Whipping boy found

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

The Council helps entrepreneur from Zaporizhzhiza convince tax officials everything was not as simple as it seemed at first glance with his “unofficial employees”.
Complainee: The Main Department of the State Tax Service in Zaporizhzhia Oblast (MD STS), The Main Department of the State Labor Service in Zaporizhzhia Oblast (MD SLS)
Complaint in brief: An individual entrepreneur (IE) from Zaporizhzhia runs a business related to organization of international road transportation of goods, mostly in the nearest countries, turned to the Council. He is doing business together with his wife helping him with accounting and reporting. She actually acted as his representative when lodging a complaint with the Council. 
A worried Complainant’s representative told that her husband and she had problems with two controlling authorities (MD STS and MD SLS). At first glance, these problems came “like a bolt from the blue”. However, the situation was very serious. Supervisory authorities stated the entrepreneur was an employer for 22 people who had not been officially employed. That was the reason why he was imposed a fine worth UAH 2.7 mn. apart from additional taxes and social contributions that should be deducted from these individuals’ salaries. 
The Complainant’s representative asked the Council to resolve the issue which she found absolutely absurd and help.
Actions taken: At first, the Council’s investigators were somewhat skeptical about the Complainant’s statements knowing that informal employment is a widespread phenomenon in Ukraine and it was highly likely supervisory authorities’ findings were substantiated to some extent. However, when they looked deeper into the situation, the investigators  realized that everything was not as it seemed at first glance. 
After questioning the Complainant and his representative about their business, the Council’s team of investigators understood his business model first of all.
So, investigators found out the Complainant sometimes carries goods directly (for example, the first Council’s investigator call caught him during one of such hauls on his own truck), and sometimes – acting only as their organizer (a forwarding agent). In the latter case he involves colleagues – other IEs, for transportation, who in turn made hauls independently or engaging their hired drivers. 
In this form of cooperation, IEs working as subcontractors retain full independence and are not subordinate to the Complainant. A clear testimony to their independence was, in particular, such IEs worked using their own trucks and had the right to independently take and execute orders from any customers apart from the Complainant.
After examining the documents, the Council’s investigators made sure that from a legal standpoint the Complainant’s business had a rather complex and sometimes confusing structure, which includes numerous freight forwarding and transportation agreements with customers, subforwarders and direct carriers, vehicles lease (rent) agreements, etc. 
Meanwhile, following a detailed review of the documents, investigators assured themselves the Complainant was telling the truth – in the Council’s investigators’ opinion there were no signs of employment relationship between him and all 22 drivers. 
Due to the fact the Complainant acted as a forwarding agent (organizer of a carriage) during many hauls, he permanently appeared in documents related to this transportations, for example in international consignment notes (CMR) and sometimes in customs declarations drawn up during customs clearance of goods. In these documents tax officers noticed the name of the Complainant. Based on that finding, the MD STS concluded in the tax audit report that the Complainant was the employer for all 22 drivers who performed the respective transportations. The tax officers not only made their own conclusion about the need for charging additional taxes and social contributions, but also reported the facts revealed by them to the MD SLS, which, in turn, imposed on the Complainant a huge fine for violation of labor legislation. However, the conclusions of both authorities were obviously premature and probably wrong.
Having reflected on the situation, the Council’s investigators decided to divide it into two streams, each requiring a specific approach.
The first one concerned a fine imposed  on the Complainant by the MD SLS. Unfortunately, such fines in Ukraine are not subject to administrative appeal procedure that the Council could be involved in. Moreover, decisions on imposing such fines are also executive documents. It means that such decisions might be sent for enforcement within a short time upon their adoption. As a result, it entails very dangerous consequences for the entrepreneur (including seizure of bank accounts and property and subsequent forced repayment of the fine at the expense of such property sale).
Therefore, the entrepreneur had no other option but to sue immediately to appeal against the decision of the MD SLS, and ask the court to suspend its enforcement. That was exactly what the Council’s investigators advised the Complainant to do, although they realized that filing a lawsuit would not allow the Council’s further direct involvement in resolving this aspect of the case. The entrepreneur followed this advice by contacting a lawyer to prepare a lawsuit.
The second stream related to tax and unified contributions. Here, the situation had not gone so far, and there was a chance for its extrajudicial settlement with the help of the Council.
The tax audit report conclusions, which became the root cause of this problematic situation, had not yet acquired the status of final ones at the time of the Complainant’s complaint to the Council. Based on the Complainant’s objections, a second documentary audit was scheduled during which the tax auditors were required to examine the situation in more detail. However, re-examination result was only slightly different from the original one – tax officers still insisted the Complainant had 19 (not 22 already) informally employed employees and were not going to give up. This time, the Complainant again submitted objections to the  second tax audit report and asked the Council to take part in their consideration.
Taking into account all the circumstances of the case, the Council’s management decided to delegate the Council’s representative for objections consideration at the MD STS.
Result achieved: During objections consideration, the Deputy Head of the MD STS accepted the Council’s representative arguments and ordered to conduct a new (a third one) audit and this time to investigate in detail all the circumstances the Complainant pointed out to in his objections, which the Council considered important. 
New audit results were dramatically different from the previous ones. Tax officers continued stating that there are signs of the Complainant’s employment relationship with only 2 persons (those of his subcontractors not having IE status, although, according to the Complainant, being independent entrepreneurs in essence). As we remember, there were conclusions on 19 informal workers before, and on 22 informal workers – at the start. 
Therefore, the new audit findings were much more favorable for the entrepreneur, and the amount of accrued taxes and social contributions considerably decreased. 
In addition, new tax audit findings refuting preliminary findings in part of 20 out of 22 “informal employees”, could be a decisive argument in court in favor of the need to cancel the MD SLS’s decision to impose a fine (at least in its main part).
The businessman from Zaporizhzhia continues insisting even those 2 persons, who remained mentioned in the last audit report, were not his employees, and he intended to further prove it. However, he acknowledged new audit findings were much more objective and reasonable than previous ones and thanked the Council for support.

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