I see nothing and hear nothing. Officials turning a blind eye to VAT frauds

The main goal of the introduction of the system of blocking tax invoices was to stop VAT abusing. Everybody – especially accountants and lawyers – knows what this turned into for ordinary payers. Let us analyze what kind of schemes have been used during the four months of the system’s work, and what kind of criteria for assessing the risks sufficient to stop the registration of the tax invoice (approved by order of the Ministry of Finance #567) are bypassed by the “schemers”.

In the four months of the system’s operation we already have the first court decisions on taxpayers’ claims to the State Fiscal Service. The decisions are mainly in favour of the payers. However, the relevant ministry keeps insisting that the system works well, the “schemers” are defeated, the revenues of VAT into the budget keep growing, and the system itself is constantly being upgraded and improved.

Schemes and inaction

However, let us first talk about the powers and delimitation of competences. It was the relevant Ministry that had to develop criteria for assessing risks in accordance with the Tax Code, as well as an exhaustive list of documents that taxpayers should submit to the State Fiscal Service’s Commission in case the registration of the relevant invoice is stopped. The system stops the registration of an invoice if it sees any risks in it and a refusal note is automatically generated. If the payers disagree with this, they submit a relevant notice and documents through the electronic office to a special commission that works as a part of the central office of the State Fiscal Service of Ukraine. Regional offices of the State Fiscal Service do not stop the registration of invoices, do not consider the documents of payers – they just silently observe how the system, adjusted in accordance with the by-laws of the Ministry of Finance, works. So, the State Fiscal Service carries out the current order of the Ministry of Finance. Therefore, everything that is described below can be considered inactivity of this particular body because of the lack of response on its part.

The first and most resource scheme is associated with the registration of tax invoices under the risk of “improper use of benefits”. In fact, by wrongfully applying benefits the schemers create a virtual warehouse for goods, works, services without VAT for their customers, who subsequently form a schematic tax credit for the next chain. The limit is replenished due to the goods of different nomenclature, that is, there is actually a “re-sorting” or substitution of some goods by others. For the period from July 1 to August 13 of this year, tax bills for a total amount of supply of 3 billion hryvnias (VAT excluded) were registered.

The State Fiscal Service started sounding the alarm and reported this to the Ministry of Finance, which amended its order to exclude this scheme with virtual warehouses. However, during the period of August 14 – October 15 (following the amendments to the order of the Ministry of Finance), there have been payers who, without forming an appropriate limit in the System of Electronic Administration, registered tax bills for the total amount of deliveries of 2.6 billion hryvnias, including 0 hryvnias of VAT (conditional VAT 0.52 billion hryvnias). They formed a risky tax credit for 232 payers of the next supply chain. This means that the amendments to the order of the Ministry of Finance were not effective and in the future they will provide for the registration of tax invoices at the expense of a “virtual” warehouse of goods.

The second scheme shows that the system of blocking risky tax invoices does not work in automatic mode with the same approach to everybody. According to the order of the Ministry of Finance, the registration of the tax invoice with the risk of “re-sorting” should stop automatically. However, in practice, this criterion stops the registration of bona fide payers, especially Ukrainian commodity producers (they buy raw materials, sell finished products), but does not always work with “schemers”. For example, one Kyiv company purchased “cigarettes”, “wood flour” and sold “spare parts”, “microcircuits”, “copper castings” for a total of 403.5 million hryvnias, including 67.3 million hryvnias of VAT. In fact, the registration of tax invoices with a nomenclature of goods which differ from those purchased does take place. During the period from July 1 to October 15, 2017, in Kyiv alone, tax invoices with the specified risk for the amount of 726.1 million hryvnias of VAT were registered. Again there is a question to the Ministry of Finance, how is this even possible and why are they not noticing it?

The third scheme is connected with the possibility of registering the calculation of adjustments to tax invoices with the replacement of the nomenclature of the goods. For example, tax invoices are submitted with the nomenclature of “sunflower meal”, “construction works on repairing the roof”, and the system registers them; and then through the adjustments, the “construction work” is replaced with “seeds”. In general, following such a scheme, in Kyiv alone, tax invoices for the amount of 99.2 million hryvnias of VAT were registered. No changes to the by-laws to deal with this scheme are introduced either.

Another characteristic example of the shortcomings of the system is the situation when tax invoices for the sale of tobacco products by a company that does not have a license for wholesale and retail trade of these products are registered. According to the legislation, this is impossible, since monitoring and stopping of the tax invoice in the absence of a license or its cancellation should occur automatically in accordance with the paragraph 6 of the order of the Ministry of Finance. But in reality, only during July-September 2017 in Kyiv, tax invoices with a nomenclature of “cigarettes” for the amount of 130.3 million hryvnias of VAT were successfully registered when the suppliers had no licenses.

