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SFS drops additional payment worth UAH 635 mn against Philip Morris Ukraine 

18.04.2019

Subject of complaint: The State Fiscal Service of Ukraine (SFS)

Complaint in brief: The Business Ombudsman Council worked on Philip Morris Ukraine international tobacco company’s case for three years. At first the company challenged SFS tax audit conclusions and then the failure of the State of Ukraine to perform the settlement agreement with the US, Swiss and Ukrainian Philip Morris offices to drop an additional payment worth UAH 635 mn. 
In 2015, Philip Morris began to apply a special customs regime  of processing on the territory of Ukraine for further products export. At the same time the company obtained a permit from Kharkiv Customs for conditional release from payment of Ukrainian import duties and other taxes. 

The total value of products manufactured and exported under this regime during 2015-2016 was EUR 87 mn. However, in March of 2016, when the validity period of this regime almost expired, the SFS conducted a tax audit and questioned the legality of special regime use by Philip Morris companies. Based on audit conclusions the SFS issued tax notifications-decisions to the company totally amounting to UAH 635 mn. At this stage the company turned to the Council for help. 

Actions taken: The BOC upheld the company’s position but it failed to convince the tax authority. Upon unsuccessful completion of the administrative appeal procedure in the SFS authorities, four Philip Morris companies raised the issue of violation of Ukraine's commitments under international agreements on international investments protection and sent a notification on the investment dispute to the Government of Ukraine. 

To resolve the issue the Government created an interdepartmental working group including experts from the BOC, the SFS, the Ministry of Justice, the Ministry of Economic Development and Trade and the Ministry of Foreign Affairs. The working group analyzed the situation and assessed all the risks: if the Complainant had declared violation of foreign investors rights at the international level, the State of Ukraine would have highly likely lost the investment dispute. Therefore, the Council recommended that the parties conclude a settlement agreement. 

The Council’s experts constantly monitored text approval, signing and fulfillment of the terms of the agreement. The SFS top management signed the document on January 31, 2019 but did not cancel additional payments within 30 days, as provided by the agreement.

To attract the attention of the public to the. issue, the company initiated a press conference where it spoke on the settlement agreement implementation status. The Deputy Business Ombudsman publicly stressed failure to fulfill the settlement agreement terms violated commitments of the State of Ukraine under mutual investment protection treaties with the United States and the Swiss Confederation. 

Result achieved: In late March, the SFS finally fulfilled the terms of the settlement agreement and dropped the additional payment against the Complainant worth UAH 635 mn. The company thanked the Council for professional assistance and support. The case was closed successfully.