How can business ease up the burden, given by the Tax Code in the form of actual audits
When it comes to business audits by tax inspectors, accountants and legal advisers appear to have diametrically opposed views on how to behave in case these guys appear on the doorstep and as to their further actions based on their "routine" / "unscheduled" intentions.
But how to behave in case of an actual audit? Expert opinion had not yet crystallized in the absence of the actual practices for these audits. The Tax Code of Ukraine (hereinafter - the "TC") actual audits, obviously, await their moment of glory as of now and so does the opportunity to replenish the Treasury through a sieve scoop of financial penalties for those violations which were not caught by the all seeing eye of inspectors during the other kind of inspections.
Onions anyone?
Of course the intuitive behaviour of an accountant during the actual audit will not differ from his/her actions in the event of an audit of any other kind - the inspector should be satisfied with the information provided (since we still have "to submit a declaration" or "receive a certificate, " or "maintain the status of a VAT taxpayer”, ... there a million and one more of these options, and they vary depending on the type operations, the size of the business, the level of risk of the applying tax optimization tool). The view of the outside tax advisors or legal counsel regarding actual audits will also be painfully familiar - you need to do all that is permitted by the letter of the law and everything that is not expressly prohibited, well, plus all that can be of great help to justify the future position company in court.
This opinion is based on the practice of participation in litigation with tax authorities, as well as on the elemental analysis of the current legislation. But here is the thing. The latter approach suffers a failure in most cases in the relationship with tax authorities.
The logical train of thought, which may be based on the norms of current legislation, usually has a few weak links, which do not pass the test of trying to extend it to the actual practice at the stage of administrative appeal of the inspection act, not to mention during the trial phase. In the latter case, the judges, understanding and accepting the internal instructions of their leaders, resolve the dispute not in favour of taxpayers.
Although official statistics are silent about such situation and based on politics, while informal, statistics as it customary in our country, is ashamed to go public with it in widely read publications, and is rather passed from mouth to mouth in a fairly narrow circle of the legal community or as part of the work of nongovernmental organizations (including non-profit business organizations). It is being disseminated as political jokes once were back in the days of the Soviet Union.
And here is what is not understood in this well-established routine by foreign investors and politicians (that have an annoying habit to look always for logic!), why is the situation not changing and business constantly yields under the fluctuating appetite of tax inspectors and why does it often comply with illegal requests and hints?
The external investor, nurtured in a legal state, has one opinion: better let the inspector give in to the interests of business, which is what must be confessed, was, is and will be the goose that lays golden eggs for the state treasury. Why stress the chickens with exorbitant plan for eggs, and the aggressive behaviour of fiscal agents? After all the chickens will go to the other chicken coops, or even disappear voluntarily, since, thank God, there is an option for available. But we still can not find consensus on the above with such foreign investor.
But we do have to find a way, don’t we?
All business representatives understand this. We are not against paying the state for providing conditions for us to operate in (what kind of conditions – this is another question all together). Let the tumid apparatus of tax collectors live on, they are human beings after all with their families and their urgent needs. But it is obvious that the business relationship with the fiscal authority should be more transparent, predictable, and without overshooting the mark by any of the parties. This is especially important during tax audits, including the raid tax audits.
A new kind of inspection raises a number of issues, among which the most pressing is: "How should management, accounting, sellers (in case of a control purchase), staff (in case of timing) behave during the raid audit? It is impossible to devise a comprehensive action plan, based on the above mentioned. But you can try to sketch the outline of possible ways of protection.
The perpetuum mobile of raid audits?
TC does not contain a unequivocal rule limiting the number of raid audits on a single company during a calendar year. In particular, we can speak of only one exception to this conclusion.
Thus, when the place of actual business activities of the taxpayer is up for inspections and inspectors found a violation, then the company gets an indulgence is the form of only one audit during the next calendar year. Expiration of the calendar year is counted from the date of the act on the previous audit (in accordance with paragraphs of Article 80.3. 80 of the TC).
Interestingly, the document says nothing about the type of tax legislation violation, which must be taken into account to schedule the first and second audit. So, if the company was convicted of violating the rules of cash transactions, and the results of second audit showed violation of the employment relationship (or lack of authorizing documents, etc., a more detailed list is specified in Secs. 75.1.3 TC), can it expect the following no show of the inspectors within the next 12 months? Given the fiscal logic, most likely, the violations based on first or subsequent actual audits entail the following checks in the coming period of time without the observance of the annual limit.
