Tax Debt Collection: an Exciting Quest

Same as in previous years, tax disputes, arising out of the tax authorities’ conclusions on fictitious deeds/ transactions made by a company, continue to be the major taxpayers’ headache. Unavailability of a mechanism or procedure that would allow a taxpayer to reliably check his/her counterparty for any signs and features of a fictitious nature of its activity lies at the root of the problem.

It has to be admitted that tax authorities play a double game. If a prudent taxpayer, before entering into an agreement, applies to the tax authority for information about the riskiness of a potential counterparty, he will be rejected.  Obviously, the tax authority will refer to a counterparty’s right of non-disclosure of such information. However, once it`s time for the tax audit, the tax authority will definitely utilize the relevant counterparty’s information in the tax audit report, using it as evidence of fictitiousness of deeds and / or transactions.

Thus, in the first place, the tax authority refuses to provide the taxpayer with requested information about the probable riskiness of the counterparty, and then, upon the fact of transaction, uses such information against the taxpayer, arguing that a deed was a fake. Consequently, the taxpayer has to defend his/her integrity in court.

If tax liabilities determined as a result of a tax audit are being challenged in court, they are considered to be unagreed. This means that a taxpayer is not obliged to pay such liabilities until a court decision confirming the validity of tax authority’s conclusions comes into legal force. It is to happen upon consideration of a case by the court of appeal.

The decision of the court of appeal comes into force immediately after its announcement. In the event it`s not ruled in the taxpayer`s favor, the obligation to pay accrued tax liabilities emerges automatically. Thereby, a taxpayer having the right to further cassation appeal, must pay tax liabilities before the final judgment. Otherwise, i.e. in case of non-payment, a tax debt will arise, which leads to probable burdensome effect on the taxpayer.

However, taxpayers always prefer to postpone the payment of accrued tax liabilities as long as possible, and they might have reasonable arguments for this.

To begin with, while the case is being considered by the cassation court, it brings the taxpayer hope that the final decision will be made in his/her favor. Should it happen, a taxpayer who has already paid the amount of tax liabilities will face a new challenge to return the funds. Such procedure is rather lengthy and often ends up in court. Moreover, it`s not a rare case that the amount of accrued tax liabilities is so significant that its payment calls into  question the possibility of the taxpayer`s further business activity itself.

Therefore, further protection of the taxpayer’s rights may turn into a real quest. 

Round 1

Definitely, filing a cassation appeal is to be a first step in order to dig for the truth. The taxpayer has a right to submit a motion to suspend the challenged court decision along with the cassation appeal. Upholding such a motion by the court is rather an exception to the rule (e.g. the ruling of the Administrative Cassation Court of 29 July 2022 in case No. 320/8042/21). Instead, usually the court denies a motion, specifying that the suspension is only possible with respect to a decision that doesn`t provide for its enforcement, i.e. if there are no binding prescriptions, but the legal issue has been resolved (in particular, action / inaction has been recognized as illegal, the act has been cancelled, etc.). If the claim was denied (e.g. claim for the cancellation of tax liabilities), the law effect of such court decision cannot be stopped (e.g. the ruling of the Administrative Cassation Court of 28 July 2022 in case No. 600/1865/21-a).

Therefore, the filing of a cassation appeal itself is not a guarantee of suspension of the obligation to pay the contested tax liabilities and it is not to avoid tax debt in case of non-payment. 

Round 2

Arising of tax debt entails numerous legal consequences for a taxpayer.

In the first place, the tax order is to be sent to the taxpayer. Delivery of a tax order is a prerequisite for the tax authority to apply to the court with a claim for exaction of a tax debt and, under specific conditions, for the establishment of a temporary restriction to leave Ukraine for the taxpayer`s CEO.

In the second place, the taxpayer’s assets amounting to the tax debt are subject to a tax lien to guarantee the payment of such debt. The assets being placed as a tax lien are to be listed and documented in the tax inventory act, which is to be registered by the tax authority in the relevant state register and may be alienated by the taxpayer only upon the consent of the tax authority.

Furthermore, a tax administrator is to be appointed to the taxpayer. The tax administrator is empowered to draw up a tax inventory act, to check the preservation of the taxpayer’s assets placed as a tax lien, to obtain from the taxpayer information about transactions with the pledged property, etc.

It is important to keep in mind, that the tax authority is entitled to seize the taxpayer’s property, if the latter:

  • breaches the rules of alienation of the property being subject to a tax lien;
  • refuses to grant access to property in order to inspect its preservation;
  • undertakes measures to transfer property outside Ukraine, hides it or transfers it to other persons;
  • does not allow the tax administrator to make an inventory of assets to be placed as a tax lien, etc.

The tax authority also has the right to apply to the court in order to:

  • stop debit transactions on the taxpayer’s accounts, if the taxpayer obstructs the tax administrator from exercising his/her authorities;
  • oblige the taxpayer’s CEO to make an inventory of some assets; and
  • oblige the taxpayer to enter into assignment agreement with the tax authority with respect to the taxpayer’s debt receivables.

Ultimately, failing to comply with law requirements as to tax lien will probably result in a big trouble for a taxpayer’s business activity.

One more important thing should be noted.

The common business practices of a legal entity include borrowing money. This enables it to efficiently use and redistribute funds. In its turn, it is well-known that loans are granted by banks subject to mortgage / pledge.

In the event that a tax debt has arisen, this common financial model can lead to huge problems for the taxpayer. The point is that any taxpayer’s assets, placed as mortgage / pledge before tax lien, are not to be taken into account as a source for tax debt collection provided that such mortgage / pledge is duly registered according to the law.

