Lawsuits between major taxpayers and Roman Nasirov's service (Read more: Roman Nasirov. The Business Past of Ukraine's Chief Tax Official) become a system.
In Ukraine, relationships between large businesses and the State Fiscal Service (SFS) are increasingly leading to legal battles. In recent months, many companies have been forced to challenge the agency's actions, proving the absurdity of their tax claims. Among them are many market leaders and, according to the SFS, legitimate taxpayers.
Perhaps the most high-profile recent tax court case is the case of Kyivstar, one of Ukraine's top ten largest taxpayers. In the spring, the State Fiscal Service demanded that the telecom operator pay an additional over 1 billion hryvnias. During an unscheduled audit, SFS officers discovered over 4 billion hryvnias in revenues in the company's accounts in 2013–2014, the origin of which the tax authorities were unable to determine. The case concerned transactions with Elbrus, a company through which mobile operators were forced to sell top-up cards and starter packs during the Yanukovych era.
The State Fiscal Service deemed the funds the company received from the distributor as payment for mobile phone "vouchers" to be non-repayable financial assistance. Kyivstar, understandably, disagreed with this interpretation and filed a lawsuit. Meanwhile, the tax service referred the case to the prosecutor's office, where the amount of the "debt" grew to UAH 2,3 billion. While the court examines the circumstances of the case, law enforcement is questioning the mobile operator's executives.
"Even though the trial isn't over yet, the tax police believe we already owe this amount. And if we're not paying, that means we're breaking the law!" Kyivstar President Petro Chernyshov commented on the situation.
Incidentally, this isn't the first time the State Fiscal Service has filed a complaint against mobile operators regarding their cooperation with Elbrus. Kyivstar and MTS have already challenged the State Fiscal Service's demands for additional payments, successfully proving their case in three courts in 2015.
The tobacco giant Philip Morris Ukraine found itself in a similar situation. According to the State Fiscal Service, the company ranked third among the largest taxpayers in the first quarter of 2016. By May, tax authorities had assessed the company 4,1 billion hryvnias in fines. The tax authorities were concerned that in 2015–2016, the company imported raw materials into Ukraine, placed them under the customs processing regime, and exported finished products from Ukraine under sales contracts. The State Fiscal Service insists that sales contracts cannot serve as the basis for such transactions.
Philip Morris calls the State Service's position unfounded. They emphasize that the tax authorities are basing their claims on the Law on Transactions with Toll-Supplied Raw Materials in Foreign Economic Relations, which was repealed in 2012. However, the business will have to defend its case in court once again.
Naftogazvydobuvannya, a company recognized by the State Fiscal Service as one of the largest taxpayers, Fozzy Food, and Infinity are also challenging tax authorities' claims in court, each totaling over UAH 100 million. And this list is far from exhaustive.
Despite significant additional costs and lengthy legal proceedings, businesses are increasingly turning to the courts—it's the only way to defend their rights. For example, the company Keramet, which transported some of its equipment from the peninsula to the mainland after the occupation of Crimea, was only able to prove after a lengthy legal process that it was not obligated to repay customs duties and VAT on it.
"By hook or by crook, at the end of last year, I evacuated equipment from Crimea. It had, of course, been imported into Ukraine ages ago, cleared customs, and was now on my company's books. Imagine my surprise when customs officials explained to me that since I had miraculously escaped, I naturally had to pay another import duty and VAT. Let me reiterate: I moved equipment that belonged to me by right of ownership from one point in Ukraine to another," explains the company's CEO, Vladimir Bubley.
The State Fiscal Service attempted to challenge the decision in a higher court but lost the appeal. However, the entire process took the businessman 11 months. During this time, the evacuated equipment, which was intended to increase the business's production capacity and create new jobs, remained in a customs warehouse.
The relationship between the State Fiscal Service and businesses displaced from the ATO zone is a separate story. A striking example of this manipulation is the company "Pushkinsky Complex" (owned by ESTA Holding), which once managed a business center of the same name in Donetsk. After the city's occupation, the company evacuated all its employees and re-registered in Brovary. Immediately after re-registration (as many market participants claim, in accordance with an unspoken State Fiscal Service rule for all companies relocating from the ATO zone), Pushkinsky was visited by a tax inspector, a regional one at that, and demanded the originals of all documents. To all requests to begin an inspection of copies of all documents and to argue that removing documents from Donetsk through militant checkpoints is not an easy task, the tax inspectorate responded: no documents, no expenses, so that's your problem. Ultimately, the company was given three months to remove the documents, after which all documents underwent a very thorough "punctuation and spelling check." All documents found to contain minor errors (such as missing periods after abbreviations, or extra or missing commas) were declared invalid by representatives of the Kyiv Regional Tax Authority. Following the audit, the company was assessed VAT violations of UAH 33,7 million and profit violations of UAH 200 million. The penalty imposed by the notice-decision was UAH 10,5 million. All administrative objections filed by the tax authority were dismissed. However, an out-of-court settlement remains possible; the company will then have no choice but to file a lawsuit, paying a court fee of several million hryvnias.
"The State Fiscal Service has questioned the very existence of the 24-story Pushkinsky business center in central Donetsk, which was commissioned back in 2012 and then operated successfully for two years. But the tax service is adamant: if it can't be verified whether construction work was carried out on the site, then it must be assumed that no work was carried out. Furthermore, they claim that Sintesis, one of the largest construction companies and part of the Italian Montagna Construzione group, lacks the resources to construct the building. Of course, we will take the State Fiscal Service representatives to court unless they themselves understand the absurdity of such claims and withdraw them," notes Maxim Gromadtsov, CEO of ESTA Holding.
According to Maksym Moklyak, former acting head of the State Fiscal Service, Ukrainian legislation currently fails to address many issues related to the fiscal service's work with businesses relocated from the ATO zone and Crimea. This state of affairs provides grounds for interpretation of existing regulations by both sides in the conflict.
"Ukrainian laws and regulations inadequately regulate relations with uncontrolled territories, leaving numerous gaps and room for interpretation by the relevant agencies. A unified national approach to these 'ATO zones' needs to be developed. Then the State Fiscal Service will follow it, rather than reinvent the wheel each time. When there's room for interpretation, like most bureaucrats, the State Fiscal Service follows a safe path: they confirm only the bare minimum they can verify. If a tax official, without looking at the documents, confirms the presence of something, simply by saying it's actually located in the ATO zone, and based on this, issues a tax refund or recognizes the amount of a loan, the prosecutor's office will then come and ask: what right did you have to take responsibility and confirm something you didn't physically verify? And then accuse the tax official of causing damage to the state in this amount," explains Maksym Moklyak.
According to him, in practice, this "room for interpretation" creates ample opportunity for corruption. Fiscal officials gain leverage to effectively blackmail businesses without formally exceeding their authority.
Maksym Moklyak emphasizes that this week the Ministry of Finance approached businesses with an initiative to provide proposals on those "blind spots" in relations with the State Fiscal Service that remain unregulated by law.
"Both the Ministry of Finance and the business community understand that the previous practice was incorrect, with the tax service issuing some clarification letters at the regional level and others at the central level. This led to different interpretations, creating opportunities for manipulation and corruption," says the former head of the State Fiscal Service.
Perhaps a more proactive dialogue between the Ministry of Finance and businesses will help resolve the conflict between the State Fiscal Service and the Pushkinsky Complex. For now, experts believe the actions of Kyiv regional tax authorities are more reminiscent of a corporate raid.
Read more: Roman Nasirov. The Business Past of Ukraine's Chief Tax Official
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