Ninety percent of tax cases are repulsively monotonous and even, in some ways, boring, predictable, consistent, and banal. The scheme consists of targeting a law-abiding, upstanding, wealthy, and successful enterprise (business entity), exploiting its connections to a less-than-stellar company, chosen as a scapegoat, to discredit its financial and economic operations. What is meant by this?
There is probably not a single large domestic enterprise that has not encountered the rather unpleasant procedure of additional tax assessments.
Moreover, it is a generally accepted "rule of good form" for the tax inspectorate, based on the results of an audit, to charge the audited enterprise from tens of thousands to tens of millions of hryvnias in unpaid taxes (primarily on profit and added value).
Almost no enterprise manages to avoid the negative consequences of an audit (with the exception of those “lucky ones” who either do not conduct business activities at all (and there is simply nothing to audit) or have up to ten financial and business transactions to their credit).
This is the generally accepted state tax policy: to “find” a violation and try to prove it by any means necessary.
But it's not all that bad: over the course of their existence, tax (fiscal) authorities have been quite successful (if we approach it from a mass perspective) in testing just one universal doctrine of additional tax assessments, using the so-called "hostage principle" (also known as the "principle of mutual responsibility" or the "principle of solidarity" (the latter name most accurately reflects the meaning and logic of what is happening).
90% of tax cases are disgustingly monotonous and even, in some ways, boring, predictable, consistent, banal.
The scheme consists of attacking a law-abiding, correct, wealthy, successful enterprise (business entity), using the latter's connections with a not entirely "splendid" enterprise, chosen as the scapegoat, to discredit the financial and economic operations of such an entity.
What does this mean? Let's imagine a company that, in all respects, is, shall we say, not exactly "splendid," and there are several prerequisites for this situation: a lack of business acumen on the part of management and founders, crises, insolvency, poor market conditions, and, as a result, practically inevitable accounting violations, minor issues with paying taxes and fees, and registration (staying at the registered address).
The enterprise was created by trial and error, in a hurry, spontaneously (however, let us remember that spontaneity (along with risk) is one of the principles of doing business, according to the definition of entrepreneurship itself, as an economic phenomenon), and definitely has its “mistakes” and “jambs”.
Such enterprises account for up to 90% of existing (created and registered) companies. Such enterprises have no assets, and, as the saying goes, it's impossible to extract anything from them other than analysis. It would seem they're of no interest to the state or tax authorities, but that's not the case...
Government officials quickly realized that even the most insignificant and dysfunctional enterprise could be used to their advantage, to sort of "disgrace" successful and wealthy enterprises (of which there are only a few, which have assets, resources, money (and therefore are the object of desire of tax authorities), but at the same time conduct their activities at a high level, excluding tax violations).
It would be quite simple to apply the aforementioned scheme and principle of solidarity and joint liability and try to "divvy up" a rich and successful construction corporation or a large bank, accusing the latter of having ties to Horns and Hooves LLC.
We have analyzed the case law contained in the Unified Register of Court Decisions, and in some cases we have actively participated (as representatives of the parties). We propose that we collectively, publicly, analyze both the pattern of coordinated actions by tax authorities to apply the "principle of solidarity" and the pattern of successfully countering attacks by tax authorities, allowing for the complete elimination of the negative consequences of tax authorities' activity.
So, recently, a certain Torenia LLC, code 38091691, was designated as one of the "bad" companies in Ukraine (all data, as a reminder, is taken from the Unified Register of Court Decisions, a public and open source). For the sake of completeness, we note that, in addition to Torenia, other "bad" companies could also be designated as such, including Mineralis LLC, Center TK LLC, Gileya Invest, and a host of other companies, including the long-known Dionis LLC.
It's not the names that matter, but the essence and system of interconnections, as well as the technologies for putting arrogant tax officials in their place (which is what we want to talk about).
The problem is that lawyers (who defend the interests of a company subjected to tax harassment) simply don't know how to work or display sufficient creativity and imagination, and these factors are always (!) fundamental... Claims and explanations are tediously dull, the efforts to prove their case are useless, and ultimately, the administrative court hearing the case and siding with the tax authorities is always to blame.
