The large enterprise in the machine-building sector received several tax notices-decisions from the Northern Interregional Directorate of the State Tax Service for work with large taxpayers following a scheduled on-site audit. The tax authority additionally assessed significant amounts of value added tax (VAT), real estate tax, personal income tax (PIT) and military levy. The largest claim concerned the VAT input tax credit – over UAH 12.5 million.
The tax authority disagreed with the VAT input tax credit that the enterprise had formed on the basis of a prepaid advance under a non-competition agreement with a counterparty. In the tax authority’s view, the transactions under the agreement did not create real legal consequences, since the enterprise did not have an authorization from the Antimonopoly Committee of Ukraine for concerted practices and had not properly executed primary documents confirming the receipt of services under the non-competition agreement. On this basis, the tax authority additionally assessed UAH 12.5 million of VAT liabilities and UAH 3.1 million in penalties.
The tax authority also additionally assessed PIT and military levy in connection with the write-off of debts owed by individual entrepreneurs, arguing that such write-off allegedly creates an “additional benefit” for those individuals, from which the enterprise, acting as a tax agent, should have withheld the relevant taxes.
In another episode, the tax authority also concluded that there was a need to charge real estate tax.
The enterprise did not agree with these conclusions and filed an administrative complaint with the State Tax Service of Ukraine, and later turned to the Business Ombudsman Council for assistance.
The Council analyzed the audit report, the company’s objections and the provisions of tax and competition legislation. The Council’s team paid particular attention to substantiating the lawfulness of the VAT input tax credit formed by the enterprise on the basis of the advance payment under the non-competition agreement, applying the “first event” rule. The Council pointed out that determining whether there is a violation of the Law of Ukraine “On Protection of Economic Competition” falls within the competence of the Antimonopoly Committee. The Council also noted that neither tax nor civil legislation provides for consequences of the absence of a permit for concerted practices for the purposes of tax accounting or for the validity of the agreement.
The Council set out its position in a letter to the State Tax Service of Ukraine and supported the enterprise during the consideration of the complaint by the State Tax Service of Ukraine.
As a result of the administrative appeal, the State Tax Service of Ukraine partially satisfied the company’s complaint. The tax authority cancelled in full the largest VAT tax notice-decision. The enterprise managed to preserve over UAH 15.6 million that had been assessed as VAT liabilities and penalties.
Ultimately, with the Council’s support, the enterprise succeeded in having almost 96% of the total additional assessments imposed following the audit cancelled within the administrative appeal procedure.
