Unblocking Tax Invoices for “Risky” Taxpayers: WINNERLEX Practice

The blocking of tax invoices and the assignment of the “risky” taxpayer status is currently one of the most painful issues for businesses, as it can lead to numerous negative consequences, including the imposition of penalties by buyers* and even refusals to cooperate from regular business partners.

The reason for blocking tax invoices is the inclusion of the taxpayer in the list of risky taxpayers or risky operations. This list can include any taxpayers whose activities raise doubts among the tax authorities and meet one of the risk criteria defined in Order No. 1165. Most of the criteria contain fairly objective signs of risky business activities.

However, in this article, we would like to share some practical aspects of resolving situations where the blocking of tax invoices is specifically related to Clause 8 of the criteria. This criterion is most often used by the tax authorities and is quite abstract in nature: “The controlling authorities possess tax information that became known during the ongoing activities in the course of performing the tasks and functions assigned to the controlling authorities, determining the riskiness of the business transaction indicated in the tax invoice/adjustment calculation presented for registration.”

At the same time, the legislator does not specify which particular tax information may lead to the inclusion of a taxpayer in the list of risky taxpayers. This allows tax authorities to apply Clause 8 of the Risk Criteria quite broadly as the basis for blocking tax invoices.

However, according to Order No. 1165, in order to classify a taxpayer as risky based on Clause 8 of the Criteria, the controlling authority must first obtain and analyze specific tax information about the taxpayer’s business activities or operations. Moreover, this information must be obtained in a lawful manner as part of the tasks and functions assigned to the tax authorities. Only after this, the tax authorities can draw conclusions about the taxpayer’s compliance with the risk criteria provided in Clause 8 of the Criteria.

Moreover, case law from the Supreme Court of Ukraine has already developed, stating that, in the case of a taxpayer meeting the requirements of Clause 8 of the Risk Criteria, the tax authorities must also specify the exact information that formed the basis for their conclusions regarding the taxpayer’s compliance with the risk criteria:

59. In both contested decisions, the defendant did not specify the essence and nature of the tax information that became the basis for the decision in the “Tax Information” field. The specific risky operations and/or tax invoices of the taxpayer in which such operations were recorded were not identified. Instead, the controlling authority merely quoted the content of Clause 8 of the Risk Criteria for taxpayers.

60. Thus, the contested decision does not contain any justification for the grounds and reasons for classifying the plaintiff as a risky taxpayer under Clause 8 of the Risk Criteria for Taxpayers.

(Supreme Court ruling of the Administrative Court of Cassation dated January 5, 2021, in case No. 640/11321/20)

According to Clause 2 of Order No. 1165, the risk of violating tax legislation is the likelihood of composing and submitting a tax invoice/adjustment calculation for registration in the Registry in violation of the rules, when there are objective signs of the impossibility of performing the transaction for the supply of goods/services, the data of which is contained in such a tax invoice/adjustment calculation, and/or the likelihood of the VAT payer avoiding fulfilling their tax obligation.

However, in practice, the taxpayer who has “had the pleasure” of experiencing close contact with the tax authorities will receive a receipt in their personal account regarding the registration of the tax invoice, which will only show the following in the “Processing Result” field:

Usually, the receipt contains no other information. Therefore, the entrepreneur is left to guess which specific tax information led to the matching of the risky status under Clause 8, and which documents need to be submitted to refute that information and unblock the tax invoice. Such circumstances place entrepreneurs in a proverbial situation of “Go there—don’t know where, find that—don’t know what,” which, especially in the context of accelerated information and document gathering, often results in an unsatisfactory decision by the tax authorities, or worse, the emergence of additional questions regarding other activities of the business and its counterparties.

It is important to note that the Supreme Court supports taxpayers in such cases and states:

The court also draws attention to the fact that, in the case of an unspecified list of documents in the receipt for stopping the registration of the tax invoice, the taxpayer is in a state of legal uncertainty, which deprives them of the opportunity to provide the necessary package of documents, as understood by the authority with legal powers. For the controlling authority, this creates the conditions for the possible manifestation of negative discretion — the decision to refuse the registration of the tax invoice.

The list of documents required for the controlling authority to make a well-founded decision must be specific and clear. Compliance with the requirement for clarity and unambiguity regarding the information provided in the receipt for stopping the registration of the tax invoice is especially important, considering the specifics of tax legislation and the consequences of non-compliance by the taxpayer with the requirements to submit an incomplete list of documents.