Once, one of our gymnasts, I don’t remember who we’re talking about, was asked on TV in an interview “how did you manage to perform so well and win, when it was clear from the start that you would be unfairly judged?” and she responded with the most beautiful phrase: “we knew it and that’s why we performed in such a way that the judges had no other choice but to award us the victory.”
This is the mindset and approach a competent lawyer (advocate) should bring to court, aiming to "make the court have no other choice." Then there will be no excuses like "the court was pressured" or "the court didn't understand." These kinds of excuses are well illustrated by and echo the well-known saying about the reasons for some individuals' poor dancing abilities.
A trial in an administrative court (or rather, the taxpayer's lawyer's conduct therein) should be based not only on documents and evidence but also include elements of creativity and showmanship (within reasonable limits, of course). The court needs to explain its position simply and clearly, leaving no room for maneuver, and we'll explore how to do this.
So, we represent a law-abiding and honest enterprise that has assets and is therefore a priori a tasty morsel for tax authorities.
After our (the protected and represented) law-abiding and successful enterprise had contact with Torenia LLC (any business and financial transactions and operations took place, such as the purchase of goods (works, services), the tax authorities promptly conducted an audit and the law-abiding enterprise learned that:
1. OOO Torenia was registered by unknown persons using unclear documents and under unknown circumstances, and OOO Torenia is not located at its registered address;
2. Three criminal cases have been opened against the director and founder of Torenia LLC (illegal entrepreneurship, tax evasion, fraud, etc.). According to the interrogation protocol, the founder (who is also the director) knows nothing about the registration of the enterprise, did not sign anywhere, and did not register the enterprise;
3. The materials of the criminal case contain an expert opinion, according to which the documents seized from Torenia LLC during the search bear the signatures of unknown persons (and not the director);
4. OOO Torenia does not have warehouse facilities, transport, equipment that would make it possible to produce certain products, and also does not have personnel (qualified workers) that could produce certain products;
5. Information about the dubious nature of the existence and activities of Torenia LLC has been entered into the Tax Inspectorate database "Tax Block"...
Furthermore, based on the totality of the above circumstances, the tax authorities conclude that the transactions concluded between the law-abiding enterprise and OOO Torenia are fictitious, void, invalid, have no economic meaning, were not commercial, and therefore were incorrectly reflected in the accounting and tax records of the law-abiding enterprise, which attributed the funds spent on OOO Torenia to expenses (reducing income tax) and to a tax credit (reducing value-added tax liabilities).
According to the tax authorities' logic, such allocations were made without sufficient grounds and are subject to restoration, with various additional charges and penalties, which is done by drawing up an audit report and then by issuing a tax notice-decision (for an amount that depends on luck).
Let us repeat: up to 90% of tax assessments are made according to this simple scheme, and similar creative efforts account for 90% of tax cases.
It is extremely surprising, but a fairly significant percentage of concocted (why “concocted” – we will see later) and additionally assessed taxes following administrative and judicial appeals are recognized as agreed upon.
At the same time, in our opinion, NONE of these tax cases regarding additional tax assessments and fees have any right to exist. Everyday practical work in protecting the rights and interests of taxpayers demonstrates the extreme effectiveness of overturning tax authority decisions with the right and creative (that's right) approach, applying a modicum of diligence, common sense, and basic logic.
Thus, above are 5 intermediate and 1 general statement (prerequisites, theses) about the illegality of the activities of Torenia LLC, which form the basis of tax notification decisions and rare (from the point of view of common sense) negative court decisions based on the results of appeals against tax notification decisions.
These arguments “break down” with amazing and striking simplicity and elegance.
Thus, the assertion that "data on the illegality and dubiousness of the activities of OOO Torenia have been entered into the Tax Block database" is refuted by the well-known (thanks to us) fact that the Tax Block has a degree of reliability and origin approximately the same as the overwhelming majority of graffiti on the walls of public restrooms at train stations.
Everyone already knows what the "Tax Block" is and what it entails. Judicial practice provides grounds for soberly asserting that no administrative court judge (who hears claims to invalidate tax notices and decisions), in their right mind, would ever even remotely justify a ruling in favor of the tax authority based on entries in the "Tax Block." Moreover, the recent trend is such that the "Tax Block" is no longer even referenced "under any pretext." Successful presentation and use of this argument also depends on the lawyer, who is simply obliged to figuratively explain the "Tax Block"—it's akin to a website for entertainment purposes, and who posts what there is a complete mystery.
