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.

Taxation of marketing costs

Ukrainian CIT law allows deduction of marketing costs if it regards business activity of taxpayer. In addition, tax authorities consider that goods shall be own by taxpayer at the moment of marketing actions. Otherwise they can’t be referred to business activity. Such expanding approach results in tax assessments and fines for understatement of taxable profit. The poor court practice on this matter is contradictory.

At the end of 2008 Kyiv district administrative court in the “Orimi-trade” case noted that CIT law doesn’t specify whether goods shall be owned by the taxpayer or not. By applying “conflict of interests” approach the court decided that ownership is not required for deduction.

Nevertheless, Kyiv district administrative court changed its opinion in the recent Red Bull case. Red Bull Ukraine bore marketing expanses regarding goods which it had already sold to wholesale traders. The court decided that positive effect of marketing actions regards to the wholesale traders’ business activity, not Red Bull. Thus marketing costs are not deductible for it.

The issue may be settled by appellate courts. Generally it may take up to 1 year. In addition State tax administration may issue clarifying Letter, which is unlikely to be favorable for taxpayers.