CAN TAX LIABILITIES FOR VAT BE ADJUSTED AFTER 1095 DAYS?

September, 2017

When determining the tax authority and the taxpayer’s obligations, the application of the limitation period established by the Tax Code of Ukraine (hereinafter referred to as the Tax Code), is, in practice, one of the most routine and common issues ultimately facing each taxpayer.  First of all, this issue is relevant during tax audits.

In the Tax Code, the issue of the statute of limitations is addressed in Article 102, providing for a general rule indicating that the controlling (taxation) authority shall be entitled to determine the amount of a taxpayer’s financial obligations no later than 1,095 days from the date of the deadline for submitting the relevant declaration, or the deadline for the taxpayer to pay his tax liability in the case that this obligation has been credited by the tax authority. This regulation stipulates special limitations for controlled transactions, i.e. those covered by transfer pricing regulations.  For them, the limitation period is much larger at 2555 days.

After the statute of limitations has lapsed, as provided for in Article 102 of the Tax Code, the taxpayer bears no financial obligations provided that, for a period of 1,095 days (or 2,555 days), the controlling authority has not yet determined the amount of financial obligations for this particular taxpayer.  That is, the tax authority has three years (or 1,095 days) in order to determine the amount of tax that the taxpayer must pay in accordance with the Tax Code.

Therefore, if all of the company’s tax statements have been filed on time, during a tax audit, the tax authorities will focus their attention on the company’s past three years, that is, to carry out audits within a period of 1,095 days.  At the same time, the exceptions to this rule are stipulated in Paragraph 120.2 Article 102 of the Tax Code.

In Paragraph 102.5 Article 102 of the Tax Code, we find another interesting provision – namely the application to refund financial obligations that have been overpaid or their compensation in the cases that, as established by the Tax Code, may be submitted no later than 1,095 days following the date that the taxpayer made this overpayment or became eligible for a refund.  That is, the taxpayer also has a period of three years in order to repay the overpaid tax amount or to obtain a refund.

At first glance, the above mentioned provisions of Article 102 of the Tax Code are clear and understandable enough: there are three years for determining the tax amount the taxpayer company should pay and, after that, he is free of such obligations to the state in connection with the fact that the time has lapsed. However, in practice, the interpretation of this provision and application of this rule is not unique, creating a situation where the final decision rests with the court in considering disputes between the tax authorities and taxpayers.

In particular, the question of whether the statute of limitations will or will not be applied, as established by Article 102 of the Tax Code, is crucial in the case of adjustments to the amounts of tax liabilities and the tax credit for value added tax (hereinafter referred to as VAT) due to changes in the amount of the cost of goods (works, services) after one company has provided them to another one.

The procedure for adjusting tax liabilities and tax credits is regulated by Article 192 of the Tax Code, the rules of which stipulate that if any changes are made to the payment amount for their cost following the delivery of goods/ services, including after a price review subsequent to delivery, a recalculation in the case that goods/ services are returned to the supplier, or refund of a prepayment for goods/ services to the supplier, the amount of tax liabilities and tax credit of the supplier and recipient shall be subject to the applicable adjustment on the basis of calculations for corrections to the tax invoice.  In other words, due to the fact that, in the process of cooperation between the parties (the seller and buyer, the customer and the supplier, etc.), there have been various cases where the price of goods (works and services) changes or the contractual relationship is terminated, this norm determines what actions and in what sequence each of the parties to adjustment should act. This entails making changes to the amount of tax liabilities and credit previously defined and declared in the previous tax periods for VAT.

At the same time, in practice, numerous taxpayers have encountered problems when trying to adjust tax liabilities or tax credits according to the provisions of Article 192 of the Tax Code.  This is due to the fact that, according to tax authorities, taxpayers can only carry out such adjustments for tax liabilities and credits that have arisen in the past 1,095 days.  As a consequence, if the taxpayer has increased the amount of tax credits claimed and reduced the amount of tax owing at the end of the 1095-day period, based on the results of tax audits, the tax authorities made the decision to charge additional VAT amounts, because they believed that the provisions of Article 102 of the Tax Code apply to these legal relations and events.  As a result, taxpayers and now we too have to defend their right to adjustment tax liabilities and credits after 1,095 days in court and to challenge tax authorities’ unlawful decisions to charge additional amounts of tax liabilities.

We have analyzed numerous legal practices with respect to the possibility of adjusting VAT liabilities at the end of the statute of limitations period (that is, 1,095 days), and have clearly identified that this is possible in accordance with tax legislation of Ukraine.  In particular, this possibility was confirmed by the Supreme Administrative Court in its judgment, dated February 18, 2016, in Case no. 800/11558/13, according to a claim by LLC “Basalt” to the local tax authority and in the judgment, dated February 7, 2017 in case no. 800/4070/16, according to a claim by LLC “Koksotreyd” to the local supervisory authority.  These decisions, as well as many other decisions taken by administrative courts, have determined the “golden” rule with respect to the application of the provisions of Articles 102 and 192 of the Tax Code.  These are as follows: “Article 192 of the Tax Code does not place restrictions on the period for making appropriate adjustments to tax liabilities and tax credits for VAT in the event that the amount of compensation increases or decreases in the taxpayer vendor’s favor. Then the tax authority’s application of the provisions of Article 102 in this case is wrong.”

According to EBS lawyers, the judiciary’s approach is absolutely justified from a legal point of view and corresponds to the interests of business, sustainability and security guarantees, which must be provided, including at the expense of the principle of legal certainty. Thus, in the course of doing business, the parties must fully understand and be able to predict the tax consequences of such activities, including in the case that the price of delivery of goods (works, services) changes following the announcement of the related tax effect.  As a consequence, it is very important for the taxpayer to have a clear sequence of actions, by which it is possible to make adjustments to a particular amount of tax liability or tax credit as defined previously, while also having a guarantee regarding the legality of such action, in spite of the different approaches and points of view held by the tax authorities.

Author: Tatiana Prychepa

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2017-10-03T09:11:37+00:00 03.10.17|Legal practice|