ABSTRACT. The article is devoted to a question of application of judicial-tax doctrines by courts of administrative justice in the USA and Ukraine. The author considers the general trends of judicial-tax doctrines, especially business purpose doctrine, substance over form doctrine, economic substance doctrine (or doctrine of the reality of economic operations), doctrine of tax due diligence (or doctrine of presumption of legality). The author analyzes these judicial-tax doctrines through the example of Ukrainian and USA’s legislation and Ukrainian application of the judicial courts. The problems are identified and an attempt to solve them is conducted.
Nowadays Ukraine has faced with a lot of problems in the sphere of taxation and it is not always possible for the parliament of Ukraine to adopt urgent and needful changes to the tax legislation. One of the solutions is to apply judicial-tax doctrines by administrative courts. At the same time judicial-tax doctrines are enough new trend in Ukraine and they are under development, that’s why the question of the application of judicial-tax doctrines are important. On December 28, 2014 the Ukrainian parliament adopted new changes to tax code of Ukraine which consist of 196 pages. Now it is going to be signed by the President of Ukraine and in the text of law it is written that this law enters in force from the 1st of December 2015 , so there are not a lot of time to be acquainted with this law for citizens and legal entities. That’s why an understanding of judicial-tax doctrines is important because they can close existing and perspective gaps connected with the new law and solve the problem of application of judicial-tax doctrines.
In science the problem of application of judicial-tax doctrines in Ukraine is not so well researched. Some authors mention them but there are still a lot of unsolved problems with them. At the same time some Ukrainian scholars use American experience, but it is still very poor situation with European practice in the question.
The purpose of the article is to research the topicality, significance, practice, application of judicial-tax doctrine in the administrative justice within the foreign, especially the USA’s, and Ukrainian practice and theory.
The tasks of the article are to define what judicial-tax doctrine is; to compare foreign and Ukrainian practice within the administrative courts and their application of judicial-tax doctrines; to research and analyse modern trends of judicial-tax doctrine and its application by administrative courts; to conclude what differences are between the application in Ukraine and other countries and what Ukraine should do to improve the existing situation.
The research object is legal relations concerning judicial-tax doctrines in Ukraine and some foreign countries.
The research methods are critical literature review, analysis, systematic method, comparative method.
The structure of the article is logically connected. In Section 1, the notion of judicial-tax doctrine is defined; in Section 2, judicial-tax doctrines are reviewed; in Section 3, the main judicial-tax doctrines in Ukraine, the USA and some European countries are analysed and compared.
2. The notion of judicial-tax doctrine
First of all, the problem of the notion of judicial-tax doctrine is that that there is no legal grounds for such a notion because there are no definition of judicial-tax doctrine and a list of them at legislative level, but it exists at empirical and theoretical levels.
There are some popular definitions of judicial-tax doctrine, one of them which presents the essence of this phenomenon is opinion of Onishchyk, that judicial-tax doctrines are typical approaches and methods for solving certain (typical) legal disputes that formed in the process of accumulation and subsequent generalization of judicial practice .
It must be mentioned that judicial-tax doctrine can be applied not only in the administrative court practice but international, constitutional, civil, criminal and other types of courts (tax, labour etc.) only if it matters in a case (e.g. violation of rights, prejudice etc.). But it is rare phenomenon because judicial-tax doctrine always emerges in administrative courts. Some states have tax courts or other names but nevertheless we are talking about administrative justice which as a rule includes almost all tax disputes.
The judicial-tax doctrine exists, as a rule, only in the decisions of courts. It has some grounds in the legislation but at the same time to live it should be applied. It is so in the continental system (Civil law) and the Common law countries. Nevertheless, where the judicial precedent has its own power for application of law it is more significant to apply judicial-tax doctrine because it is proclaimed by the judgments in the ratio decidendi. Ukraine is a civil law country but the latest changes in application of judicial-tax doctrines prove that they are adopted and used by administrative courts.
