The system of blocking tax invoices: what should you be ready for?

Checking for compliance of tax invoices / settlement adjustments to certain attributes

As before, all tax invoices / settlement adjustments (hereinafter referred to as “TI / SA”) submitted for registration in the Unified Register of Tax Invoices (hereinafter referred to as “the Register”) will be checked for compliance with certain attributes that have hardly changed, as compared to the old operation procedure of the System.

If a TI / SA conforms to at least one of these attributes, then such TI / SA will not be subject to further monitoring.

The practice of 2017 has shown that despite the availability of these attributes, it seems like sooner or later almost all businesses faced the problem of blocking tax invoices. In particular, this System has generated lots of problems for agricultural commodity producers. Therefore, most regrettably, the latest version of the Procedure does not include the proposals of the State Fiscal Service of Ukraine (hereinafter referred to as “the SFS”), which were present in its draft versions and brought up for discussion with business representatives. For example, among such attributes, the draft version of the Procedure named the availability of the taxpayer’s own or leased land plots of 200 hectares or more, the availability of municipal and / or state owned leased land plots with the area of at least 0.5 hectares (as of January 1, 2017) declared by February 20, 2017, or the taxpayer’s belonging to large taxpayers according to the Tax Code of Ukraine (hereinafter referred to as “the TCU”), etc.

Monitoring

If TI / SA does not conform to any of the established attributes, then such TI / SA will still be monitored, same as before.
However, it is necessary to pay attention to the fact that unlike in the previously existing procedure, not only the economic transaction itself, but also the status of the taxpayer will matter. Thus, TI / SA will be checked for compliance to:

• The criteria of the taxpayer’s riskiness;
• The criteria of the riskiness of conducting transactions;
• The indicators of the taxpayer’s positive tax history.

To date, none of these criteria and indicators has yet been approved. The Procedure only stipulates that after agreeing on the list of such criteria and indicators with the Ministry of Finance of Ukraine, the SFS will publish it on its official website. At the same time, there are no clear deadlines for the SFS to do this, while many relevant questions already arise.

Taking into account the draft versions of this Procedure, it can be assumed that the criteria of the taxpayer’s riskiness will include the following indicators:

• The taxpayer’s registration based on invalid, forged documents;
• The taxpayer’s location at the place of mass registration;
• The taxpayer’s registration and carrying out financial and economic activities without the knowledge and consent of its founders and managers;
• The presence of a guilty verdict rendered by a court against the taxpayer’s official under Article 205 of the Criminal Code of Ukraine (fictitious enterprise), which, in its turn, is quite logical in view of the latest judicial practice, where the courts’ opinions were quite explicit: “The status of a fictitious enterprise is incompatible with legal entrepreneurial activities”. This legal position was formed by the Supreme Court of Ukraine as early as in 2015 (the Decision of December 1, 2015 in the case No. 826/15034/14) and supported by the new Supreme Court in 2018 (the Decision of January 16, 2018 in the case No. 2а-7075/12/2670).

As regards the criteria of the riskiness of conducting transactions, those are likely to be almost the same as before.

However, it is still unclear which indicators will form the taxpayer’s tax history. It is only established that the SFS will calculate such indicators on a monthly basis by the 10th day of the month following the reporting one and make these indicators available to taxpayers in their electronic cabinets. Several issues immediately arise here, such as how taxpayers can influence these indicators and how they can protect their rights, if they disagree with the information they see in their electronic cabinets.

After all, for example, the judicial practice demonstrates that it is impossible to appeal against the tax authority’s entering certain information into its internal databases / registers, if it does not directly influence the activities of such a taxpayer, for example, bring them to liability. As of now, one can only hope that these issues will be resolved with the approval of these indicators, when it becomes clear what will form the taxpayer’s positive tax history.