At the same time, if the taxpayer has no assets or its value is less than the amount of the tax debt, or such property is restricted to be a source of payment of the tax debt, the tax authority is entitled to apply to the court with one more claim, in particular, with a claim for the seizure of funds and other valuables on the taxpayer’s bank accounts. It is obvious that the court decision taken in the tax authority’s favor will paralyze the taxpayer’s business. 

Round 3

Based on understanding that decisions made and measures carried out by the tax authority can essentially affect the taxpayer’s business activity, it is recommended to challenge any actions / decisions in court subject to there being the legal grounds to do so.

In particular, it is possible to appeal against a tax order to a court (for example, on the grounds of its early sending, incorrect amount of tax debt or fine, etc.), as well as to submit a motion to secure the claim by stopping the effect of the tax order, prohibiting the tax authority from taking actions aimed at collection of a tax debt, seizure of property / funds or at stopping the taxpayer’s debit transactions. In some cases, such motions are satisfied by the courts (e.g. the ruling of the Kyiv District Administrative Court of 1 November 2021 in case No. 640/30395/21). but there is a significant risk of their cancellation as a result of appeal proceedings (e.g. the decision of the Sixth Administrative Court of Appeal dated 21 December 2021 on case No. 640/30395/21). Still, it allows the taxpayer to gain some time. 

Round 4

Upon expiration of 30 calendar days term as of the date of sending the tax order, the tax authority acquires the right to apply to the court with a claim for the recovery of the tax debt.

When it occurs, the taxpayer might benefit from the abovementioned security, obtained in the tax order appeal case, as it will prohibit the tax authority from exercising such a right.

Should the tax authority ignore the court ruling on security and file a claim for the recovery of the tax debt, it will be a reason to bring the officials of the tax authority to liability within the procedure of control over the enforcement of the court ruling. Besides, such court ruling on security will become an argument for the taxpayer regarding the illegality and groundlessness of such claim by the tax authority.

Moreover, since sending of the tax order to the taxpayer is a prerequisite for the tax authority to file a claim regarding the tax debt recovery, the taxpayer will have grounds for filing a motion to suspend the proceedings in the case on the tax debt recovery until the court’s decision in the case on the appeal of the tax order enters into force  (e.g. the ruling of the Administrative Cassation Court of 27 January 2021 in case No. 640/15943/19).

These measures will allow the taxpayer to gain additional time before the final resolution on the case on validity of tax liabilities (the Main case) to be issued by the Cassation Administrative Court. 

Round 5

Further on, everything will depend entirely on whether the taxpayer is able to defend his/her legal position in the Cassation Administrative Court regarding the Main case.

A final decision taken in favor of the taxpayer will withdraw all issues regarding the tax debt, tax lien, etc.

If the case is sent for new consideration under results of the cassation appeal, it should also take off the table all issues, since the challenged tax liabilities will become unagreed, and therefore the tax debt will no longer exist. However, in reality the situation can differ.

In particular, the decision of the Cassation Administrative Court in the Main case, according whereto the case is sent for new consideration, should obviously result in refusal to satisfy the tax authority’s claim for the tax debt collection due to the fact the tax debt no longer exists. However, it is predictable, that the tax authority will file a motion to suspend the consideration of the case until the court decision in the Main case enters into force. As practice reflects, courts often grant such motions (e.g. the ruling of the Kyiv District Administrative Court of 9 June 2022 in case No. 640/32162/21). In fact, the tax authority intends to take advantage of existing court proceedings in the event new tax debts arise, which will permit recovery of new tax debt more promptly. Fortunately, the courts of appeal do not agree that the suspension of the proceedings under such circumstances is lawful and reasonable (e.g. the decision of the Sixth Administrative Court of Appeal of 2 August 2022 in case No. 640/32162/21). This allows the taxpayer to quickly resolve in his/her favor the case regarding tax debt collection.

The taxpayer’s road is covered with “thorns and spikes”. However difficult it is, we believe, the taxpayer will find the way to the truth.

  • Tetiana Daniltseva

    Partner, Head of Tax Disputes Practice, ADER HABER

    Tetiana Daniltseva provides professional advice on taxation and tax dispute resolution. Ms. Daniltseva accompanies complex projects in the practice of taxation for international and national leaders at all stages from conducting tax audits to appealing against illegal actions and acts of tax authorities.

    Tetiana Daniltseva also specializes in financial and insurance law, advises in the framework of comprehensive legal support for insurance companies, including registration of insurance companies, licensing of insurance activities, development of internal documents of insurance companies (including insurance rules), representation of interests of insurance companies in judicial disputes from insurance contracts, optimization of taxation of income derived from insurance activities

  • Stanislav Karpov

    Counsel, Attorney, Co-head of Tax Disputes Practice, ADER HABER

    Stanislav Karpov specializes in protecting the rights of taxpayers in the process of their interaction with tax authorities. Over the past year, Stanislav successfully represented clients in disputes against State Tax Service of Ukraine worth over UAH 400 million.

    During his period at ADER HABER, Stanislav Karpov successfully advised and represented the interests of both Ukrainian companies (Merx, Velyka Kyshenia, Ukrproduct, Ukrsotsbank, national agricultural producers and oil traders), and multinational companies (BNP Paribas Cardiff, British American Tobacco, Colliers International, Dragon Capital, Inditex, MetLife), as well as private individuals.

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