Tax disputes: recent rulings by the Supreme Court in the first quarter of 2024.

Even amidst full-scale military aggression against Ukraine, disputes between taxpayers and the tax authorities have continued. And since 1 August last year, when restrictions on the types of audits and the range of persons subject to audit began to be lifted (exceptions: single-tax payers in Groups 1 and 2, and taxpayers located in temporarily occupied territories or territories where active hostilities are taking place), the number of disputes between tax authorities and taxpayers has increased significantly.

Recently, a considerable number of disputes have arisen due to taxpayers’ failure to meet the deadlines for registering tax invoices and adjustment calculations (hereinafter referred to as ‘tax invoices/adjustment calculations’). Such breaches are quite often caused by the military aggression against Ukraine, whilst the large number of taxpayers held liable stems from the absence of clear, comprehensible and fair legal regulation of the registration of tax invoices and adjustment calculations during martial law. The legal conclusions of the Supreme Court, set out following the resolution of such disputes, are set out below.

The most common and universal justification for taxpayers’ disagreement with the fines imposed is the argument that, due to the COVID-19 quarantine, taxpayers were exempt from liability for failing to meet the deadlines for registering tax invoices and adjustment calculations during the period of such quarantine. The relevant provision is set out in paragraph 52-1 of Subsection 10 of Section XX of the Tax Code of Ukraine (hereinafter — the TCU) and its effect was not suspended by the legislature for the period during which martial law was in force.

Furthermore, the tax authorities, in objecting to this, referred to sub-paragraph 69.2 of Subsection 10 of Section XX of the TCU. By Law No. 2260-IX of 12 May 2022 (which came into force on 27 May 2022), this sub-paragraph was amended; in particular, the following paragraph was added ‘Where infringements of the law are identified as a result of audits, taxpayers shall be held liable in accordance with this Code and the laws whose enforcement is entrusted to the supervisory authorities, taking into account the circumstances provided for in sub-paragraph 112.8.9 of paragraph 112.8 of Article 112 of this Code, which provide for exemption from financial liability. In this regard, the statutory requirements concerning the moratorium (suspension) on the application of penalty (financial) sanctions (fines) for the duration of a state of war, a state of emergency and/or for the duration of the quarantine established by the Cabinet of Ministers of Ukraine throughout the territory of Ukraine with the aim of preventing the spread of coronavirus disease (COVID-19) shall not apply.”

Consequently, there was a conflict of laws: one provision of the Tax Code of Ukraine exempts from liability for breaches of the deadlines for registering tax invoices and adjustment calculations committed during the COVID-19 quarantine, whilst another provision states that such an exemption does not apply during a state of war.

Until recently, this category of disputes was predominantly resolved by the courts in favour of taxpayers: tax assessment notices imposing such penalties were either quashed in their entirety by the courts or the amount of the penalty was significantly reduced.

However, on 30 January 2024, the Supreme Court, in its ruling in case No. 280/4484/23, set out legal conclusions regarding the application of penalties for late registration of tax invoices and adjustment calculations under martial law, which are not particularly encouraging for taxpayers. In particular, the Supreme Court noted the following:

• temporarily, for the period until the termination or lifting of martial law on the territory of Ukraine, the collection of taxes and duties shall be carried out taking into account the specific provisions set out in paragraph 69 of subsection 10 of Section XX of the Tax Code of Ukraine;

• on 27 May 2022, the new version of sub-paragraph 69.2 of Subsection 10 of Section XX of the Tax Code of Ukraine came into force, and therefore the provisions of the Tax Code of Ukraine regarding the moratorium on the imposition of penalties for the duration of the quarantine period, which were governed by paragraph 52-1 of Subsection 10 of Section XX of the Tax Code of Ukraine, have ceased to apply;

• if tax invoices/adjustment calculations were drawn up by the taxpayer during the period from 1 February 2022 to 31 May 2022, but were registered in the Unified Register of Tax Invoices after 15 July 2022 in breach of the deadline, the tax authority has grounds to impose penalties (financial sanctions) in accordance with paragraph 120-1.1 of Article 120-1 of the Tax Code;

• By Law No. 2876-IX of 12 January 2023 (which came into force on 8 February 2023) Subsection 2 of Section XX of the Tax Code of Ukraine has been supplemented with paragraphs 89 and 90, which, for the duration of martial law, extend the time limits for the registration of tax invoices and adjustment calculations and reduce the amounts of penalties for non-compliance;

•  Law No. 2876-IX of 12 January 2023 does not contain any explicit provision granting its provisions retroactive effect, and therefore its effect does not extend to the period prior to its entry into force (before 8 February 2023). The liability set out in paragraph 90 of Subsection 2 of Section XX of the Tax Code of Ukraine applies to taxpayers’ breaches of the time limit provided for in paragraph 89 of that section; that is, it is directly linked to the extended time limits for registering tax invoices.

The Supreme Court confirmed the above conclusions in its rulings of 6 February 2024 in case No. 160/10740/23, and of 13 March 2024 in Case No. 120/6331/23.