It seems that based on this formal interpretation of the Tax Code, inspectors would drop by fairly often and grace with their presence those businesses that during a raid audit demonstrated the potential for finding breaches. Thank God the grounds for such unscheduled inspections the developers of the new Tax Code found plenty and the list came out long and easily applicable to most companies (for details see pp. 80.2.6 Art. 80 TC).
Obviously it won’t be possible to reduce the number of actual inspections should the company fail to be transparent regarding any of the operations listed in paragraphs of Article 75.1.3. 75 TC and if this gets discovered by the inspectors. For such enterprises the only thing to do would be perhaps to buy time, when the inspectors are already standing on the threshold, in order to address a clear violation of the rules regarding the PPO, labor relations, etc.
Prevent it from happening based on formalities
Formalities are pretty much all the business was left with by lawmakers and the State Tax Agency (by way of issuing letter # 2337/7/23-7017/125 on 28.01.2011 and # 11892/7/23-4017/345 on 27.04.2011, as well as methodical recommendations # 213 on 14.04.2011 and # 355 on 27.05.2008).
You can try stopping the inspectors notifying you about a raid audit by scrutinizing their paperwork and verifying how many of them are knocking on your door. Briefly grounds for non-admission may be summarized as follows:
When it comes to business audits by tax inspectors, accountants and legal advisers appear to have diametrically opposed views on how to behave in case these guys appear on the doorstep and as to their further actions based on their "routine" / "unscheduled" intentions.
But how to behave in case of an actual audit? Expert opinion had not yet crystallized in the absence of the actual practices for these audits. The Tax Code of Ukraine (hereinafter - the "TC") actual audits, obviously, await their moment of glory as of now and so does the opportunity to replenish the Treasury through a sieve scoop of financial penalties for those violations which were not caught by the all seeing eye of inspectors during the other kind of inspections.
Onions anyone?
Of course the intuitive behaviour of an accountant during the actual audit will not differ from his/her actions in the event of an audit of any other kind - the inspector should be satisfied with the information provided (since we still have "to submit a declaration" or "receive a certificate, " or "maintain the status of a VAT taxpayer”, ... there a million and one more of these options, and they vary depending on the type operations, the size of the business, the level of risk of the applying tax optimization tool). The view of the outside tax advisors or legal counsel regarding actual audits will also be painfully familiar - you need to do all that is permitted by the letter of the law and everything that is not expressly prohibited, well, plus all that can be of great help to justify the future position company in court.
This opinion is based on the practice of participation in litigation with tax authorities, as well as on the elemental analysis of the current legislation. But here is the thing. The latter approach suffers a failure in most cases in the relationship with tax authorities.
The logical train of thought, which may be based on the norms of current legislation, usually has a few weak links, which do not pass the test of trying to extend it to the actual practice at the stage of administrative appeal of the inspection act, not to mention during the trial phase. In the latter case, the judges, understanding and accepting the internal instructions of their leaders, resolve the dispute not in favour of taxpayers.
Although official statistics are silent about such situation and based on politics, while informal, statistics as it customary in our country, is ashamed to go public with it in widely read publications, and is rather passed from mouth to mouth in a fairly narrow circle of the legal community or as part of the work of nongovernmental organizations (including non-profit business organizations). It is being disseminated as political jokes once were back in the days of the Soviet Union.
And here is what is not understood in this well-established routine by foreign investors and politicians (that have an annoying habit to look always for logic!), why is the situation not changing and business constantly yields under the fluctuating appetite of tax inspectors and why does it often comply with illegal requests and hints?
The external investor, nurtured in a legal state, has one opinion: better let the inspector give in to the interests of business, which is what must be confessed, was, is and will be the goose that lays golden eggs for the state treasury. Why stress the chickens with exorbitant plan for eggs, and the aggressive behaviour of fiscal agents? After all the chickens will go to the other chicken coops, or even disappear voluntarily, since, thank God, there is an option for available. But we still can not find consensus on the above with such foreign investor.
But we do have to find a way, don’t we?
All business representatives understand this. We are not against paying the state for providing conditions for us to operate in (what kind of conditions – this is another question all together). Let the tumid apparatus of tax collectors live on, they are human beings after all with their families and their urgent needs. But it is obvious that the business relationship with the fiscal authority should be more transparent, predictable, and without overshooting the mark by any of the parties. This is especially important during tax audits, including the raid tax audits.
A new kind of inspection raises a number of issues, among which the most pressing is: "How should management, accounting, sellers (in case of a control purchase), staff (in case of timing) behave during the raid audit? It is impossible to devise a comprehensive action plan, based on the above mentioned. But you can try to sketch the outline of possible ways of protection.