Why does the system have loopholes? That’s a rhetorical question. In 4 months the Ministry of Finance has not managed to correct these gaps. Whereas, due to the incorrect work of the system and the lack of control and response from the relevant ministry, the “schemers” received an undisputed tax credit.

It is also interesting to look at manipulations with the percentage of blocked invoices of the real sector enterprises in which more than 5 people work and which paid more than 250 thousand hryvnias of taxes in 2017. In Kyiv, this figure is an average of 36.9% for the number of tax invoices stopped in 4 months. Altogether, as of October 30, 2017, 126,243 tax invoices of Kyiv enterprises were stopped, of which 46,616 accounts for such enterprises.

Mistakes and silence

Where does the latest jurisprudence stand on this issue? It is worth referring to the decision of the Rivne District Administrative Court dated August 17, 2017 in a case #817/1147/17 and Vinnytsia District Administrative Court’s decision dated September 15, 2017 in a case #802/1356/17. Based on the results of consideration of these cases, the courts reached the following conclusions:

“The regulatory authority violated the norms of subparagraph 201.16.1 of paragraph 201.16 of article 201 of the Tax Code of Ukraine because they did not specify in the receipt number 2 a specific clear criterion for assessing the degree of risks sufficient to stop the registration of the tax invoice/adjustment calculation in the Unified Register of Tax Invoices upon the basis of which the registration of the tax invoice/adjustment calculation was stopped.”

Such a conclusion of the court is based on the fact that the fiscal body only specifies a general reference to the compliance of tax invoices with the criteria for assessing the degree of risks in the receipt #2. While subparagraph 201.16.1 of paragraph 201.16 of Article 201 of the Tax Code of Ukraine requires the controlling body to specify a concrete type of criterion. Therefore, the court concluded that the fiscal body was obliged to clearly indicate the specific type of criterion from those enlisted in paragraph 6 of the Order #567.

The court decision specifies that the definition of a particular risk criterion by the fiscal body in the receipt directly influences the possibility of further submitting the relevant documents by the taxpayer, the list of which is presented in the Order #567. It is established that the decisions of the Commission on the refusal to register the tax invoice does not contain specific information on the reasons and grounds for such a decision, but only contains a general phrase that the reason is as follows: the taxpayer’s submission of copies of documents that are drawn up in violation of the legislation and/or are not sufficient for the decision of the State Fiscal Service’s Commission to register the tax invoice/adjustment calculation. However, the decisions do not specify which documents were drawn up in violation of the law and which documents are not sufficient enough to make a decision on the registration of the tax invoices.

The decision of the Commission shall contain a clear basis for refusing to register a tax invoice. However, the decisions appealed do not contain a clear definition of the grounds for the Commission’s decision to refuse to register the tax invoices. Consequently, the courts came to the conclusion that the decisions being appealed are unfounded, since the payers have submitted all the documents proving the fact of accomplishing economic transactions on tax invoices whose registration was refused.

As you can see, the system is blocking the work of real business, while the State Fiscal Service, with the tacit consent of the Ministry of Finance, is fulfilling its order grossly violating the rights of taxpayers:

– the receipts for stopping the registration of tax invoices do not indicate the criterion on the basis of which the registration was stopped;

– the payer is not informed about which exactly documents were not provided to the Commission and why the provided documents are not sufficient to make a positive decision; it is neither indicated why the State Fiscal Service regards the documents to be drawn up in violation of the law.

The Ministry of Finance pays no attention to these remarks, which all payers face in practice, and which are also stated in the decisions of administrative courts. This is despite the fact that since the time the by-laws regulating the procedure for stopping the registration of tax invoices became effective, the Ministry of Finance has had enough time to eliminate the defects, to improve the procedure for registering tax invoices, and to create no problems for bona fide enterprises. Therefore, constant upgrading without tangible improvements, as well as officials’ failure to comply with the direct requirements of the Tax Code and gross violations of the rights of taxpayers – especially Ukrainian producers, small businesses – cannot remain without parliamentarians’ attention when considering bills of the “budget package”.

object(WP_Term)#4341 (16) { ["term_id"]=> int(1) ["name"]=> string(4) "News" ["slug"]=> string(4) "news" ["term_group"]=> int(0) ["term_taxonomy_id"]=> int(1) ["taxonomy"]=> string(8) "category" ["description"]=> string(0) "" ["parent"]=> int(0) ["count"]=> int(4050) ["filter"]=> string(3) "raw" ["cat_ID"]=> int(1) ["category_count"]=> int(4050) ["category_description"]=> string(0) "" ["cat_name"]=> string(4) "News" ["category_nicename"]=> string(4) "news" ["category_parent"]=> int(0) }
News