Communicated on 18 January 2021 Published on 8 February 2021

FIFTH SECTION

Application no. 71542/12 B&H PJSC against Ukraine lodged on 30 October 2012

STATEMENT OF FACTS

The applicant company, B&H, is a private joint-stock company registered in Ukraine in 1993 with its office in Kyiv. The company is represented before the Court by Mr O. Peremezhko , a lawyer practising in Kyiv.

The facts of the case, as submitted by the applicant, may be summarised as follows.

The applicant company was the exclusive theatrical distributor of Sony Pictures (USA), Columbia Pictures (USA), Walt Disney (USA), Paramount Pictures (USA) and Universal Studios (USA). For the purpose of theatrical distribution the applicant company purchased advertising services from different suppliers. The applicant company was registered under the Value-Added Tax Act (the “VAT Act”) as a VAT payer.

Between 2009 and 2010 the applicant company imported to Ukraine film prints and advertising materials (the “goods”) from subsidiaries of the above-mentioned film studios. The goods were imported into Ukraine under the “importation” customs regime, meaning that during customs clearance the applicant company paid all customs duties and value-added tax (VAT) to the State budget of Ukraine. Upon payment of VAT and customs duties the imported goods were released for free circulation within the territory of Ukraine and the applicant company obtained duly signed and stamped cargo customs declarations (“import declarations”) which certified the amount of VAT paid by the applicant company during customs clearance.

The applicant company included the operations on importation of goods in its accounting records, showing the VAT and customs duties paid at the relevant time. In the disputed period the applicant company claimed VAT deduction in the amount of UAH 18,848,745 (about EUR 1,800,806) as that amount of VAT had been paid on the importation of goods. The applicant company lodged the relevant VAT returns with Shevchenkivskyy District Tax Inspectorate of Kyiv (“the local tax office”).

In order to promote films the applicant company, among other things, contracted a supplying company, M., to provide advertising services. M. was registered under the VAT Act and transactions between the applicant company and M. constituted a taxable supply under the VAT Act.

The applicant company deducted input VAT of UAH 441,062 (about EUR 42,139) that it had paid to M. for the supply of services. The applicant company further included the purchase of services from M. in the list of expenditure for corporate income tax purposes.

(a) Tax audit in 2010

On 25 February 2010 the local tax office issued a report on tax audit of the applicant company covering the period between 1 October 2006 and 30 September 2009. The tax office accepted the tax accounting records showing that the applicant company had deducted VAT, after it had paid the VAT in 2009 for the customs clearance of imported film prints.

(b) First tax audit in 2011

On 20 April 2011 the local tax office issued a report on tax audit of the applicant company covering the period between 1 January 2007 and 28 February 2011. The tax office found that the applicant company ’ s transactions with M. had been null and void and the supporting documents on those transactions had been inappropriate. The tax office considered by that time that M. had been involved in the chain of fictitious business. On these grounds the tax office concluded that the applicant company could not put the purchase of services from M. on the list of deductible expenses for corporate income tax purposes and that consequently, having done so, the applicant company had groundlessly reduced its taxable income. The applicant company was therefore surcharged UAH 79,270 (about EUR 7,573) in corporate income tax and imposed a financial penalty of UAH 19,818.00 (about EUR 1,893).

The applicant company appealed against the tax assessment to the courts. On 27 March 2012, by the final decision of the Kyiv Administrative Court of Appeal, the tax surcharges and penalty were repealed because the tax office had not proved the nullity of the business transactions between the applicant company and M.

(c) Second tax audit in 2011

On 10 June 2011 the tax office issued a report on tax audit of the applicant company covering the period between 1 January 2009 and 31 March 2011 (the second tax audit included the period between 1 January and 30 September 2009 which had been covered by the tax audit of 2010 and the first tax audit of 2011).

With regard to the transactions with M., the local tax office found that M. had been declared bankrupt, and it had not had any supporting documents in relation to the transactions with the applicant company. Considering that M. had been involved in a chain of fraudulent transactions, the local tax office decided that between January and September 2009 the applicant company did not have a right to deduct input VAT of UAH 441,062 (about EUR 42,139) that it had paid to M. for the supply of services or to include in its deductible expenses the costs of the services bought from M., reducing thereby taxable income.

With regard to the importation of goods from foreign film studios, the local tax office considered that the applicant company had no right to VAT deduction. In particular, it found that between January 2009 and December 2011 the applicant company had unlawfully deducted VAT in the amount of UAH 18,407,683 (about EUR 1,800,806) which it had paid on the importation of goods. The tax office noted that the ownership of such goods had not been transferred to the applicant company and, moreover, the applicant company had received those goods free of charge. However, an essential condition under section 7.4.1 of the VAT Act to claim VAT deduction was the fact that the goods had been purchased and that the property title was transferred to the buyer.

On 18 June 2011, at the request of the applicant company for clarification of the tax law, the State Tax Administration of Ukraine provided the following interpretation of VAT law:

“... in accordance with ... the VAT Law, which was in effect until January 1, 2011, the entitlement to VAT deduction includes VAT amounts paid on the basis of cargo customs declarations in the context of transactions involving movement of goods to the territory of Ukraine under the customs regime of “importation”, regardless of the transfer of ownership thereto, for the subsequent use of such goods in taxable transactions within the scope of the business activities of the company. ...”

On 30 June 2011 the local tax office, relying on its report of 10 June 2011, ordered the applicant company to pay a corporate income tax surcharge, plus a penalty. By another decision of the same date, it ordered the applicant company to pay VAT which – according to their assessment – had been deducted unlawfully, plus a penalty.

(d) Court proceedings on challenging the tax surcharges and penalties

On 12 July 2011 the applicant company instituted court proceedings against the local tax office seeking to quash the decisions of 30 June 2011.