However, if the plaintiff's representatives are bored at the court hearing, then, purely for the sake of a laugh and to ease the tension, they can pester the tax authorities with demands to confirm the presence of certificates of conformity from the "Tax Block" or, even more exotically, demand an extract from the "Tax Block" (neither of which is even hypothetically possible, let alone provided in kind).
Therefore, the thesis “and we have it written down in the ‘Tax Block’ that OOO ‘Torenia’ is bad” is not valid under any circumstances and cannot be used in any way as evidence in favor of the tax authority.
Moving on.
When it comes to analyzing the tax authority's assertion, "But the investigator questioned the director and founder of Torenia LLC, and he testified in the interrogation report that he did not create the company..." it's essential to guide the administrative court judge (who is hearing the tax case) in the correct understanding of the facts. Unfortunately, even experienced judges often lose their bearings in the procedural context and begin to accept this nonsense at face value when analyzing the interrogation reports of the directors and founders of Torenia LLC (or any other similar firm).
Here, things are even simpler. For the administrative court (which evaluates the results of tax authorities' audit activities), there are NO records of witness interrogations (or of defendants or suspects) in other proceedings (criminal, in particular), much less in pending ones. An administrative court has no right to provide a legal procedural assessment of a witness's statements in an entirely different proceeding, nor, moreover, to assess a witness's testimony if such testimony is "fragmentary" and is analyzed without taking into account the witness's (defendant's) situation.
Let's remember that several criminal cases have been opened against the founder and director of Torenia LLC, ranging from tax evasion to fraud and illegal entrepreneurship. He's likely to end up in a "prison and lice" zone within a few steps. Or perhaps he's the real director and founder of Torenia LLC, and in that position, he racked up loans, sold goods, carried out licensed activities without a license, or even sold a batch of Kolchugas to Iraq or supplied nuclear fuel for nuclear power plants to the Donetsk and Luhansk People's Republics (DPR) and Luhansk People's Republics (LPR)?
In such a case, the director (founder) faces the prospect of potentially receiving a life sentence for multiple offenses, and therefore, he sees it as a perfectly natural procedural and tactical solution to declare his non-involvement in the company's registration process and its activities! This explains his position, "I didn't create anything, I didn't manage the company, I don't know who did what," and basing tax notices and decisions on such haphazard nonsense is the height of stupidity, procedural carelessness, and arrogance.
Administrative court judges can clearly understand what's going on if we let our imagination run wild. Beyond the arguments, "Your Honor, it's understandable why the director claims he has no connection to a company with such a string of criminal cases... But if you were to evaluate a witness's testimony in an administrative proceeding, deeming it credible, claiming he wasn't the director of Torenia LLC (or any other), he'd be grateful, because the administrative court would establish the legal fact of a specific citizen's non-involvement in the company's activities, and that, in turn, offers hope of exemption from criminal liability for various frauds and illegal entrepreneurship..."
Even the most intellectually undeveloped judges understand the danger of such procedural pseudo-prejudicial constructions, when an administrative court "borrows" fragments of interrogation protocols from "left-wing" criminal cases, foisted on the court by tax officials (this can easily create an "alibi of competence" for a seasoned fraudster and embezzler, giving the latter the opportunity to avoid punishment...).
You just need to properly "press" the judge, demonstrating the "dangerous" direction he's heading, led by the "good" tax officials. Don't forget about basic imagination and consistency, because reasonable ideas, especially when expressed in simple and accessible language, will always be heard.
For an administrative court, what matters is not a fragment of a protocol taken out of context, but only the court's verdict based on the outcome of a criminal case's examination in its entirety, systematically, based on an analysis of hundreds of factors, and not a piece of "excuse" like "I didn't create anything...".
And here, having already mentioned the existence of a verdict and its prejudicial effect on the administrative court, we should go a little further, because cases never reach a verdict. The games with Torenia LLC and other similar firms are mutually controlled by tax authorities at every stage.
