A private enterprise filed a lawsuit with the administrative court against the tax authority to declare the tax notice-decision issued based on the results of the audit unlawful and to cancel it. The tax authority considered that the enterprise had violated Clause 161.2 of Article 161 of the Tax Code of Ukraine by including in its expenses 100% of the cost of goods purchased from non-resident counterparties, which, in the opinion of the authority, had offshore status due to the location of their founders in offshore zones, which, in accordance with Clause 161.2 of Article 161 of the Tax Code of Ukraine, limits the inclusion of expenses to 85% of their cost. On this basis, the authority assessed additional income tax and applied penalties.
The taxpayer argued that non-resident counterparties registered in the United Kingdom do not have offshore status, since they are located in a state that is not included in the list of offshore zones defined by the Resolution of the Cabinet of Ministers of Ukraine dated February 23, 2011 No. 143-r. He emphasized that the presence of the founders of the counterparties in states classified as offshore zones (British Virgin Islands, Belize) does not indicate the offshore status of the legal entities themselves.
Accordingly, the enterprise legally included 100% of the cost of imported goods in the composition of expenses.
The key issue in the dispute is the tax authority’s proof of the offshore status of non-resident counterparties in order to limit expenses to 85% of their value.
The Supreme Court emphasized that the location of the founders of the counterparties in offshore zones is not a basis for recognizing the legal entities themselves as having offshore status.
According to paragraph 161.3 of Article 161 of the Tax Code of Ukraine, a non-resident has offshore status if it is located in the territory of an offshore zone defined by regulatory enactments.
According to part two of Article 77 of the Code of Administrative Procedure of Ukraine, the obligation to prove the offshore status of a counterparty lies with the control authority.
In this case, the authority did not provide proper evidence of the location of the plaintiff’s counterparties in offshore zones and did not establish their actual location during the inspection. The case materials, including contracts, pro forma invoices, cargo and customs declarations and certificates of work performed, confirm that the counterparties are registered in the United Kingdom, which is not included in the list of offshore zones.
The Supreme Court concluded that the absence of convincing evidence of a violation by the payer indicates the illegality of the tax notice-decision, since doubts about the legality of the taxpayer’s actions cannot be interpreted in favor of the tax authority.
For more information on the text of the decision of the Supreme Court of Appeals in case No. 805/4691/16-a, please visit the link.
