The Supreme Court allowed companies to recover losses from contractors for failure to register tax invoices
Independence of business activity is the basic engine for the well-being of any modern state. This freedom gives individuals the opportunity to fully realize their entrepreneurial potential, which in turn brings development and well-being to society. But there is also the flip side of this coin. These are constant risks that accompany such activities.
One of these possible risks is to receive losses due to the fault of contractors, in the form of an unpaid tax credit from the value added tax.
So, at the time, set by article 187 of the Tax code of Ukraine (hereinafter – TC of Ukraine), the counterparty of a business entity is obliged to make a tax invoice (hereinafter TI) and register it in the Unified register of tax invoices (hereinafter - URTI), within the prescribed period TC.
However, from time to time, the counterparties violate the requirements of tax legislation of Ukraine, which also deprives such a business entity of the right to attribution in the tax credit (further - TC) paid value added tax (hereinafter – VAT) for the relevant operations.
Previously, to restore such a violated right, a business entity had only to submit a complaint to the Supervisory authority against the counterparty-Appendix D8 to the VAT Declaration, which allowed it to include the amount of VAT paid in the tax code, but since January 01, 2015, filing such an application does not generate any positive consequences for the business entity, except for a tax audit of such an unfair counterparty. Without sufficient legislative mechanisms to restore the violated right, business entities began to seek such assistance from Themis.
Judicial practice in this matter has been very ambiguous. Thus, some courts satisfied claims, indicating that the business entity has the right to recover damages from the counterparty in the amount of the lost PC (for example, the Decision of the Supreme economic court of Ukraine of November 23, 2016 in case No. 917/852/16), while other courts refused to satisfy claims, indicating that these relations are not in the plane of civil (economic) relations.
The newly formed Supreme Court (hereinafter referred to as the Supreme court) in this issue was initially a supporter of the position that helped unscrupulous contractors avoid responsibility for their unfair actions.
Thus, the Supreme court in its Decision of March 12, 2018 in case no. 918/216/17 established that the requirement to register an TI is not an economic obligation, and therefore economic sanctions in the form of a fine or compensation for damages cannot be applied for non-performance of such an obligation.
However, the Supreme court of the United chamber of cassation economic court put an end to this issue by its Decision of August 03, 2018 in case no. 917/877/17, noting:
"Given the above, in this case there is a direct causal link between the failure of the defendant to fulfill a statutory obligation to register tax invoices and the inability to include VAT amounts in the plaintiff's tax credit, as well as, accordingly, reduce the tax liability by the specified amount, which is actually the losses of this person. Therefore, there are all elements of the composition of the economic offense.The court considers it necessary to depart from the conclusion set out in paragraph 28 of the Supreme Court's decision of 12.03.2018 in case No. 918/216/17, and concludes that the provisions of paragraph 201.10 of article 201 of the tax code of Ukraine, as amended at the time of the disputed legal relationship, do not provide for the possibility of including the VAT amount to the tax credit by the buyer of goods/services if the seller does not fulfill the obligation to draw up and register a tax invoice in the Unified register of tax invoices (except in cases established by tax legislation, if the basis for calculating tax amounts related to a tax credit without receiving a tax invoice is other documents) in this case, the buyer of the specified goods/services has the right to attach a complaint against such a seller to the tax return, but filing such a complaint in accordance with the above rule in the version effective after 01.01.2015 is not a basis for including tax amounts in the tax credit."
Therefore, in order to apply such a measure of liability as collecting losses from an unfair counterparty who registered an TI in the ERNN, it is necessary to have all the elements of the composition of the economic offense:
1) illegal behavior (action or omission) of a person (violation of an obligation) – in the form of non-registration of the TI in the ERNN;
2) harmful result of such behavior-losses in the form of lost PC;
3) the causal relationship between illegal behavior and losses - the right to reflect the tax code directly depends on the fact of registration of the tax code;
4) the fault of the person who caused the damage - inaction of the counterparty in fulfilling the obligation to register the TI in the ERNN.
In the absence of at least one of the above elements, liability for damages cannot occur.
Currently, the courts of all instances, including the Supreme court, during the consideration of such cases are actively guided by the above-mentioned legal position of the joint chamber of the economic court of Cassation in the Supreme court (for example, the Supreme court's Decision of December 03, 2018 in case No. 908/76/18), which is a very positive trend.
So, all business entities, including those that did not provide for sanctions for non-registration of VAT in their contracts, now have an excellent tool for restoring their violated rights, namely, in case of violation of tax legislation by their counterparties regarding the registration of tax invoices in the Unified register of tax invoices.
Now such business entities will be able to recover losses from such unscrupulous contractors in the amount of the tax credit not received by such violation from the value added tax.
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