“Family contract” in the tax officials’ spotlight

Complainee: The Main Department of the State Fiscal Service of Ukraine in Kyiv Oblast (MD STS Service in Kyiv Oblast) 
 
Complaint in brief: A private entrepreneur from Kyiv Oblast turned to the Council. The entrepreneur disagreed with the tax audit findings, according to which he had to additionally pay almost UAH 90 k in taxes (and, besides, another UAH 65 k of the unified social contribution. USC). 
The entrepreneur-son bought freight services from his entrepreneur-mother – that’s the way they decided to structure their business. The mother owned trucks, and the son traded in goods. When he needed a truck to carry goods, he bought freight services from his mother. Although such a business model is a bit unusual, however, it is quite legal and not aimed at tax evasion.
Notwithstanding that fact, the tax authority did not like something in this scheme. They decided that the transportation price included two components, the first of which – the actual cost of transportation of goods from the loading point to the unloading point – could be treated as deductible expenses of the customer. The second part –the cost of the vehicle’s arrival for loading and its return to the parking lot after unloading – in view of the tax authority, could not be deducted by the customer.
Disagreeing with the tax authority’s conclusions, the individual entrepreneur appealed to the SFS of Ukraine and asked the Council for assistance.
Actions taken: After examining the case file, the Council upheld the complainant’s position. The Council concluded that division of the freight price into two components by the tax authority was artificial and did not correspond to the established business practice in the car transport field, according to which the cost of so-called “empty” or “zero” mileage (legs of the route on which the truck moves empty) is always included in transportation costs. But even if we move away from this practice and allocate a separate cost of the truck’s arrival for loading and its return to the parking lot after unloading – these components would still be integrally linked to the actual transportation of goods (and, accordingly, would be in the same way connected with the customer’s economic activities, as the transportation itself). Therefore, the conclusion that the private entrepreneur had no right to deduct a part of his transportation costs seemed unreasonable to the Council. The BOC informed the SFS of Ukraine in writing thereof and proposed to cancel disputed decisions. 
Result achieved: The Council’s investigator managed to convince the SFS of Ukraine to cancel ungrounded additional payments for the private entrepreneur. 
 
Cancelling tax authority’s decisions on additional tax accruals would logically have as a consequence cancellation of USC additional payments – another problem with similar origins faced by the complainant. However, due to the deficiencies of certain procedures related to the USC administration, this part of the complaint continues being addressed in a separate case.