The taxman is coming... Don't panic, prepare

Marc-Tell Madl, Partner, Legal Services
/Kyiv Post, 22 January 2009/

The tax authorities are going to hit harder in the days to come. With budgetary losses from decreased profit taxes and VAT estimated at UAH 5.9 billion (according to the Ukrainian State Tax Administration), the taxman may be knocking on your door soon. The decline in revenue and the need for more budget discipline will lead to an assessment of state revenues; and the IMF line of credit will tighten the budget discipline even further. The government has no choice but to cut spending or raise taxes.

Since both measures are hard to lobby through a teetering parliament, there is really only one solution: the tax authorities will be forced to collect even more money from the taxpayer. The Ukrainian tax authorities (USTA) are likely to step-up tax code enforcement (i.e., tax audits) and areas of particular focus are likely to be VAT, corporate profit tax, and customs duties, as these will probably be the hardest hit by the financial crisis. This is bad news.

So, considering this “gloom”, what should we do?

Know your rights and be determined. If you know your rights and are willing to push your individual case through the court system, you have a pretty good chance of keeping the law on your side. Tax authority data shows that 45% of court decisions in tax disputes (in total in the third quarter of 2008) are decided in favour of the taxpayer. Independent PwC research shows that nearly 75% of tax notification decisions have been cancelled by the courts.

While these numbers illustrate the uneven state of the tax system and its law enforcement organs, they also show that the court system works. And, in such a "state of emergency", reasonable arguments are not a bad option. The courts are likely to listen. However, the art is to understand when this state of emergency kicks in. Frankly, the answer is very early.

Properly preparing for any tax audit is a good beginning, and may stave off audit-driven tax officials searching for an easy target.

Usually the USTA will announce its visit beforehand, and only in exceptional cases will an unscheduled field audit occur. An unscheduled visit is very likely if the taxpayer fails to file a tax return with the tax authority; or the tax authorities discover a violation of Ukrainian tax or currency legislation that the taxpayer cannot explain on time. Notably, any unscheduled visits can take place if the taxpayer declares VAT receivable in an amount more than UAH 100,000. However, as a rule, a tax audit is usually scheduled by the tax authorities in advance and conducted annually or less frequently. A written audit notification must be sent 10 days prior to the scheduled audit date, and the audit itself should normally not take more than 20 working days, though this period may be prolonged. There is plenty of time to prepare, if you know where to look.

Unsurprisingly, the USTA has far reaching rights. If requested the taxpayer has to allow the authorities to examine its premises and at the time of the audit, executives and other officials are obligated to provide explanations for tax purposes. However, tax officers are guided by the Ukrainian Constitution and legislation. If these officials do not fulfil or unduly fulfil their duties, they come under disciplinary, administrative, criminal and material responsibility. Most importantly, tax officers shall observe commercial and official secrecy, and losses caused by illegal actions of tax officers shall be refunded from the State budget. The taxpayer always has the right to appeal decisions made by the tax authorities and challenge actions of tax officials.

Nevertheless, to understand the rights and obligations of all parties involved, several things are key.

First, it is advisable to carefully prepare for tax audits. Use the time available before the taxman steps into your door to do this. Every businessman knows his Achilles heel. Likewise, the tax authorities have certain taxes or transactions that they are very likely to look into. A thorough review of these “hot topics” or – even better – a kind of due diligence before the authorities move in is the best approach. Training staff on how to behave during audits, covering the “dos and don'ts”, will also help.

Next, be proactive. Relevant documents (but only these) have to be provided, but you have the right to support your position during the audit itself. Negotiating and constructively arguing your case before the taxman cements the facts may change his opinions and will often prevent a court battle.