Supplier’s official’s denial the fact of having signed primary documents. Impact on a taxpayer – position of the Supreme Court of Ukraine

On 22.09.2015 the Supreme Court of Ukraine (the SCU) adopted the Resolution in case No. 810/5645/14[1] (the Resolution) partially satisfying the claim of the tax authority, revoking decisions of inferior courts and moving the case for a new round of consideration.

Thus, in the Resolution the SCU stated the following:

"Considering the case, inferior courts found out that PERSON_10 – founder and director of the Toreniya LLC who has been sentenced for a crime under Part 2 of Article 205 of the Criminal Code of Ukraine – (sham business) but discharged on non-rehabilitating grounds due to the end of the limitation period and the proceedings against whom have been closed – denies founding and participating in the business activity of this company, i.a. signing of any primary documents.

The Resolution of the Supreme Court of Ukraine dated 5 March 2012 (case No. 21-421а11) contains a legal position that the tax invoices that have been used as basis for formation of the tax credit on VAT and issued on behalf of persons who deny founding and participating in the business activity of the taxpayer's contracting party, i.a. signing any primary documents, shall not be considered as reporting documents duly issued and signed by authorized persons which confirm the purchase of goods, works or services, and, therefore, attribution of any VAT amounts stated therein to the tax credit on VAT is unjustified.  

Thus, as the case shows that PERSON_10 – founder and director at the Toreniya LLC (Fozzy Food LLC's contracting party) denies founding and participating in the business activity of the Toreniya LLC, i.a. signing any primary documents, checking and establishing this fact is important for the correct settlement of the dispute ".

Analysis of the Resolution shows that the mere denial of signing a tax invoice or any other primary documents by a supplier's official is sufficient to deprive the taxpayer of its right to form a tax credit on VAT. Such denial, in the worst case scenario, may be confirmed by a sentence against the supplier's official – under Article 205 of the Criminal Code of Ukraine – sham business (see Newsletter dated 06.07.2015 “Settlements on Pleading Guilty of Sham Business by Supplier Companies as a New Trend for Additional Tax Accruals”[2]).

However, stating that tax invoices or any other primary documents signed by a person who denies signing them deprive of the right to attribute VAT amounts to the tax credit on VAT, the SCU underlined thenecessity to investigate the circumstances around the signing of the primary documents. We have a catch-22 here – in course of its business activity a taxpayer, being no handwriting expert, has to check each time the "authenticity" of the signatures on all primary documents provided by its suppliers.

Nevertheless, we pay attention that according to Article 244-2 of the Code of Administrative Procedure of Ukraine, the legal position of the Supreme Court in decisions of such type as examined Resolution is mandatory for all government authorities and for all courts of Ukraine, which are obliged to bring their own practices in line with it.

The legal position outlined in the Resolution might have negative tax and criminal consequences for taxpayers. The main risks arise for the taxpayers for which acts of tax audits have been already composed based on the materials of criminal proceedings where suppliers' officials deny own participation in the business activity or the fact of having signed any primary documents.   

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Kind regards and best wishes,

Kateryna Gupalo

Counsel at Arzinger Law Office