Termination of TI / SA registration

TI / SA registration is terminated, if:

• The taxpayer who has drawn up a TI / SA meets the criteria of the taxpayer’s riskiness;
• TI / SA meet the criteria of the riskiness of conducting transactions, except for TI / SA drawn up by a taxpayer with a positive tax history.

As before, in the event of termination of the TI / SA registration, the taxpayer will automatically receive the electronic receipt confirming the termination of such registration.

It is important! If the receipt on acceptance, non-acceptance, or termination of registration of a TI / SA is not sent within one operational day, such a tax invoice will be considered to be registered in the Register (Clause 201.10 of Article 201 of the TCU).

The establishment of the publicly available separate Register of Tax Invoices / Settlement Adjustments, Registration thereof Was Terminated (hereinafter referred to as “the Separate Register”) is an interesting novelty that aims to ensure greater transparency in the operation of the System. This register will be formed and maintained by the SFS and published on its official website on a daily basis. However, within one month from the start of work of the System, this Register will work in the test mode.

Submission of written explanations and copies of documents

Within 365 calendar days following the date of the emergence of tax liability reflected in the TI / SA, a taxpayer will have the right to submit to the SFS their written explanations and copies of documents (in electronic form) that are necessary for making a decision on the TI / SA registration in the Register. The list of these documents is exhaustive and has hardly changed, as compared to the previous procedure.

It is important that the Procedure now directly establishes that a taxpayer is entitled to submit written explanations and copies of documents for several TI / SA, if:

• Such TI / SA are drawn up for the same recipient taxpayer under the same agreement; or
• Such TI / SA reflect transactions of the same type (with the same codes of goods under the UCG FEA (the Ukrainian Classifier of Goods for Foreign Economic Activity), or codes of services under the SCPS (State Classifier of Products and Services).

It is clear that this should facilitate the taxpayer’s work in the event of the simultaneous termination of many TI / SA, because earlier the explanations and documents had to be submitted separately for each tax invoice and, therefore, the accounting departments of enterprises were turned into departments for document scanning.
It is important! The Resolution also stipulates that taxpayers, the registration of whose TI / SA in the Register was terminated by December 1, 2017 and who failed to provide explanations and copies of documents to such TI / SA as of December 1, 2017, are also entitled to submit explanations and copies of documents to such TI / SA for consideration of commissions that make decisions on the registration of TI / SA in the Register or denial of their registration within 365 calendar days following the date of the emergence of tax liability reflected in such TI / SA.

Making decisions on the TI / SA registration or denial of such registration

In order to accelerate the processing of documents submitted by the taxpayer and reduce the workload of the SFS, the Procedure stipulates the creation of regional level commissions (commissions of the SFS main departments in oblasts, the city of Kyiv, as well as the SFS Office of large taxpayers) and the central level commission (SFS), but not a single SFS commission, as before.

The indicated commissions will review documents submitted by the taxpayer and make subsequent decisions on the TI / SA registration or denial of such registration.

It is a novelty that the commission’s decision to register TI / SA or deny of such registration is also subject to the registration in the Separate Register, and the respective decision will come into force only after this registration is performed.

It should be noted that the Procedure does not define the manner (automatic or not) and the timeframe for the registration of the decision made by the respective commission, although the fact of such registration will be decisive, because, for instance, if the decision is positive, then the tax invoice will be registered after it comes into force. Taxpayers would probably say that there will be no problems with the registration, as it is established that in the event TI / SA are not registered within the set timeframe, the TI / SA will be registered automatically. Though, taking into account the previous experience, such automatic registration did not always work properly, and taxpayers were forced to go to court to protect their rights. It is to be hoped that if the SFS publishes this Separate Register on its official website, it will be updated on a daily basis.