3. Types of judicial-tax doctrine
As it was mentioned before there is no list of judicial-tax doctrines at legislative level, but it exists at empirical and theoretical levels
Steven J. Willis in his work «Top 40 Tax Doctrines» singles out main 40 tax doctrines: Acceleration of Income Doctrine; Accounting Method Definition; Arrowsmith Doctrine; Assignment of Income Doctrine; Burgess/Battlestein Scenario; Business Purpose Doctrine; Cash Equivalence Doctrine; Chevron Deference; Commerciality Doctrine; Claim of Right Doctrine; Cohan Rule; Constructive Receipt Doctrine; Corn Products Doctrine; Court Holding Company Doctrine; Crane Rule; Crummey Trust Doctrine; Davis/Kenan Gain; Destination of Income Test; Duty of Consistency; Economic Benefit Doctrine; Equitable Recoupment Doctrine; Erroneous Deduction Exception; Form Over Substance Rule; Family Hostility Rule; Golson Rule; Idaho Power Rule; Integral Part Doctrine; Legislative Grace Doctrine; Matching Principle; Old and Cold Doctrine; Old Colony Rule; Open Transaction Doctrine; Rabbi Trust Doctrine; Realization Event Doctrine; Res Judicata; Schlude Doctrine; Skelly Oil Doctrine; Sham Transaction Doctrine; Substance Over Form Doctrine; Tax Benefit Rule.
Meanwhile in Ukraine they are not so developed and that is why there not a lot of them. There are at least 10 judicial-tax doctrines but the most applicable Judicial-tax doctrine in Ukraine are «business purpose doctrine», «economic substance doctrine», “due diligence» (or doctrine of tax due diligence), “substance over form», «factual place of business», «agreement on steps» (or step transaction doctrine) . In Europe the same doctrines exist but they are not called as judicial-tax doctrines. They are considered as separate practice of a court.
4. The comparative analysis of some judicial-tax doctrines in Ukraine, the USA and some European countries
4.1. The doctrine of the reality of economic operations (or economic substance doctrine)
The sources of this doctrine are Letters of Higher administrative courts of Ukraine №742/11/13-11 from 02.06.2011 and №1936/11/13-11 from 01.11.2011 which say “to confirm tax accounting data it may be taken into account only those primary documents that are made when there is de facto a realization of business operations” .
At the same time in the USA this doctrine was set in the law in 2010 which proves that some doctrines transform their source of law but it is rare phenomenon because the majority of the doctrines are established in the court’s decisions.
In the Internal Revenue Code of the USA it is written the following:
«§ 7701 — Definitions
(o) Clarification of economic substance doctrine
(1) Application of doctrine
In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if —
(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction» .
Concerning the application of this doctrine in Ukraine we can see the some problems.
For example, in Decision of lviv’ Circuit administrative court № 813/5765/13-а from 26th November 2013 it is said “tax law does not require state registration of the lease of land (share) as mandatory feature for proper qualification of land parcel as one that is in use by agricultural producers. Hence, any right to use the land parcels on which there is the agricultural land, regardless of the grounds of emergency of this right is due to confirm share of agricultural production for purposes of applying the special tax regime” , but the problem is our state fiscal service sometimes tries to require state registration of the lease of land (share) as mandatory feature for proper qualification of land parcel as one that is in use by agricultural producers and if there is no such a registration it can be not agricultural land and therefore there is no special simplified regime of taxation.
In the decision of the Higher administrative court of Ukraine №К/9991/50772/12 from 14th November 2012 it is said “The main reason to consider transaction (contract) as a void is an invalidity established by law. It is the law, but not acts whatever facts wouldn’t displayed. The mentioned acts-conclusions are purely subjective opinion of state tax inspector, because they were made in the absence of information provided by the legislation … one of the main tasks of the State Tax Service is to conduct a control of tax legislation and provide clarification of legislation on taxation of taxpayers. In no law is provided a right of tax authorities on their own, out of a court, to recognize transactions (contracts) and data mentioned by the taxpayer in tax declarations as void”. But sometimes the state fiscal service try to establish a contract as void, fortunately, there is definitive position of the Higher administrative court of Ukraine, therefore such practice are rare, but sometimes it happens.
4.2. Business purpose doctrine
Legal ground for this doctrine is art. 14.1.231 of tax code of Ukraine which says “a reason which can exist only if a taxpayer intends to get economic benefit as a result of economic activity” , but further there is no references and notice to this article, so such doctrine is opened and developed by the administrative courts.
The essence of this doctrine in the USA arose from Gregory v. Helvering, 293 U.S. 465 (1935). Here business purpose doctrine is If a transaction has no Substantial Business Purpose other than tax avoidance or reduction of income tax, the law will not respect the transaction. The facts of the case are the following: Evelyn Gregory was the owner of all the shares of a company called United Mortgage Company (“United”). United Mortgage in turn owned 1,000 shares of stock of a company called Monitor Securities Corporation (“Monitor”). On 18 September 1928 she created Averill Corp and three days after transferred the 1000 shares in Monitor to Averill. On 24 September she dissolved Averill and distributed the 1000 shares in Monitor to herself, and on the same day sold the shares for $133,333.33. She claimed there was a cost of $57,325.45, and she should be taxed on a capital net gain on $76,007.88. On her 1928 federal income tax return, Gregory treated the transaction as a tax free corporate reorganization, under the Revenue Act of 1928 section 112. The Commissioner of Internal Revenue, Guy Helvering, argued in economic substance there was no business reorganization, that Gregory owned all three corporations and was simply following a legal form to make it appear like a reorganization so she could dispose of the Monitor shares without paying substantial income tax. Accordingly, she understated her liability by $10,000 .
