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Methodological error worth 220 mn: mayonnaise producer to face difficult trial with tax authorities

01.06.2021

 Complainee: Large Taxpayers Office of the State Tax Service (LTO) 
 

Complaint in brief: A company producing mayonnaise, ketchup and other products approached the Council. The company's tax audit suddenly resulted in a tremendous charge of UAH 220 mn due to an allegedly trifle thing: methodological nuances of filling out adjustment calculations for VAT tax returns. However, the tax authority did not even claim that the company applied any tax evasion scheme. 

The manufacturer usually exported a significant share of its products at a zero VAT rate, so it regularly declared a negative value of this tax, which was transferred from one period to another. The company once found that it had made a number of mistakes in previous tax periods: in some periods it overestimated its tax credit and underestimated it in others. The mistake did not look threatening to the budget: in total, the company made a mistake “in favor of the state” (underestimated the credit even more than overstated) and it would seem impossible to accuse it of even a penny of tax underpayment. Therefore, the taxpayer submitted adjustment calculations for all 35 tax periods covered by the error to bring its reporting in order. The company adjusted its tax returns on a cascading basis (for example, if the adjustment by January 2020 led to an increase in the amount of a negative VAT value in this period, the amount of such an increase was consistently transferred to February, March and all subsequent periods up to the current one).
The complainant was surprised when tax inspectors stated that he had done everything wrong. According to tax authorities, the reporting should have been adjusted based on a different principle – from the period in which the mistake in favor of the state had been made, the “lost” negative VAT value should have been brought directly to the current period, bypassing all intermediate ones. Yet, in periods where the mistake in favor of the taxpayer had been made, it was necessary to pay the appropriate VAT amount to the budget by correcting it. As a result, according to the logic of tax auditors, the manufacturer had to declare and pay about UAH 163 mn in tax for previous periods, while retaining the right to reflect the accumulated negative VAT value in the amount of UAH 206 mn in the current period.

As a result of the audit, the LTO issued the taxpayer tax notifications-decisions (TNDs) totaling about 220 mn, including 163 mn in taxes and 40 mn in fines to be paid to the budget.

Actions taken: The Council’s investigator comprehensively analyzed both the circumstances of the case and arguments of both parties to the dispute. He acknowledged that provisions of the corresponding bylaw determining nuances of filling out tax returns – Procedure No. 21 – could be interpreted both in favour of the taxpayer and the tax authority. However, it could not be said about provisions of Article 200 of the Tax Code of Ukraine, which quite clearly enshrined a taxpayer’s right to transfer a VAT negative value from one period to the next one without exception. The provision of Procedure No. 21 intended to simplify lives of taxpayers (allowed to transfer a “lost” negative value from the old period directly to the current one without adjusting all intermediate periods) should not apply to the detriment of the latter. And in the interpretation of the tax authority, it caused the need for business to transfer over UAH 200 mn to the budget, the necessity of payment thereof was not stipulated by the Code. At first glance, it seemed that the demand to pay these amounts was at least partially balanced by the taxpayer's right to transfer similar negative VAT value amounts to the current period and then claim their refund from the budget. However, in practice, this right turned out to be an illusion. The amounts specified in the TND were payable directly to the budget and would not increase the payer's registration limit in the VAT electronic administration system, within which the taxpayer could claim a budget refund. For business, paying these amounts would mean losing them forever. Besides, it is unknown whether the business itself could withstand such a loss.  

Taking all the circumstances of the case into account, the Council upheld the complainant and recommended a higher-level tax authority – the State Tax Service of Ukraine satisfy its appeal and cancel the disputed TND.

Result achieved: Notwithstanding the Council’s proposals, the State Tax Service of Ukraine agreed with the LTO position this time and left the disputed TND unchanged. The complainant had to go to court, armed, inter alia, with the BOC’s conclusion in its favor. The case is currently being considered at first instance.