On the Move

The turbulent transformations in the economy are usually a crowning moment for new business ideas. This period reveals entrepreneurial skills and pragmatic financial mindset. The legal market is not exclusion. Splits and spin-offs, amalgamation of teams, pro-active employment and expansions are creating exciting environment in the Ukrainian legal market. The competition leads to precise focus on clients’ needs. Oleg Vdovychen, who announced the establishment of Vdovychen & Partners, explained his vision of managing a law firm on the move. We ask him to tell us about recent challenges for taxpayers, their typical legal requests and vision of tax police reform in the country.

UJBL: Your firm is a relatively new one in the Ukrainian legal market, though you personally have been practising law for a long time. Why did you decide to create your own brand? What practices became priority for Vdovychen & Partners attorneys at law?

Oleg Vdovychen: Of course, founding the Vdovychen & Partners brand was not due to any single reason. There were a number of professional and life circumstances that enabled me to clearly understand the wisdom of the following expression — the main thing in this world is not where we are, but where we move (Oliver Holmes). Independent development in the sector of interests of business legal support and protection, in which, as is proved by many years of my practice, the number of problems was not only reduced, but their number is growing “exponentially” — and this was one of the most “inspiring” incentives to create a law society. As a result, the following specializations became our priorities: tax law and disputes, criminal defense of business, banking and finance.

UJBL: What trends in tax disputes do you see in practice? Did the approach of courts to their resolving change?

O. V.: Analyzing trends in tax disputes in recent years, first of all I would like to note that the number of such disputes fell significantly. A bit of pallid statistics to confirm this: according to official figures in 2014 there were 65,600 cases pending in courts, concerning abolition of tax assessment notices for total amount of UAH 146.5 billion (18,721 decisions were taken in favor of taxpayers for the amount of UAH 35.9 billion), in 2015 — 54,500 claims in this category (in favor of taxpayers — 11,700 cases for the amount of UAH 32 billion). During 10 months of 2016 these figures are 43,200 lawsuits for total amount of UAH 169.4 billion, out of which 5,700 cases for the amount of UAH 18.5 billion — in favor of taxpayers. As the probable main reasons for what is happening I could refer to current moratorium on tax audits, signs of a crisis in economy, which nullified the economic activity of many business entities, as well as permanent reform of inspection divisions of the State Fiscal Service. Nevertheless, I should point out, that such circumstances are temporary and in the following year we may reasonably expect outbreak both in the number of tax audits and in the number of relevant disputes.

As for the “quality” trend, the “law of transition from quantitative changes to qualitative ones” is unlikely to prove to be true in this case. Quite often, as always, while protecting our customers, we pay attention to explicit “imperfections” and “inconsistency” of findings in tax audit reports, despite the fact that the number of conducted tax audits in the past three years, as we have seen, greatly decreased. If we have a look from the perspective of conditionally allocated categories of tax disputes, in the first place, I think, both in the number and in amount of additional charges, are disputes on appeals of tax assessment notices, related to recognition of business transactions as unjustified or fictitious sale operations and, as a consequence, with groundless receipt of tax benefits in the form of VAT. For many business entities regular charges in the form of “kind of” established facts of conducted unjustified or fictitious sale operations, arrangements with “transiters”, “twisters” and the like claims of this kind have become almost common practice. For the fiscal authorities it seemed to be less “labor-intensive” type of detected violations. Data from tax accounts, available public registries and, in some cases, unquestioned creative analytical mind of inspection officers, provided an opportunity to question the conduct of the very real economic transaction and, therefore, to exclude VAT from the tax credit and to recognize the transfer of funds in favor of a business partner, for example, as provision of irrevocable financial aid. Special approach to resolution of such disputes developed in court practice. In fact, courts, as a rule, take place of a tax inspector and fact of business transaction conduct is proved by a taxpayer in court. The duty of fiscal authorities to prove validity of a decision made, as provided by law, was not taken into account. But it is also possible to mention new trends. The intensification of law-enforcement practice of the Supreme Court of Ukraine on this issue led to the fact that not only the availability of a sentence for fictitious business activity, but also interrogation protocol of your company officer, denying the fact of contract signing, can be treated not in favor of a payer and may result in the declaring of all the documents and business operations to be invalid for tax calculation purposes.

UJBL: Appeal of tax assessment notices is one of the most sought-after business needs. What requests do your customers often address you with?

