SFS drops VAT and fines worth nearly UAH 200mn against major tobacco company

Tax issues: Inspections by state tax and fiscal agencies Chernigiv region

Subject of complaint: State Fiscal Service (SFS), Large Taxpayers Office (LTO)
Complaint in brief: On January 5, 2018, an international tobacco company addressed the BOC because the SFS was claiming that the firm had understated its tax liabilities and was fining it over UAH 180mn. 
The Verkhovna Rada had raised the excise tax on tobacco products by 40% at the end of 2016 and nearly 30% at the end of 2017. As a rule, this results in a similar increase in the cost of the finished product for the retail consumer. The Complainant claimed that, in order not to raise prices steeply all at once, it had planned a gradual increase in the cost of ready-made products. At the same time, the company bore the cost of the higher excise taxes during the transition period at the beginning of 2017 and 2018, and sold its cigarettes at below cost.
The SFS treated this as unlawful action on the part of the Complainant, calling it an operation that was not related to ordinary business activities but was intended to reduce the firm’s tax liabilities.  Thus, the SFS additionally charged the VAT and a fine on the entire batch of cigarettes sold at below-cost, which added up to nearly UAH 200mn.
Actions taken: The BOC investigator argued that the lawful interests of the Complainant had been violated and requested that the SFS to review the company’s complaint comprehensively and impartially. In particular, he stressed that, according to Ukrainian law, undertaking a loss-making business operation is lawful if said operation has an appropriate commercial purpose. In this case, the Complainant refused to sharply increase prices and took a short-term loss of margin to maintain market share. The Complainant then gradually raised prices, allowing the company to maintain profitability. 
Result achieved: With the involvement of the Council, the SFS accepted the Complainant’s explanation and dropped the additional charges and fines almost entirely. The case was successfully closed in early April. 

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