Consequently, for tax invoices and adjustment calculations drawn up from 1 February 2022 and registered late by 8 February 2023, a penalty applies under Article 120-1 of the Tax Code of Ukraine.

Among the positive case law in cases relating to the late registration of tax invoices and adjustment calculations, it is worth noting the Supreme Court’s ruling of 7 February 2024 in case No.380/7070/23, which addressed the issue of holding parties liable for the late registration of tax invoices and adjustment calculations drawn up whilst the COVID-19 quarantine was in force, but registered after martial law had been imposed.

As noted above, Law No. 2260-IX came into force on 27 May 2022, reinstating both the obligation to register tax invoices and adjustment calculations during martial law and the imposition of fines for late registration of such documents. The same law provided that, for tax invoices and adjustment calculations issued between 1 February 2022 and 31 May 2022, no penalty for late registration would apply provided they were registered by 15 July 2022. However, the legislator did not address the issue of registering tax invoices and adjustment calculations issued during the period of the COVID-19 quarantine from 1 March 2020 to 1 February 2022, but which remained unregistered as at 27 May 2022. In effect, such taxpayers were automatically subject to a penalty, as from 24 February 2022 to 27 May 2022 there was no technical means to register tax invoices (the Unified Register of Tax Invoices resumed operations on 27 May 2022), and from 27 May 2022 the provision (sub-paragraph 69.2 of subsection 10 of Section XX of the Tax Code of Ukraine) came into force, under which the COVID exemption does not apply during martial law.

In resolving this dispute, the Supreme Court noted: ‘In such circumstances, the principle of the rule of law and the prohibition on discrimination against taxpayers, as provided for in sub-paragraph 4.1.2 of paragraph 4.1 of Article 4 of the Tax Code of Ukraine, require the application of uniform conditions for holding taxpayers liable for the late registration of all tax invoices covered by the moratorium up to 27 May 2022 — both the ‘COVID-related’ and ‘martial law’ moratoriums.

In view of the above, the decisive criterion to be taken into account when determining liability for the late registration of tax invoices following the lifting of the moratoriums on 27 May 2022 is the taxpayer’s ability to fulfil their obligations.

At the same time, all taxpayers must be subject to the same conditions under which they can avoid liability by registering tax invoices during the relevant transitional period — until 15 July 2022.”

In other words, it is unlawful to impose penalties for late registration on taxpayers who have registered tax invoices and adjustment calculations, issued between 1 March 2020 and 1 February 2022, by 15 July 2022.

Another fairly common category of disputes at present concerns challenges to decisions by the tax authorities regarding the imposition of late payment interest for breaches of payment deadlines under foreign trade contracts. This is due to the fact that Law of Ukraine No. 2260-IX of 12 May 2022 (which came into force on 27 May 2022) reinstated audits of taxpayers in respect of whom the regulatory authorities had received tax information indicating non-compliance with the deadlines for the receipt of goods under import transactions and/or foreign currency proceeds under export transactions. In other words, these audits were virtually uninterrupted during the period of martial law. It is worth recalling that the Law of Ukraine ‘On Currency and Currency Transactions’ provides that failure to meet the time limits for settlements in respect of transactions involving the export and import of goods results in the imposition of a penalty for each day of delay, amounting to 0.3 per cent of the sum of funds not received under the contract or the value of undelivered goods.

The dispute, which the Supreme Court resolved in favour of the taxpayer, concerned penalty charges in the field of foreign economic activity, imposed for breaches of foreign exchange legislation that occurred whilst the COVID-19 quarantine was in force. In its ruling of 15 February 2024 in case No. 420/1538/23 (https://reyestr.court.gov.ua/Review/117022640), the Supreme Court reached the following conclusions: ‘Penalties imposed on residents for failing to meet foreign currency settlement deadlines from 1 January 2021 (the date on which the Law of Ukraine “On Amendments to the Tax Code of Ukraine Regarding the Improvement of Tax Administration, and the elimination of technical and logical inconsistencies in tax legislation’ No. 466-IX of 16 January 2020 came into force) constitute penalty interest within the meaning of the provisions of sub-paragraph 14.1.162 of paragraph 14.1 of Article 14 of the Tax Code of Ukraine, and, accordingly, it is subject to the provisions of sub-paragraph 11 of paragraph 52-1 of Subsection 10 of Section XX ‘Transitional Provisions’ of the Tax Code of Ukraine, which provides that during the period from 1 March 2020 to the last calendar day of the month (inclusive) in which the quarantine imposed by the Cabinet of Ministers of Ukraine throughout the territory of Ukraine to prevent the spread of coronavirus disease (COVID-19) ends, taxpayers shall not be charged penalty interest, and any penalty interest charged but not paid during this period shall be written off.

Applying the above conclusion to the legal relations that have arisen in this case, the panel of judges notes that the tax authority had no grounds for charging the Company, during the period of the quarantine imposed by the Cabinet of Ministers of Ukraine across the whole territory of Ukraine to prevent the spread of coronavirus disease (COVID-19) within Ukraine, namely from 1 January 2021 to 15 November 2022, a penalty for breaching payment deadlines in the sphere of foreign economic activity”.

Read the article on the “Yurydychna Gazeta” website: here