The perpetuum mobile of raid audits?
TC does not contain a unequivocal rule limiting the number of raid audits on a single company during a calendar year. In particular, we can speak of only one exception to this conclusion.
Thus, when the place of actual business activities of the taxpayer is up for inspections and inspectors found a violation, then the company gets an indulgence is the form of only one audit during the next calendar year. Expiration of the calendar year is counted from the date of the act on the previous audit (in accordance with paragraphs of Article 80.3. 80 of the TC).
Interestingly, the document says nothing about the type of tax legislation violation, which must be taken into account to schedule the first and second audit. So, if the company was convicted of violating the rules of cash transactions, and the results of second audit showed violation of the employment relationship (or lack of authorizing documents, etc., a more detailed list is specified in Secs. 75.1.3 TC), can it expect the following no show of the inspectors within the next 12 months? Given the fiscal logic, most likely, the violations based on first or subsequent actual audits entail the following checks in the coming period of time without the observance of the annual limit.
It seems that based on this formal interpretation of the Tax Code, inspectors would drop by fairly often and grace with their presence those businesses that during a raid audit demonstrated the potential for finding breaches. Thank God the grounds for such unscheduled inspections the developers of the new Tax Code found plenty and the list came out long and easily applicable to most companies (for details see pp. 80.2.6 Art. 80 TC).
Obviously it won’t be possible to reduce the number of actual inspections should the company fail to be transparent regarding any of the operations listed in paragraphs of Article 75.1.3. 75 TC and if this gets discovered by the inspectors. For such enterprises the only thing to do would be perhaps to buy time, when the inspectors are already standing on the threshold, in order to address a clear violation of the rules regarding the PPO, labor relations, etc.
Prevent it from happening based on formalities
Formalities are pretty much all the business was left with by lawmakers and the State Tax Agency (by way of issuing letter # 2337/7/23-7017/125 on 28.01.2011 and # 11892/7/23-4017/345 on 27.04.2011, as well as methodical recommendations # 213 on 14.04.2011 and # 355 on 27.05.2008).
You can try stopping the inspectors notifying you about a raid audit by scrutinizing their paperwork and verifying how many of them are knocking on your door. Briefly grounds for non-admission may be summarized as follows:
- There is only one inspector (according to paragraph 80.7, article 80 of the TC there should be at least two) or not every inspector has the referral to conduct this raid audit;
- Incorrectly drafted referral (necessary details are given in Secs. 81.1 Article 81 TC) and/or lack of signature of the head of State Tax Agency or his deputy with the seal (by the way, a facsimile signature is prohibited, see paragraph 1.5 of the Methodological Recommendations № 213 from 14.04.2011);
- An incorrectly issued order to conduct the raid inspection. Thus, the order must be made separately for each audited object, and contain full data about the positions and last names of the delegated to inspect inspectors. State Tax Agency gave more details on the design of the order in a letter dated № 2337/7/23-7017/125, as well as in Methodical recommendations № 213 from 14.04.2011 was).
So basically there are not too many formal grounds for refusing entry (you can find some more with a further careful study of these rules of the TC and regulatory information and State Tax Agency documents), and they can help only with winning some time until the second coming of the auditors with suitable documentation. But this time may not be entirely sufficient to find a lawyer or an auditor, who will continue to accompany the process of inspection, advising management, employees (and vendors) and accountants.
The essence of these consultations can be predicted (based on general tips that are provided in case of inspections of other kinds):
- As much as possible document every step of the inspector (ask the inspector to sign in when they arrive and sign out when they live, say that it is your company policy, etc.), keep video recording from the date of the inspection (if there are any);
- As much as you can keep most employees from giving oral "on the fly” explanations (you can instruct staff not to give any clarification and answer all questions with the request to address it only with management or the chief accountant (and then do so in the presence of a lawyer and/or an auditor).
Conclusions
It's hard not to agree that these tips on how to behave during the actual raid audit, are only the tip of the iceberg of the possible nuances of a complex policy on audits and the subsequent litigious relationships with tax authorities. Only practice will teach you the basics and we do not wish it upon any businessman to have to learn it this way.
There is no doubt that having studied the rules of the new Tax Code and regulatory documents, you can at least win some time and counteract illegal actions of the inspectors or increase the chance of winning in litigation, challenging the notice of the decision adopted by the tax authorities based on the report of the raid audit.
Юрист и Закон (Yuryst i Zakon)
18.05.2011 – 24.05.2011, № 20
18.05.2011 – 24.05.2011, № 20