Also, the procedure for consideration of written explanations and documents submitted by the taxpayer will now depend on the volume of delivery specified in the TI / SA registered in the Register during the current month, taking into account the TI / SA submitted for registration, namely:

• If such volume of delivery is less than UAH 30 million, the documents submitted by the taxpayer will be considered by the regional level commission within five working days following the day of receipt of explanations and copies of documents; after that, this commission will make the relevant decision, which will be registered in the Separate Register and sent to the taxpayer;
• If such volume of delivery exceeds UAH 30 million inclusive, documents submitted by the taxpayer will be considered by the regional level commission within five working days following the day of the receipt of explanations and copies of documents, after which this commission will make the relevant decision, which will be previously registered in the Separate Register and sent to the central level commission. In turn, the central level commission can make another decision on the registration / denial of registration of the TI / SA within seven working days following the day of the receipt of explanations and copies of documents, but not before the decision of the regional level commission is received; after that, this decision is registered in the Separate Register and sent to the taxpayer, and the decision of the regional level commission is cancelled. If no other decision is made, the next day after the expiry of seven working days following the day of the receipt of explanations and copies of documents, the decision of the regional level commission will come into force and will be sent to the taxpayer.

Also, grounds for the commissions to make decisions on the denial of the TI / SA registration were changed as follows:

1. The taxpayer’s failure to provide written explanations regarding the confirmation of the information specified in the TI / SA, the registration thereof was terminated;
2. The taxpayer’s failure to provide copies of documents according to Subparagraph 4 of Paragraph 13 of the Procedure;
3. The taxpayer’s providing copies of documents drawn up in violation of the legislation.

Previously, the third ground for making a decision on denial of the registration was as follows: “The taxpayer’s failure to provide copies of documents drawn up in violation of the legislation and/or insufficient for the SFS commission to make a decision on the TI / SA registration”. It is clear that this formulation was very vague, and in almost every decision cancelling the commission’s decision on the denial of the TI / SA registration the courts indicated that the decision actually made by the commission was groundless, as it was impossible to understand what documents submitted by the taxpayer were drawn up in violation of the legislation, why they were insufficient for the SFS commission to make a decision on the TI / SA registration, and what was missing.

Taking this into account, with the adoption of the new Procedure, the form of the commissions’ decisions on the registration or denial of registration of the TI / SA was changed. From now on, the decision on denial of the TI / SA registration should clearly indicate the reason for such denial, documents that were not provided and / or documents drawn up in violation of the legislation.

It is important! The recommendations of the Ministry of Finance of Ukraine as regards the automatic registration of TI / SA in the event of missing the deadline for consideration of explanations and copies of documents submitted by the taxpayer were finally taken into account. Thus, TI / SA the registration thereof was terminated shall be registered on the day of occurrence of one of the following events:

• The decision on the TI / SA registration in the Register was made and entered into force;
• The court decision on the TI / SA registration in the Register came into legal force;
• Within five working days, no relevant decision on taxpayers, the volume of delivery thereof specified in the TI / SA registered during the current month in the Register in view of the TI / SA submitted for registration is less than UAH 30 million, is made and/or registered in the Separate Register by the regional level commission;
• Within seven working days, no relevant decision on taxpayers, the volume of delivery thereof specified in the TI / SA registered during the current month in the Register in view of the TI / SA submitted for registration exceeds UAH 30 million, is made and/or registered in the Separate Register by the regional level commission.

Appealing against the commission’s decision on denial of the TI / SA registration

Despite certain legislative initiatives for leaving only the judicial method of appeal, the commission’s decision on denial of the TI / SA registration may be appealed against in the administrative or judicial proceedings.

As before, the administrative procedure for appealing against the decision still requires the taxpayer’s filing a complaint with the SFS, and such complaints will be considered by the SFS commission for complaint consideration. The only novelty in this procedure for filing appeals is that from now on, the complaint has to be filed by the taxpayer electronically via the electronic means determined by the SFS.