On 6 September 2011 the Circuit Administrative Court of Kyiv allowed the claims of the applicant company. As regards the transactions with M., the court considered that the local tax office had not proved that those transactions had been faked or that they had been affected by any fraudulent business of M. As regards the import VAT, the court found that the cargo customs declarations were sufficient evidence to show that the applicant company had paid VAT upon importation of goods from foreign film studios and that the applicant company, having paid VAT, had a legitimate right to deduct the relevant amounts in its VAT accounting balance.

The local tax office appealed against that decision.

On 15 February 2012 the Kyiv Administrative Court of Appeal quashed the decision of the first-instance court and upheld the impugned decisions of the local tax office. The appellate court found that the transactions between the applicant company and M. had not generated entitlement to VAT deduction and to increasing expenditures for the purpose of corporate income tax because the documents in support of those transactions were inadequate. As regards VAT deduction in the context of importation of goods, the appellate court stated that the applicant company received those goods free of charge and it did not become their owner. In fact, the applicant company had only a right to use these goods on the territory of Ukraine. In these circumstances section 7.4.1 of VAT Act prevented the applicant company from deducting the import VAT.

The applicant company appealed on points of law to the Higher Administrative Court, arguing that under section 3.1.2 of the VAT Act the importation of goods constituted a separate basis for imposing VAT which was distinct from taxation of internal supply operations for which section 7.4.1 had been designed. Under section 7.5.2 of the VAT Act, a taxpayer was entitled to tax deduction in respect of the importation of goods on the date when the tax duty was fulfilled. Moreover, in accordance with section 7.2.7 of the VAT Act, the cargo customs declaration was the only and sufficient document which certified entitlement to tax deduction.

The applicant company further submitted that their understanding of the legal entitlement to VAT deduction on importation of goods had been confirmed by the letter of 18 June 2011 on clarification of tax law issued to the applicant company by the superior tax authority, namely the State Tax Administration. Moreover, that interpretation had been endorsed in the case ‑ law of the Higher Administrative Court.

On 3 May 2012 the Higher Administrative Court dismissed the applicant company ’ s appeal on points of law, finding that the ruling of the appellate court had been lawful and substantiated.

According to the VAT Act, taxable transactions included the importation of goods under the “importation” customs regime; for the purpose of taxation by VAT, the concept of “importation” also included transactions on importation of goods under contracts which did not envisage the transfer of ownership of such goods (section 3.1.2).

In respect of importation of goods to the territory of Ukraine, the cargo customs declaration acknowledging the payment of VAT was the document which certified entitlement to the tax deduction (section 7.2.7). The date when a taxpayer became entitled to the VAT deduction in respect of the importation of goods was the date when the VAT duty was paid (section 7.5.2).

The amount of entitlement to the VAT deduction was determined based on the contractual value of goods, provided that it was not above the regular prices thereof, and provided that the relevant operation concerned the purchase or the manufacturing of goods (including their importation) for their further usage in taxable transactions within the business activities of the taxpayer (section 7.4.1).

The tax legislation of Ukraine includes the principle of presuming the lawfulness of taxpayers ’ decisions in cases where legal rule(s) offer ambiguous (multiple) interpretations of the rights and duties of the taxpayers or the supervising authorities resulting in the possibility that a decision may be made either in favour of a taxpayer or a supervising authority (Article 4.1.4).

The same principle is provided in Article 56 dealing with appeals against tax authorities: if a provision of the Tax Code or a regulation issued by the supervising authority on the ground of this Code, or if provisions of different laws or different regulations issued by supervising authority allow multiple (ambiguous) interpretation of rights and obligations of the taxpayers or supervising authorities resulting in the possibility that a decision may be made either in favour of a taxpayer or a supervising authority, such decision shall be made in favour of the taxpayer (Article 56.21).

In the decision of 16 June 2011 in case No K-21171/10 (Unified State Register of Court Decisions, doc. no. 16567670), the High Administrative Court stated the following:

“The panel of judges of the High Administrative Court endorses the conclusion of the lower courts that the importation of goods from abroad under lease contract should be interpreted, for the purpose of taxation, as “importation” with the result that the sums of VAT paid upon such importation of goods should be subject to deduction in the reporting period. ...

As it was established by the lower courts, the claimant had paid VAT during the importation of goods to Ukraine and the payment had been confirmed by the cargo customs declarations.

Under the said circumstances the courts of the first and appellate instances reached the correct conclusion that the claim must be allowed.”

In the decision of 30 June 2011 in case No K/9991/274/11 (Unified State Register of Court Decisions, doc. no 18165926) the High Administrative Court stated as follows:

“Legal grounds for deducting VAT paid during the importation of goods to the territory of Ukraine are governed by section 7.5.2 of the VAT Act which provides that with respect to the importation of goods ... the date when the taxpayer is deemed to be entitled to the VAT deduction shall be the date when the tax duty has been paid ...

On the basis of the said provisions, the panel of judges finds that since the leasing is a taxable transaction, and the claimant paid the value-added tax of UAH 4,718,208 during the importation of goods, such sum was subject to VAT deduction. ...”

COMPLAINT

The applicant company complains under Article 1 of Protocol No. 1 that the domestic authorities groundlessly refused deduction of VAT which was paid by the applicant company during the importation of goods to the territory of Ukraine.

QUESTIONS TO THE PARTIES

With regard to the tax authorities ’ treatment of the applicant company ’ s operations on importing goods from abroad, has there been an interference with the applicant company ’ s peaceful enjoyment of possessions, within the meaning of Article 1 of Protocol No. 1? If so, was that interference necessary to secure the payment of taxes or other contributions or penalties? Was the interference lawful for the purpose of the Convention? Did that interference impose an excessive individual burden on the applicant company?