Tuesday, June 23, 2009

Tax race with high stakes. Correcting of tax records

No one can be sure his tax records are perfect as the risk of “human factor” mistakes always exists. The price for mistakes may be high. Only 5% fine if revealed and corrected by taxpayer but up to 100% fine, if revealed by inspector during tax audit. It is a nice stimulus to check past tax records. Nevertheless, taxpayer may reveal mistake in time but not correct it before the beginning of tax audit. What fines are applicable in such case?

Ukrainian law stipulates that if taxpayer independently reveals mistake before the beginning of tax audit he shall either: (I) file correction paper or; (II) account mistake in the next tax declaration. Consequently 5% of the understated taxes shall be paid. Judging from the text time requirement “before tax audit” clearly refers to the moment of reveal. It is uncertain whether it refers to the filing of correction paper or tax declaration.

The matter is the moments of disclosure and filing don’t concur as tax declarations can be filed only within determined period e.g. 40 days after each quarter for CIT purpose. Hence, there is always time gap during which inspector may forestall taxpayer.

Consequently, a taxpayer who decided to correct revealed mistake shall wait for a month or two while unplanned tax audit may start, reveal it “again” and assess 100% fine the next week. Thus, time requirement shall not refer to filing of tax declarations as it limits at least second option and makes it useless. Therefore 5% fine shall be applied.

On the other hand, filing of respective corrective paper or new tax declaration may be the only evidence of mistake disclosure. Without time requirement taxpayer may unreasonably claim he had revealed mistake before the beginning of tax audit but was waiting for a filing period. Consequently 100% fine shall be applied.

Uncertainty regarding abovementioned disclosure and correction of mistakes may be finally solved by application of conflict of interests provision. It prescribes that provisions which arise uncertainties shall be applied in favour of a taxpayer. Consequently, taxpayer who revealed mistake in time but corrected it during tax audit shall pay 5% fine.

Nevertheless, it is likely to have direct or indirect evidences that taxpayer has revealed mistake before tax audit. For example in recent court case a taxpayer filed new tax declaration during tax audit but before the date when inspectors requested tax records comprising mistake. The Court upheld taxpayer’s position.

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