As regards the judicial method of appeal, it should be noted that most likely, the taxpayer will have to prove in court the credibility of the economic transaction for which the TI / SA has been drawn up, as well as the possibility to carry out such an economic transaction. Therefore, it is necessary to pay attention to the new judicial practice of the Supreme Court (the Decision of January 17, 2018 in the case No. 826/1244/13-a), where the court distinguished the circumstances which entail legal consequences in the form of emergence of the buyer’s right to form appropriate amounts of the tax credit, in particular: actual (real) carrying out of taxable transactions; documentary confirmation of the actual implementation of economic transactions with the combination of legally significant (valid) primary and other documents, which usually accompany transactions of a certain type; availability of the special tax legal personality of the parties; availability of the buyer’s properly drawn up tax invoice; availability of business purpose and reasonable economic reasons for carrying out an economic transaction.

That is, when appealing against the commission’s decision on denial of the TI / SA registration, the taxpayer will have to use all possible ways to prove the credibility of the economic transaction for which the controversial TI / SA has been drawn.

And a few more words about the Taxpayer’s Data Table

In order to prevent the blocking of tax invoices, which primarily applies to agricultural enterprises and producers of goods, the taxpayer still has the right to submit to the SFS the taxpayer’s data table (hereinafter referred to as “the Table”) indicating the permanently supplied / purchased goods / services, together with the relevant written explanations. The form of the Table has not changed; therefore, it is logical to assume that the procedure of submitting and filling out this table will not change.
The Table with explanations will be considered by the regional level commissions within five working days after the day of its receipt; after that, the commissions will have to make a decision on taking the Table into account or disregarding it, which becomes available to the taxpayer in their electronic cabinet within one operational day.
As before, the Table is automatically taken into account by the SFS, in particular, if this Table is submitted by agricultural producers included in the Register of recipients of transfers from the budget and/or by agricultural producers, which applied the special tax regime as of December 31, 2016 and own (have the right of ownership / use) and/or lease land plots which have the total area of 200 hectares or more as of January 1, 2017 and are reflected in the tax report (by February 20, 2017 of the current year, the availability of such land plots in the reporting period of the previous year is taken into account). It also specifies the UCG FEA codes for the supply (production) of the following groups of products:

• Live animals (UCG FEA code 01);
• Fish and crustaceans, molluscs, and other aquatic invertebrates (UCG FEA code 03);
• Milk and dairy products; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified (UCG FEA code 04);
• Vegetables and some edible roots and tubers (UCG FEA code 07);
• Edible fruit and nuts; peel of citrus fruit or melon (UCG FEA code 08);
• Cereals (UCG FEA code 10);
• Oil seeds and oleaginous fruit; miscellaneous grains, fruit, and seeds; industrial or medicinal plants; straws and fodder (UCG FEA code 12).

However, it should be noted that if tax authorities receive tax information certifying the payer’s provision of false information, the Table, which was taken into account, including in the automatic mode, the commissions of the controlling authorities have the right to decide to disregard the taxpayer’s data table. After the regional level commission decides to disregard this taxpayer’s data table, such taxpayer’s data table is subject to consideration within five working days.

Herewith, based on the substance of this provision of the Procedure, this may be any information, but the SFS also failed to define where it can be obtained. Therefore, even if the Table was accepted automatically, this does not mean that later one will not make a decision to disregard it.

It is important! If a taxpayer has already submitted the Table in 2017 and it was taken into account, this taxpayer is not obliged to submit it for the second time. Indeed, the Procedure clearly defines that if the Table is taken into account by the SFS as from July 1, 2017, then the registration of TI / SA in the Register of transactions specified in the Table is not subject to further termination.

In view of the above, it can be summarised that the System will work the same way as before. It is to be hoped that the criteria of the taxpayer’s riskiness, the criteria of the riskiness of conducting transactions, and the indicators of the taxpayer’s positive tax history, which are soon to be published by the SFS, will be objective, really facilitate minimizing the number of events of blocking TI / SA, and act specifically against unscrupulous taxpayers, but not complicate the work of all VAT payers.