Tax examination. How to minimize the risks of additional assessment?
Almost all tax audits in Ukraine end the same way — with an acceptance of the Examination Certificate that provides for an assessment of additional tax liabilities to taxpayers. As a result, the costs of business grow along with temporary costs since decisions of the State Fiscal Service often have to be challenged in court. However, such risks can always be minimized. The key is to find and reinforce the weaknesses in own financial statements, but it has to be done before the tax inspectors come rather than upon acceptance of the Examination Certificate.
Aspects to consider
In most cases, the State Fiscal Service does not recognize the calculation of a tax credit, as well as many categories of expenses in business transactions. The issue is that the State Fiscal Service has a special database that records all risk-laden counterparties. If a taxpayer declares transactions with a counterparty from the database, they will be automatically recognized as “on paper only” (fictitious). It does not even matter if the counterparty was clean at the moment of your transaction, that is, had no tax claims from the SFS. The general fact of such a claim is already enough to enter the regulator’s database.
What counterparties does the SFS consider risky?
The most obvious indicator of a counterparty’s unreliability is the fact of criminal proceedings lodged against it pursuant to Article 205 of the Criminal Code “Fictitious Entrepreneurship” or prosecution of its responsible officials on tax avoidance. Moreover, the SFS considers counterparties risky if they:
- are officially declared bankrupt and will, therefore, be liquidated;
- have received Examination Certificates that prescribe their transactions to be fictitious or a court’s decision on the invalidity of their constituent documents;
- do not submit their returns for examination for more than two tax periods in a row;
- have up to five employees in-house;
- do not work at the officially specified address;
- have the VAT certification annulled.
What should a taxpayer do then?
At least to make sure that there are no problem-plagued characters in the list of counterparties. If found, one should conduct an audit of source documents related to those parties in order to understand all the documents weaknesses, risks, etc. The most important thing here is to catch the moment. Documents should be audited just before the tax examination to have the most accurate data to answer if your counterparties are enlisted as risk-laden or not.
As far as tax examinations are concerned, things are simple: all you have to do is to synchronize with their schedule for 2018 published on the SFS website. The closer the examination date for your company is, the faster you need to prepare.
Unscheduled examinations are more difficult to deal with. On the second thought, though, it gets somewhat easier since it is possible to learn about them in advance (15 days before). The bottom line is that Article 78 of the Tax Code of Ukraine prescribes certain conditions for the unscheduled examinations of documents. One of those outlines that there has to be an absence of a taxpayer’s reply to the request of the State Fiscal Serice to provide information and documents. That is, the regulator shall send you a request prior to an examination with a text, from which you can figure what transactions and which counterparties raised the doubts.
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