“Tax thriller” from private entrepreneur’s life from Donetsk region

Tax issues: Inspections by state tax and fiscal agencies Kyiv

Complainee: State Tax Service of Ukraine (STS)
Complaint in brief: An individual entrepreneur from Donetsk region appealed to the Council. She started her business in the construction sphere in 2016. After executing orders at several facilities for over two and a half years, the complainant terminated her business activity.
However, after business liquidation, the tax authority decided to inspect the entrepreneur’s activities. It turned out that the execution of works on the territory of the facilities built at the expense of budget funds drew the tax officials’ attention. The tax authority sent letters  to the complainant three times (requesting documents with notifications regarding the inspection start and results of the already conducted one), but, according to her, she did not receive any of them. Having held the inspection without the complainant’s presence, the tax authority detected violations, among which was the business activity beyond the chosen codes in state classifiers.
According to the law, a private  entrepreneur of any group is obliged to switch to the general taxation system in case of conducting a type of activity absent from his file in the Unified Tax Payers Register .
That is why the tax specialist decided to retroactively move the complainant (from the beginning of 2017) from the simplified taxation system to the general one. As a result, the amount of taxes and fines accrued to the  private entrepreneur was more than 73% instead of 5% of her declared turnover for the respective period and 14 times higher than the total amount of taxes and the SSC she declared and paid for that period. Having received the tax notification-decision, in which the amount of additional payments and fines reached seven digit numbers, the shocked businesswoman turned to the Business Ombudsman Council.
Actions taken: Having examined the case file, the Council came to the conclusion that the tax authority had not fully investigated the situation and made premature decisions. Thus, inspection conclusions were based exclusively on bank statements of the entrepreneur, which the tax authority was able to obtain from the other body (the Prosecutor’s Office). No other financial and economic documents were examined. Without such examination, in the Council’s investigator’s view, it is impossible to precisely identify  the nature of economic transactions and make a final conclusion as to whether the complainant had in fact violated certain tax law provisions. Hence, the Council recommended the STS to cancel the tax decision by scheduling an additional inspection.
In addition to references to certain procedural shortcomings of the inspection, the Council noticed a significant severity of liability disproportionate to the gravity of the acts (tax offenses) incriminated against her.
Referring also to the relevant case-law of the European Court of Human Rights, the Council’s investigator ascertained that such disproportionately severe sanctions the tax authority intended to impose against the complainant could be equated to a criminal punishment.
The latter can be applied only when the fact of offense committed by a person is proven beyond a reasonable doubt. In turn, the decision of the supervisory authority on the complainant was made without a proper investigation and without taking into account the complainant’s arguments.  In the Council’s opinion, that is unacceptable in a democratic society.
The investigator tried to persuade the STS representatives to schedule a follow-up audit to investigate the situation more thoroughly. Unfortunately, this time the tax authority officials disagreed with the Council’s arguments and supported the position of their colleagues who conducted the inspection. The appealed tax decisions were upheld, and the complaint was dismissed.
Results achieved: The Council discontinued the complaint investigation as long as all out-of-court opportunities for settling the case were exhausted. The private entrepreneur decided to appeal against the tax decision in court. The trial in her case is currently ongoing.

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