Story which requires additional audit

Dnipropetrovs'k region

Complainee: Main Department of the State Tax Service in Dnipropetrovsk region (MD STS)
Complaint in brief: The Council received a complaint from a private entrepreneur (PE) from Dnipropetrovsk region that produces paints and varnishes. The scale of the PE’s activity (with annual income of UAH 12-13 mn., more than 30 employees etc.) did not allow him to enjoy a simplified taxation system, so a general taxation system was applied to his business. It is a common fact that this system is not attractive enough for business since it foresees significant tax burden for the entrepreneur and leaves a wide space for the tax authority to disagree with entrepreneur’s accounting data and charge him/her with additional payments following the results of tax audit.
The entrepreneur complained about the groundless conclusions of the MD STS on violation of tax legislation by the complainant. As a result of the scheduled tax audit that covered almost a three-year period, the tax authority did not recognize deductibility of the part of the entrepreneur’s expenses related to his entrepreneurship activity for a total amount of almost UAH 8 mn. The disputable expenses included the following: depreciation of production machinery purchased before 2017, legal services, insurance, labeling products and others. Hence, the entrepreneur was threatened with additional payments of the personal income tax (UAH 1,4 mn) and the military tax (UAH 120 k). In addition to that, he could face fines. The separate episode was the discovery of an unpaid land tax of over UAH 360 k. Disagreeing with the results of the audit, the entrepreneur approached the Council and asked for help.
Actions taken: Having impartially reviewed materials of the tax audit, the Council’s investigator made a conclusion that the Complainant’s objections were largely fair.
The Tax Code of Ukraine defines an indicative list of types of expenses which a private entrepreneur under the general taxation system has the right to deduct from his/her pre-tax income. The list is not exhaustive. The main point is that only those expenses connected with entrepreneur’s business activities may be deducted.
However, the SFS/STS had significantly limited the space for maneuver for entrepreneurs due to its “Questions and Answers” in the Public Information Resource (PIR). For instance, it is said in the PIR that PEs may deduct the amount of depreciation of only those fixed assets that were purchased after January 1, 2017. However, the Tax Code of Ukraine does not have such a restriction. It is also indicated in the PIR that PEs are not allowed to deduct such expenses as the amount of interest or other payments on loans (irrespective of the fact whether  the loan is connected with entrepreneurship), insurance payments (even if the insurance is connected with entrepreneurship), the amount of military tax paid to the state budget etc.
Meanwhile, in the Council’s opinion, “Questions and Answers” published in the PIR cannot replace or amend provisions of tax legislation and limit the rights of taxpayers (as, in particular, the right to depreciate their fixed assets purchased before 2017).
The Council decided to participate in consideration of the complainant`s objections to the tax audit report. Taking into account strict quarantine restrictions, the Council suggested  considering the objections in the format of a video conference. The MD STS came along with this suggestion.
On April 23, 2020 the consideration of the objections took place via Skype. In the course of discussion the investigator of the Council gave a lot of arguments in favor of the fact that deductibility of the PE’s expenses was groundlessly denied by tax inspectors. The discussion appeared uneasy because of the existence of the mentioned “Questions and Answers” in the PIR, which (despite their non-mandatory legal status) the tax authority of the regional level did not see an opportunity to override.
In the course of the meeting, the tax authority was still convinced that it was reasonable to withdraw the conclusions of the tax audit report and appoint the additional tax audit of the entrepreneur. The complainant, in turn, informed about his readiness for such an audit as it will give an opportunity to comprehensively examine all the disputable issues.
Results achieved:  In mid-May 2020 the representative of the entrepreneur informed the Council that the MD STS officially withdrew the tax audit report in the part of the most significant episodes. The tax authority also stated that a new tax audit would be carried out as soon as possible with respect to quarantine restrictions. The entrepreneur got the chance to prove his point. The case was closed.

Next case:: Error in STS information database – enterprise not a debtor any more