In Ukraine one of the important decisions is a decision of the Higher administrative court of Ukraine from 26.01.2012 in №К-12059/09 which says “determining criteria for the qualification of activity of a taxpayer as economic one is a focus of such activities to generate income. Although losses of economic activity cannot be the basis for determining such activity as non-economic, when making business transactions, there is a normal economic risk not to receive income from a particular operation, but determining feature of economic activity is the presence of business purpose that intends to get an economic benefit from operations” . We can see that there is not so equal in the understanding of this doctrine. If the USA’s mentioned case would be in Ukraine probably it would be qualified fictitious company and there would be a criminal liability.
4.3. Substance over form
In Ukraine it means that for tax purposes primarily economic consequences created by business transactions (contracts) are taken into account, but not such transactions (contracts) . So some mentioned problematic cases are actual for this doctrine as well.
In the USA this doctrine also set by Gregory v. Helvering case . Substance Over Form Doctrine means that the substance of a transaction controls over its form. Effectively, only the government may make this argument. Taxpayers – because they choose the form of their transactions – rarely, if ever, successfully disavow their chosen form in favor of the economic substance.
In one more case Helvering v. F. & R. Lazarus & Co. — 308 U.S. 252 (1939) it was stated «In the field of taxation, administrators of the laws and the courts are concerned with substance and realities, and formal written documents are not rigidly binding. Congress has specifically emphasized the equitable nature of proceedings before the Board of Tax Appeals by requiring the Board to act «in accordance with the rules of evidence applicable in courts of equity of the District of Columbia»
4.4. The doctrine of presumption of legality (or doctrine of tax due diligence)
In Ukraine we have art. 4.1.4. of Tax code of Ukraine which says “presumption of legality of decisions of a taxpayer if the rule of law or other legal act adopted on the basis of the law, or if the rules of different laws and different regulations allow mixed (multiple) interpretation of the rights and duties of taxpayers or regulatory authorities, resulting in ability to take a decision in favour of the taxpayer” , but de facto it is not always in the favour of the taxpayer. Proof of this is violations identified by the European Court of Human Rights.
In Intersplav v. Ukraine case it was said: «The applicant maintained that it had paid its taxes lawfully and these payments had been checked on numerous occasions by the State authorities. It pointed out that it was not responsible for other companies from whom it bought metal, the price of which was inclusive of VAT. The obligation to pay that VAT was on the latter companies, not the applicant. The applicant underlined that it had neither the competence nor the possibility to control other businesses, and the situation referred to by the Government demonstrated the unsatisfactory workings of the tax authorities, for which the applicant should not be held liable. It further underlined that numerous checks of its activities conducted by the tax authorities had revealed no irregularities on which the latter could base their refusals … In the Court’s view, when the State authorities possess any information about abuse of the VAT refund system by a concrete entity, they can apply appropriate measures to prevent or stop such abuses. The Court cannot, however, accept the argument about a general situation with the VAT refunds advanced by the Government, in the absence of any indication of the applicant’s direct involvement in such abusive practices … the VAT refunds to the applicant have been systematically delayed. Such delays were caused by the situation in which the tax authorities, not disputing, as it appears from the case-file, the amounts of VAT refunds due to the applicant, constantly failed to confirm these amounts. Such failure prevented the applicant from recovering the claimed amounts in due time and created a situation of chronic uncertainty. Furthermore, it forced the applicant to appeal to the courts on a regular basis with identical claims. In the Court’s view, it may be considered reasonable to require that such refusals be challenged in a single or a few cases. However, in the present case, the applicant’s recourse to this remedy has not prevented the tax authorities from continuing the practice of delaying payment of the VAT refunds, even after court decisions have been given in the applicant’s favour … The systematic nature of the failings of the State authorities has resulted in an excessive burden being imposed on the applicant. In these circumstances, therefore, the Court considers that interference with the applicant’s possession was disproportionate. In fact, the constant delays with VAT refund and compensation in conjunction with the lack of effective remedies to prevent or terminate such an administrative practice, as well as the state of uncertainty as to the time of return of its funds, upset the “fair balance” between the demands of the public interest and the protection of the right to peaceful enjoyment of possessions. In the Court’s view, the applicant bore and continues to bear an individual and excessive burden» . Therefore, we can see a violation of the state fiscal body concerning presumption of legality.
