, explaining that his company challenges legal advice that claims bribes are the only way out. Instead, Fedechko wants legal advisers to do their jobs and resist bribery as a normal way of doing business.

In order to properly defend their interests, companies have to start by learning their rights, which means keeping up with an ever-changing legal landscape.

One task is to determine what regime of tax withholding they will fall under. Here the main issue is the taxable income obtained during the previous year. Companies with revenue of more than Hr 10 million ($1.2 million) will have to prepay on a monthly basis, while those making less will only have to pay after filing annual declarations.

Not paying these advance taxes is considered tax evasion and thus falls under criminal liability, the penalties for which are up around 50 percent, warned Oleg Shmal, senior tax expert at PwC. This is but one example of why new legislation presents a challenge for businesses.

Fines levied by customs officials are another issue. They have gone up 300 percent, with the possible confiscation of goods. Since Jan. 1, 16,800 cases worth Hr 1.7 billion have been filed, said Robert Zeldy, a customs expert at PwC. “Before people wouldn’t go to court (and just) pay the Hr 17,000 fine. But now fines are bigger and the appeals court is the last instance (to challenge rulings),” Zeldy said.

“The authorities cannot do without this thick and juicy chunk of budget revenue,” said Igor Dankov, a senior manager at PwC. “Inspections are now seen as one of the priority directions for development … This means more and more audits in coming years.”

Companies should follow several tips to increase the chance of a positive outcome and to minimize costs. For one, all communication with tax authorities should be carried out in writing, a provision to which companies are entitled. This can notably help when dealing with customs as well.

Aside from written communication, every effort should be made to communicate with auditors as much as possible, if only to understand the underlying reason for the audit. This comes in handy particularly when a company receives 150-200 pages of documentation with 10 days to respond, experts noted. In such cases, early preparation is key.

Finally, companies have to pick partners wisely and make their dealings as clear and transparent as possible, so as not to arouse the suspicions of tax authorities in the first place. This is particularly important due to new provisions regarding so-called “unreal” transactions – fictitious deals used by companies to minimize taxes and profits through transfer pricing.

In such cases, experts warn, tax authorities watch for counter-parties that dispose of limited resources compared to the amounts required to complete a deal or who have faulty documentation.

Kyiv Post editor Jakub Parusinski