O. V.: Indeed, excessive fiscal pressure, imperfection of tax legislation, corruption, unwillingness to differentiate such different, in my opinion, concepts, as legal optimization of taxation and tax evasion, led to the fact that appeals of tax assessment notices became not just a need, but vitally important necessity for business. Today’s realities show that “over-reverential” relations with fiscal authorities may lead to results that are far from positive. As well as errors in accounting and tax records, business transactions that are risky from the point of view of their tax consequences can also turn out to be costly to a taxpayer. But no wonder they say — a stitch in time saves nine. I can draw the conclusion: appeal of tax assessment notices is just the tip of the iceberg. As a consequence, the requests of our clients in the field of taxation are various: they touch upon issues of application of tax legislation; assessment of counterparties’ tax fair practices, of tax risks of planned and carried out business transactions, i.e. issues that are not directly related to adoption of tax assessment notices, but that allow further on to predetermine final outcome of tax audits. In terms of trends and innovations in the context of appeals, attention is drawn to the growing activity of fiscal authorities on obvious “blackmailing” of taxpayers in matters of effect of agreement on recognition of electronic tax documents. For example, a certain creative innovation is temporary unilateral termination of an agreement on recognition of electronic documents in view of occurrence of controversial issues related to the authenticity of tax documents, in the view of the fiscal authority. Hence, a taxpayer receives a request to provide documents about business operations that have been conducted, including data on material and technical base, transportation, etc.

If we look to the future, I expect growth in the number of customers inquiries as to transfer pricing and conducted “price” tax audits, as we should hope that in future the State Fiscal Service will reach a new level in the sphere of control over payment of taxes and over taxpayers activity.

UJBL: In spite of various legislative initiatives, business continues to complain of strong pressure from the tax authorities, in particular, of commencement of criminal proceedings. What do practising lawyers face with when protecting clients? How can businesses appropriately respond to demands of tax authorities?

O. V.: Just because he says he will does not mean he will. This fully applies to legislative initiatives aimed at reducing fiscal pressure. There are draft acts enabling dramatic changes to the situation in this regard, but Parliament cannot get around to their adoption, for partly unknown causes. What do we have? A sensational example: without any argument under unreasonable ruling of Solomenskiy District Court of Kiev of 1 August 2016, 56 companies were recognized as conversion-transit ones and more than 900 companies were ordered to undergo unscheduled inspections.

In order to reduce fiscal pressure, our authorities should recognize and eliminate the main problem, which practising lawyers face in the field of taxation. It is current impunity of fiscal authorities’ officials, which, as a consequence, generates their irresponsibility. And so we have wrongly commenced criminal proceedings, sometimes “absurd” tax audit findings, “blackmailing” by fiscal officers, inclusion of “untruthful” tax information to fiscal service database, etc., for elimination of which and for protection of a customer interests it is necessary to spend a lot of time and to make a great effort.

But the fiscal authorities will always have requirements for taxpayers, such is their nature. And the correctness of the business response to these requirements is, in my opinion, determined by the following three simple recommendations. One must be able to anticipate disputes with the State Fiscal Service, to remain calm and to act within the law as much as possible.

UJBL: But if the situation still ends in the search and seizure of documents, how should a company director and employees adequately behave?

O. V.: The procedure for searches and seizure of documents by law-enforcement agencies is sufficiently regulated by norms of the Criminal Procedure Code. Therefore, one should prepare for such events in advance. In such case the following is necessary:

— Firstly, the constant “readiness” of a company director and its employees to such actions, key to which are developed standards of conduct and worked out mechanisms of interaction within a company, adequate protection of confidential information;

— Secondly, timely appearance of a lawyer enabling to solve unorthodox situations with minimum losses.

UJBL: You have been talking about reform of the Tax Police in public for quite a long time. In your view, with what should it start? What are the expectations expressed by taxpayers?

O. V.: It should start with the most simple and, at the same time, the most difficult issue — adoption of a law on elimination of the Tax Police as part of the State Fiscal Service. Its necessity has been discussed by a lot of people and for some time now but, unfortunately, with no result. Let’s be honest, there is a need for real action to be taken on reforming this law-enforcement agency, even as of yesterday, but the situation is not moving forward. The reason is the interest of the “powers that be” in having the Tax Police as the punitive instrument of the State Fiscal Service, which can be managed in “manual” mode. With regard to the expectations of taxpayers, those boil down to one simple question — what will happen next? What new authority will investigate economic crimes, with what “diligence” and how justified will its pressure on business be? They hope for positive changes but, as always, time will tell. In my turn, I see the need for centralization of function to combat all economic crimes (not only tax ones) as part of a separate sub-division in the structure of the National Police Force of Ukraine.

UJBL: Futher tax reform is announced in Ukraine. How do you assess the proposed changes?

O. V.: With cautious optimism. I am encouraged by the fact that authors of proposals for amendments to the Tax Code of Ukraine do not suggest, once again, to take drastic Pre-New Year changes in part of list of taxes and their rates. I certainly believe that initiative on introduction of “tax holidays” for small and medium-sized business, on depreciation for individuals who are entrepreneurs on a common system of taxation and on introduction of electronic taxpayer’s account are positive trends. But there is a long way from a draft bill to official law, as evidenced by the practice in our country, so it is too early to give a final evaluation of the legislative initiatives, I think.

Vdovychen & Partners Key facts:

• Year of establishment

2015

• Number of lawyers/partners

13/1

• Core practice areas

Tax law

Criminal and legal defense

Interaction with state authorities

Contract law

Banking and finance