Torenia LLC could have been created under any circumstances. But for the tax authorities, its real-time existence and the "suspended" status are crucial. Trivial negotiations were held with the founder (director), trading "goodies" along the lines of "we're not locking you up, and there's no reason to, so give us the 'general' interrogation reports proving you know nothing and didn't commit anything." The case drags on, and the director (founder) is immune from imprisonment, earning loyal treatment with the necessary testimony and the necessary level of activity.
For the same reason (the fragmentary nature of the situation and evidence, which was collected through another process), the tax authorities' arguments are also simply rejected: "There is an expert opinion that the documents of Torenia LLC for 2013 bear the signature of someone other than the director."
That's all well and good, but what does this have to do with some expert opinion regarding some documents related (or perhaps not) to the activities of Torenia LLC, if these documents have no bearing on the events being considered by the administrative court here and now? Yes, of course, anyone could have falsified documents at any time on behalf of Torenia LLC (some invoices or who knows what from 2013), but what does this have to do with the contracts signed in the current year, 2015, between Torenia LLC and a law-abiding company that is proving its case, refuting the tax authorities' arguments?
There is no connection at all, and the representatives of the parties should point this out (with such an orientation, NOT A SINGLE administrative court judge will engage in nonsense and write in black and white).
Moving on.
In the overwhelming majority of cases, as we have already understood, the existence of Torenia LLC is due to banal "deals" between the latter's management and the tax authorities, a criminal symbiosis between them aimed at creating and maintaining the preconditions for infringing on the property interests of law-abiding and wealthy enterprises, whose only guilt is that they had connections with a "shady" entity.
Another technology is extremely effective in successfully resolving tax cases, and we've already described it. Today, we'll go a little further.
So, the tax inspectorate drew up an audit report in which they outlined some pseudo-smart ideas, such as "OOO Torenia was created in a dubious manner and is not located at its registered address..."
The cure for such scribbling is simple and elegant (we suggest you learn while you can): any citizen (who has absolutely no connection to the situation, ideally a potential representative of a law-abiding enterprise being targeted) writes a statement to the main (regional) tax service, the prosecutor's office, or the police along the following lines: "I, an honest citizen, have learned that Torenia LLC, created by unknown criminals, is registered using stolen documents, is not located at its registered address, and is engaged in questionable operations. I suspect that it was created with the connivance of tax officials who are cashing out money. Part of the cashed-out money is used to finance the LPR and DPR and the 'Dentist's Family' in exile..." (there's no harm in exploiting current trends, if any). And furthermore, we ask that action be taken to punish the negligent tax authorities, who have not yet even filed lawsuits to terminate the state registration of Torenia LLC and invalidate its founding documents.
What happens next? A funny thing happens. Local tax officials are up to this kind of mischief with Torenia LLC and others, at their own risk, often without management approval. Management changes frequently and is unaware of Torenia LLC's lofty purpose. Plus, bureaucracy and the incompatibility of different systems and jurisdictions are a good thing (the prosecutor's office doesn't communicate with the tax authorities, and the police don't communicate with either; each operates in its own way, individually, independently, and independently).
For example, the prosecutor's office, having read the perfectly reasonable comments about "why, exactly, does this illegal company exist?", more or less launches an investigation and asks the tax authorities difficult questions, engaging in heart-wrenching dialogues like, "Is Torenia legally established? No? Then why does it exist? Has anyone filed a lawsuit to terminate it? No? Why? Maybe you're in on it? Honest citizens are already filing complaints that money is going to the LPR and DPR—how can we understand that?..." The administrative audit ends with the tax inspectorate, in order to avoid difficult questions that escalate into accusations, finding nothing easier than to declare that Torenia LLC may have some shortcomings, but they're not serious enough to warrant terminating the legal entity or challenging its statutory documents. This is the response that ultimately goes to the complainant.
So, the applicant brings this response to the administrative court, explaining, "Your Honor, I don't understand anything at all... The tax office screams about the illegality of Torenia LLC, and the signatures on the founding documents and everything, and shoves some kind of director's testimony everywhere. But when it comes down to it, the prosecutor's investigation reveals that Torenia LLC is practically the most legitimate enterprise in Ukraine. They even refused to file a lawsuit to terminate it, so the official response is signed by the regional prosecutor..."
