SC Grand Chamber - On the Taxpayer's Responsibility for Entering Unreliable Data into Primary Documents by Another Person

The company filed a claim with the tax authority to recognize tax notice-decisions as unlawful and to cancel them. The court of first instance dismissed the claim. The court of appeal reversed the decision and upheld the claim. The сourt concluded that the commercial transactions between the plaintiff and other companies, which resulted in the formation of a disputed tax credit, were real.

Considering the cassation appeal of the tax authority, the Grand Chamber of the Supreme Court, in particular, departed from the position of the Supreme Court of Ukraine in view of the exclusion of criminal liability for fictitious entrepreneurship.

The SC Grand Chamber stated that any document issued on behalf of a business entity (taxpayer), which had not been deprived of the corresponding status at the time of drawing up this document, had the force of a primary document. Such a document according to Art. 44 of the Tax Code of Ukraine and Art. 9 of the Law of Ukraine On Accounting and Financial Reporting in Ukraine confirms the tax accounting data of the business entity and/or its counterparties if it contains a number of details, such as reliable data on the actual commercial transaction and its economic essence; a personal signature or other data that make it possible to identify a person who participated in the implementation of an commercial transaction. At the same time, another taxpayer, when using such a document in his tax accounting, must act reasonably, in good faith and with due diligence, and also he should have no sufficient grounds to doubt the accuracy of the data entered in the relevant document by his counterparty.

The SC Grand Chamber noted that the verdict against the official of the counterparty under Art. 205 of the Criminal Code of Ukraine, as well as a decision to release a person from criminal liability under this article due to the expiration of the statute of limitations, could not create a prejudicial basis for an administrative court, unless the court of criminal jurisdiction had established the specific circumstances of the plaintiff's acts or omissions. Such a verdict or court ruling based on the results of consideration of criminal proceedings must be evaluated by an administrative court together with the provided primary documents and the circumstances of the primary documents, the correctness of their execution, the possibility of performing (carrying out) controversial commercial operations, their connection with the commercial activity of the plaintiff and the possible use of the purchased goods (work, services) in future activities.

If another person entered into the document information about a participant in a commercial transaction that has defects in legal status, then a bona fide taxpayer who used the relevant document to confirm his tax accounting data cannot experience any negative consequences if other circumstances specified in the primary document including the movement of related assets have taken place. At the same time, it should be taken into account if the taxpayer is really capable of ascertaining whether the information entered into the primary document by his counterparty was reliable.

Therefore, the fact that primary documents with unreliable data are used to confirm the circumstances of a commercial transaction should not automatically indicate that tax accounting data are groundless. Instead, the regulatory authority must prove that the taxpayer, when accepting from counterparties and using certain documents for tax accounting purposes, acted unreasonably, in bad faith or without due diligence. There must be evidence that, by reasonable measures, a bona fide taxpayer could have verified the authenticity of the relevant documents, and also had sufficient grounds, acting with due diligence, for reasonable doubt as to their content.

The SC Grand Chamber departed from the conclusion of the Supreme Court of Ukraine, set out in the resolution of December 1, 2015 in case No. 826/15034/14 (No. 21-3788а15), given that the Supreme Court of Ukraine had mistakenly extended the provision of Art. 205 of the Criminal Code of Ukraine, which has a different subject of regulation, to tax legal relations. The SC Grand Chamber found groundless the conclusion that the status of a fictitious, illegal enterprise was incompatible with legal business activities, therefore, the business operations of such enterprises cannot be legalized even with formal confirmation by accounting documents.

The SC Grand Chamber stated that the court of appeal came to the correct conclusion to cancel the decision of the court of first instance and satisfy the claim.

The Resolution of the Grand Chamber of the Supreme Court of July 07, 2022, in case No. 160/3364/19 (proceedings No.11-200апп21) - https://reyestr.court.gov.ua/Review/105852864.

This and other legal positions of the Supreme Court can be found in the Database of Legal Positions of the Supreme Court - lpd.court.gov.ua/login.