Resolution of the Supreme Court, Panel of Judges of the Cassation Administrative Court, dated April 10, 2020, No. 819 / 330/18.

Therefore, if a business receives such a receipt with a request to provide an unclear package of documents, it already shows signs of a violation of the procedure for stopping the registration of tax invoices by the tax authority, which could later become a significant argument in favor of the taxpayer. However, with the goal of still achieving the unblocking of the tax invoice, despite the tax authorities not specifying a clear list of documents and information, the company must not only submit the maximum package of documents for the specific transaction but also outline the structure and specifics of transactions and relationships with counterparties, provide bank statements with “wet” bank seals, and other explanations and justifications for the reality of that particular business operation. It is advisable, already at the stage of receiving the receipt for stopping the registration of the tax invoice, to seek specialized legal assistance in preparing quality explanations in the legal field and taking into account positive judicial precedents for the early preparation of proper evidence for further appeals.

However, there are cases when, even after providing a full list of documents and information, the tax authorities do not unblock the tax invoices for various reasons, such as the presence of a risky taxpayer status, the need to correct data for certain counterparties, the need to increase tax liabilities, or even without providing any reasons. A clear example from our practice is when the tax authority stated in an official letter that the reason for blocking the tax invoices under the 8th criterion was the insufficient number of employees working at the company, in the opinion of the tax authorities:

In this case, the only way for the taxpayer to protect their violated rights is to file a lawsuit in court, seeking the cancellation of the decision to refuse the registration of the tax invoice and an order for the State Tax Service of Ukraine to register the tax invoice in the Unified Register of Tax Invoices.

WINNERLEX Lawyers’ CASE:

One of our clients faced the blocking of a tax invoice for over 1 million hryvnias, based solely on being included in the list of risky taxpayers under item 8 of the Risk Criteria. In the receipt for stopping the registration, they were asked to provide explanations and substantiate them with documents, without specifying the reasons for the risky status and the list of required documents. The client then provided their own explanations, supported by all available documents related to the blocked transaction of resale. Specifically: contracts with the seller and the final customer of the goods, proof of prepayment and receipt of goods from the seller, as well as the receipt and payment for the goods by the final buyer. Despite this, the client was denied registration of the invoice both by the regional and the central commission of the State Tax Service of Ukraine.

The decision to refuse the registration of the client’s tax invoice was as uninformative as in the overwhelming majority of cases we handle—no specific information regarding the documents that were not provided was mentioned in the decision.

Therefore, after receiving a refusal at the administrative level, the only remaining option for taxpayers to unblock the invoice is to appeal the tax authority’s decision in court. At this stage, the client sought legal assistance from our law firm.

The tax lawyers at WINNERLEX developed a legal position to protect the client, which was as follows:

1. The tax authority unjustifiably included the taxpayer in the list of risky taxpayers without having the relevant tax information.
2. The tax authority did not provide the taxpayer with a specific list of documents that needed to be submitted to unblock the tax invoices, while the taxpayer, in turn, had submitted all the necessary and available documents related to the business transaction.

The Kyiv District Administrative Court agreed with all the arguments presented by WINNERLEX’s tax lawyers. The court noted that no evidence was provided to confirm the existence of tax information held by the tax authority, which became known during the ongoing activity of the tax authority in fulfilling its assigned tasks and functions, determining the riskiness of the business transaction mentioned in the submitted tax invoices. The sources of such information were also unknown to the court, which made it impossible to verify the grounds for establishing the compliance of the taxpayer’s activities with item 8 of the Risk Criteria and the basis for stopping the registration of the disputed tax invoice. Instead, the use by the tax authority of a general reference to item 8 of the Risk Criteria, as in this case, was unsubstantiated. Moreover, the court noted that there was no evidence in the case materials showing that the tax authority investigated the circumstances of the plaintiff’s business activities at the time the disputed decisions were made.

The court also pointed out that the failure of the tax authority to comply with the requirement to specify a comprehensive list of documents necessary for the registration of the tax invoice restricts the taxpayer’s right to be informed about the need to submit documents according to such a list in accordance with the criteria for stopping the registration of the tax invoice, rather than providing any documents at its discretion.