Author: Olena Andriyko, lawyer at F&P
Actual audits are one of the methods of tax control carried out by the controlling authorities to verify compliance with tax legislation, cash discipline, payment transactions and licensing conditions. However, in many cases, the results of such audits may be challenged by business entities due to violations of the audit procedure or unreasonable conclusions of the tax authorities.
Actual audits are carried out without prior notice to the taxpayer and may be initiated by the controlling authority in cases provided for in Article 80 of the Tax Code of Ukraine (the ‘TCU’), in particular in the following cases
- violation of the procedure for conducting settlement transactions, use of cash registers or cash discipline;
- inspection of licence conditions (for example, in the field of retail trade in excisable goods);
- failure to submit reports related to the payment of taxes or fees;
- detection of violations in labour relations.
One of the most common grounds for conducting an actual audit is clause 80.2.5 of the Tax Code of Ukraine, namely, conducting an audit in case of availability and/or receipt of information in accordance with the procedure established by law on violations of the law in terms of production, accounting, storage and transportation of alcohol, alcoholic beverages, tobacco products and liquids used in electronic cigarettes and fuel, and the intended use of alcohol by taxpayers, equipment of excise warehouses with flow meters and/or equalisers.
Further, within the framework of this article, we propose to analyse the mistakes made by the tax authorities when issuing orders for conducting an audit and which are the grounds for cancellation of the results of such audits.
First of all, it is worth noting that the correctness of the order to conduct an actual audit and its completeness is one of the most important prerequisites for the controlling authority to proceed with the audit. The legal and factual grounds set out in the order define the subject of the inspection, the period – its limits, and the indication of the subject to be inspected indicates compliance with other requirements regarding the procedure for its conduct.
In the decisions of 12 August 2021 (case No. 140/14625/20), 10 April 2020 (case No. 815/1978/18), 25 January 2019 (case No. 812/1112/16), 5 November 2018 (case No. 803/988/17), 22 May 2018 (case No. 810/1394/16), 20 March 2018 (case No. 820/4766/17), etc., the conclusion of which was taken into account by the court of appeal in this case, the Supreme Court stated that subpara. 2.5 of para. 80.2 of Article 80 of the TC of Ukraine provides for alternative grounds for conducting a factual audit, which can be applied both in aggregate and separately, namely
– availability and/or receipt of information in accordance with the procedure established by law on violation by the taxpayer of the requirements of the legislation in terms of production, accounting, storage and transportation of alcohol, alcoholic beverages and tobacco products and the intended use of alcohol by taxpayers, equipment of excise warehouses with flow meters and/or level meters;
– performing the functions defined by law in the field of production and circulation of alcohol, alcoholic beverages, tobacco products and fuel.
At the same time, in its resolutions dated 08 September 2020 in case No. 640/21536/19, 19 November 2020 in case No. 160/7971/19, 17 December 2020 in case No. 520/12028/18, the Supreme Court stated that the order to conduct a factual audit pursuant to subparagraph 80.2.5 of paragraph 80.2 of Article 80 of the Tax Code of Ukraine, in addition to the usual reference to the provision governing its appointment, should also specify the specific factual grounds for its appointment. In these cases, it was concluded that when appointing a tax audit, the controlling authority must specify one of the grounds set out in subparagraph 80.2.5 of paragraph 80.2 of Article 80 of the Tax Code, and if such ground is the availability and/or receipt of information about the taxpayer’s violation of the law, the latter must be specified.
In addition, the Supreme Court in its resolutions dated 11 July 2022 in case No. 120/5728/20-a and 21 December 2022 in case No. 500/1331/21, noted that the wording of the specific content of the order is at the discretion of the controlling authority, however, with mandatory compliance with the requirements of the third paragraph of Article 81.1 of the Tax Code regarding the content of the order to conduct an audit. If several independent grounds for conducting an audit are established in one subparagraph of the article, each of them does not necessarily have to be formulated identically to the content of the legal provision that establishes this ground, but must be clearly defined and comply with the legal provision.
Fulfilment of this requirement ensures that the business entity understands the reasons for the audit, as well as the range of issues that may be the subject of the audit, depending on the grounds for the audit.
Thus, if the order does not contain any references to the specific grounds for the audit, defined by subparagraph 80.2.5 of paragraph 80.5 of Article 80 of the TC of Ukraine, namely, whether the audit is appointed due to the availability of information on violation of the law or in connection with the performance by the controlling authority of functions defined by law in the field of production and circulation of alcohol, alcoholic beverages and tobacco products, fuel, such an order contradicts the requirements of the law. In this case, it can be argued that the controlling authority did not comply with the requirements of paragraph 81.1 of Article 81 of the Tax Code of Ukraine, according to which its officials have the right to proceed with a documentary on-site inspection, an actual inspection if there are grounds for their conduct as defined by this Code.
According to the conclusions of the Supreme Court set out in its decision of 26.03.2024 in case No. 420/9909/23, each violation alleged in a particular case is assessed by the court for its ‘materiality’ or ‘immateriality’. The Supreme Court has concluded that if the controlling authority finds that the tax authorities have committed material violations of tax legislation (for example, establishing that there are no legal grounds for the appointment of an audit), this may result in the cancellation of the order to appoint an audit and/or decisions made as a result of the audit.
Therefore, even if the tax authority’s representatives are actually admitted to the audit, the taxpayer is not deprived of the opportunity to refer to the shortcomings of the audit order when challenging the tax assessment notices issued as a result of such audit.
Taxpayers may use both administrative and judicial means of appealing tax assessment notices. The main thing is to build a competent defence strategy, and FEDORYSHYN&PARTNERS’ specialists can help.
