Tax disputes: Preparation gives you a good chance of beating the taxman in court

Marc-Tell Madl, Partner, Legal Services
/Kyiv Post, 12 February 2009/

As a rule, negotiating and compromising are always the best ways to solve any dispute. Of course, this also holds true when quarrelling with the tax authorities. Sometimes, however, there is no room to manoeuvre. This is when legal means are the only tool to clarify who is right. In this last part of our series, we want to give you some hints on what a “legal battle” with the tax authorities may look like.

Obviously it is quite difficult to foresee how the courts will assess a particular case. However, statistics clearly prove that the chance to win exists: Data from the tax authorities indicates that almost 50% of court conflicts are decided in favour of the taxpayer. Independent PwC research demonstrates, though, that your chances are even higher. PwC has found that nearly 75% of tax notification decisions have been cancelled by the courts. With such favorable odds, you should not be afraid to take the litigation leap.

But, what route should you take? Current Ukrainian legislation allows you to use an administrative procedure / appeal or you may address the court directly to protect your rights. Below we will briefly touch on each method and provide you with some practical tips on how to prepare for the legal contest.

Obviously there is no direct answer on which path to choose. Each and every case should be analysed separately to identify strong and weak points. You should also take into account recent trends in court rulings prior to making your final decision. It may even turn out that instead of a court proceeding, it is better to try and compromise with the tax authorities using an administrative procedure.

In short, an administrative procedure means that the taxpayer refers his case to the tax authorities of higher instances. This avenue is used if the taxpayer believes that a decision or an action made by the tax authorities breaks or limits his rights. In practice, you should choose this course of action only if you believe that you have strong grounds to convince the tax authorities that they were wrong.

The law gives you the opportunity to appeal decisions of the tax authorities all the way up to the State Tax Administration of Ukraine – the highest body in the hierarchy of the tax system. However, you should remember that the taxpayer only has ten calendar days to prepare an appeal after each stage of this process. Another twenty calendar days will be taken by the tax authorities to reply to the appeal, though this period may be extended up to sixty calendar days by the tax authorities. Recently PwC has observed a tendency on the part of the tax authorities to leave their decisions in force, rather than cancelling them even when provided with strong arguments to the contrary. This means that appealing to the court is currently likely the best option.

Just so that you know, in Ukraine, disputes between tax authorities and taxpayers are resolved in administrative courts. There are four instances within the Ukrainian system of administrative courts. It is worth noting that the taxpayer has the right to file a court suit against the tax authorities at any stage of the administrative appeal procedure. Initiating a court proceeding will automatically suspend the administrative appeal. Should you decide to go directly to the court, you will have no right to pause this process and try the administrative procedure. In any case, you are obliged to inform the tax authorities when filing a court suit.

Further, to successfully challenge certain decisions of the tax authorities, like coercive reimbursement of VAT from the state budget, the taxpayer will have to involve other state bodies, e.g. the state treasury, as the second defendant. Otherwise, it is likely that you will experience problems enforcing the court ruling. And be prepared to face all of the courts, right up to the top, before you receive the final, non-appellate, court decision.

Finally, “winning is not enough”. After having received a positive judgement, enforcing decisions against the authorities is what really matters. Here again you may find some resistance. You need to know that it is not the tax authority that has to pay out any money but the state treasury. So, you have to turn to the treasury in order “to inquire”. To be honest, you have to push them a bit, and as you know, in this country everything takes longer, but eventually you will reap the rewards of your persistence.