It's clear that with this type of evidence, the court has no choice but to, guided by its inner conviction, issue a ruling on the complete, presumed and confirmed legality of the activities of Torenia LLC, as well as its counterparties, who, accordingly, committed no offenses or tax evasion (which is what needed to be proven).
And for the sake of completeness, we note, again, that the tax authorities' arguments—"the transactions were meaningless and therefore null and void," "Torenia LLC lacks the equipment to manufacture the products and could not have produced them, and there is no economic rationale for production," and so on—are not even discussed at all. The law, as we know, presumes the legality of transactions, and proving their necessity and legality is unnecessary. If the tax authorities deem a particular transaction illegal, then the courts are open to challenging the transactions, and only an independent decision on the initiated claim for declaring the transaction null and void can serve as the basis for any arguments or fantasies, nothing more.
And the tax authorities' argument, along the lines of "...Torenia LLC lacks the equipment and premises to produce the mesh (bricks, paint, asphalt, nuts, etc.) it sold...," seems ridiculous. Firstly, modern commercial and civil legislation operates with dozens of types of transactions and forms of interaction between business entities, allowing a law-abiding enterprise to acquire the necessary goods in any quantity and from any party (agency agreements, purchase and sale, consignment (commission), delivery with deferred payment, joint ventures, exchange trading, options, futures, etc.), and it is absolutely not necessary for the supplier to have ever owned (let alone produced) the goods (works, services) provided.
Secondly, each enterprise will decide, and does decide, independently what the economic meaning of a particular transaction (system of transactions, set of transactions, schemes, mechanisms) is, without the “external expert” influence of tax authorities (whose responsibilities certainly do not include the functions of experts in the field of business and production organization).
The tax authorities' astonishing audacity is to attempt to analyze the economic rationale of companies' activities, claiming that such activities are meaningless and impossible due to a lack of resources and personnel, while they themselves have neither the resources, nor the personnel, nor, especially, the competence to make such assessments. Incidentally, such "attempts" are easily "cured" by a salutary appeal to the prosecutor's office and a higher-level inspectorate, together with the State Financial Inspectorate. "At a time when the country is in crisis and facing a multitude of problems, the district tax inspectorate, contrary to its competence and assigned tasks, is busy analyzing the economic activities of companies."
"At the same time, an attempt is being made to assess the development prospects of enterprises in the nuclear energy, agriculture, automotive, heavy engineering, and fundamental science sectors without the presence of specialists on the inspectorate's staff who can distinguish a cow from a helicopter. These assessments are being made during working hours, using the resources of the tax inspectorate..."
The answer, as you all understand, will be unequivocal: "Nobody evaluates anything; the tax inspectorate is on guard for taxes and fees"—and such an answer for the administrative court, as they say, is what needs to be...
You could also get creative, for example, by reading the tax authorities' overly enthusiastic scribblings, "the deal to buy and sell equipment for generating electricity from solar radiation made no sense..." and writing a query, "How many solar energy specialists are on the tax authority's payroll, where did they study, what academic degrees do they have, what expert qualifications..." but that's, as they say, an acquired taste.
So, to summarize the above, we note that in modern conditions, it is quite simple to combat the creativity of tax authorities who are thirsty for experiments.
Administrative court judges make decisions on cases based on their personal convictions, understanding of the situation, and basic common sense. With the creative approach we've described, it's IMPOSSIBLE to lose a dispute with the tax authorities (unless the taxpayer truly has no primary documentation to support expenses or has clearly acted improperly).
A little diligence, coupled with clear thinking and a correct, unconventional application of procedural law, is simply necessary—and victory over the tax authorities is just a matter of time, inevitable and consistent in all its glory, without any talk of corruption, bias, complexities and procedural twists and turns, low professional standards, or any other kind of corruption. The representative's job is simply to prevent judges from having any other procedural chances, any chance for a different model of behavior and a different decision (other than the one we need, and most importantly, one that is legal and justified).
Irina Kremenovskaya, Oleksiy Svyatogor, Institute of Economic and Legal Research of the National Academy of Sciences of Ukraine
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