In the current global economic crisis, governments around the world are taking urgent measures to ensure they collect all taxes due to them. In this environment, the attitude of the tax and customs authorities naturally is to increase the number and scope of their tax investigations and audits.
Not surprisingly, tax authorities are more likely than ever to have a tax-collection mindset during their tax and customs audits. In Ukraine, the authorities have already started. Thus it is important for taxpayers to formulate in advance their strategy for dealing with the expected disputes and litigation.
The purpose of this brief article is to give common-sense tips to businesspeople on how to respond to increased tax inspections, resolve disputes that arise and, if necessary, take the tax man to court.
The first recommendation is obvious: prepare in advance for the tax or customs audit.
This means several things. First, I would suggest that you revisit the legal arguments in which you substantiated the position you took in relation to the tax treatment of certain transactions. Frankly, the worst thing that can happen is to not have an answer for the authorities during the audit. Mutes never win tax debates.
This is especially important for significant transactions, or for those in which you took an aggressive tax position. Reviewing past periods and transactions can be done in-house. But if you have the resources, it would be even better if you can involve your tax advisers. Moreover, if you can afford to do so, it will surely pay to ask your advisers to carry out a tax review of the periods which will be reviewed by the tax authorities. Nothing beats knowing exactly which skeletons are in the closet.
Secondly, make sure that you have all the supporting documents, contracts, invoices and the rest of the documents underpinning transactions. There are many instances in which companies put off the task of documenting transactions or tax positions. In the current tax environment, it is imperative that you do it now.
And since you will be dealing with the Ukrainian tax and customs authorities, remember that the more supporting documents you have, the better your chances to avoid tax assessments for lack of evidence. In summary, prepare in advance, as “doing the homework” never hurt during a tax audit.
The second recommendation is: Manage the tax audit process.
First, do not wait for the tax inspector to finish the audit and notify you with the official act before acting and presenting your arguments. The tax audit process ought to be interactive. The faster you react, the better the chances that at least some issues do not reach the act.
Secondly, involve your tax advisers during the audit rather than when the ink in the tax acts is already dry. Your tax adviser ought to be interacting with the tax inspector during the audit and this may very likely reduce the number of issues that reach the act. If you know human nature, remember that people hate to admit their mistakes, so it is obviously going to be easier to convince the tax inspector that he or she is wrong before they have cast in stone (in the act) their position.
After you have been notified with the assessment, you must watch the statutory deadlines, as the ones established in Ukrainian tax law are quite tight. This is also the reason for the recommendation to make sure that arguments and supporting documents are ready before the tax inspection, as the terms for contesting assessments and substantiating arguments are challenging at best.
After you have been notified with the assessment, it is time to choose either the administrative or judicial route to contest the tax assessment. In this area, my first recommendation is: exhaust the dispute resolution mechanism before going to court.
A recent opinion in the media recommended taxpayers to seek recourse at higher level tax authorities (administrative procedure) only if the taxpayer believed he could convince the tax authorities to change their position. This recommendation is wrong, as first, even with a crystal ball, it is difficult for a taxpayer to know whether the tax authorities will change their minds. In fact, even if the taxpayer believes that the tax authorities will not change their minds, exhausting the administrative procedure before going to court is a sound practice, as it forces the tax authorities to reveal all the arguments grounding their assessment, other than those already in the acts. In other words, by seeking administrative recourse all the way to the top, you force the tax authorities to show you all their cards (arguments). Hence, please exhaust the dispute resolution mechanism before going to court!
Finally, I recommend not being afraid of taking the tax man to court and defending your case vigorously, as the Ukrainian and tax authorities have long ago gotten used to taxpayers litigating rather than simply accepting assessment. Finally, you must be positive. Believe it or not, and obviously depending on the merits of your case, you do have a chance to win in court. In fact, many taxpayers have successfully litigated against tax and customs authorities in Ukrainian courts.
Good luck resolving your disputes through administrative recourse, and if not, then in court!
Jorge Intriago is a tax & legal partner with Ernst & Young in Kyiv. He can be reached at [email protected]