In Case of Shchokin v. Ukraine the court said «57. In this regard the Court cannot overlook the requirement of section 4.4.1 of the Law “On the procedure for payment of taxpayers’ liabilities to budgets and state purpose funds” of 21 December 2000 which provided that if domestic legislation offered ambiguous or multiple interpretations of the rights and obligations of the taxpayers the domestic authorities were obliged to take the approach which was more favourable to the taxpayer. However, in the present case the authorities opted for the less favourable interpretation of the domestic law which resulted in the increase in the applicant’s income tax liability» , so such a provision repeat the essence of this presumption of legality.
For the countries of the Council of Europe these decisions are source of this doctrine of tax due diligence that’s why the further practice of the European court of Human Rights maintains this doctrine. In case of Bulves AD v. Bulgaria the court had stated:
«57 … the Court considers that, in so far as the applicant company had complied fully and in time with the VAT rules set by the State, had no means of enforcing compliance by its supplier and had no knowledge of the latter’s failure to do so, it could justifiably expect to be allowed to benefit from one of the principal rules of the VAT system of taxation by being allowed to deduct the input VAT it had paid to its supplier. Moreover, only once a claim for such a deduction had been made and a cross-check of the supplier had been conducted by the tax authorities could it be ascertained whether the latter had fully complied with its own VAT reporting obligations … 69 … the applicant company had absolutely no power to monitor, control or secure compliance by its supplier with its VAT reporting, filing and payment obligations. Accordingly, the Court finds that the applicant company was placed in a disadvantaged position by having no certainty as to whether, in spite of its own full compliance, it would be able to deduct the input VAT it had paid to its supplier, since the recognition or otherwise of the right to deduct was also dependent on the tax authorities’ assessment as to whether the latter had discharged its VAT reporting obligations in timely fashion … 70 … efforts to curb fraudulent abuse of the VAT system of taxation, the Court accepts that when Contracting States possess information of such abuse by a specific individual or entity, they may take appropriate measures to prevent, stop or punish it. However, it considers that if the national authorities, in the absence of any indication of direct involvement by an individual or entity in fraudulent abuse of a VAT chain of supply, or knowledge thereof, nevertheless penalise the fully compliant recipient of a VAT-taxable supply for the actions or inactions of a supplier over which it has no control and in relation to which it has no means of monitoring or securing compliance, they are going beyond what is reasonable and are upsetting the fair balance that must be maintained between the demands of the general interest of the community and the requirements of the protection of the right of property» .
Due to such a practice it was changed the approach of the administrative courts , but the state fiscal body continues to apply or not the presumption in its favor.
After theoretical and empirical analysis, it can be stated that:
1. Judicial-tax doctrines are typical approaches and methods for solving certain (typical) legal disputes that formed in the process of accumulation and subsequent generalization of judicial practice.
2. Judicial-tax doctrine can be applied not only in the administrative court practice but international, constitutional, civil, criminal and other types of courts if it matters in a case (e.g. violation of rights, prejudice etc.). But the majority of tax disputes are connected with judicial-tax doctrines and under jurisdiction of the administrative courts (some exceptions – special courts considering tax disputes).
3. The judicial-tax doctrine exists, as a rule, only in the decisions of courts. It has some grounds in the legislation but at the same time to live it should be applied. It is so in the continental system (Civil law) and the Common law countries. Nevertheless, where the judicial precedent has its own power for application of law it is more significant to apply judicial-tax doctrine because it is proclaimed by the judgments (in the ratio decidendi).
4. There are a lot of judicial-tax doctrines and they help to fill gaps and allow the legislation to be flexible.
5. In Ukraine there are problems with the application of the judicial-tax doctrines because tax authorities don’t always apply rightly these doctrines. Moreover sometimes they abuse using them. The most important ones in Ukraine are the doctrine of the reality of economic operations, business purpose, substance over form, presumption of legality. Understanding of these doctrines is almost the same in the world, but their development are different, and sometimes this application and interpretation is broader or narrower.
6. Therefore, there are not a lot of problems at the theoretical level, but at empirical level there is the misunderstanding, because the state fiscal service mistakenly tries to use these doctrines in its favor when it is necessary and not to apply when it is not in favor of the state body.
7. From the analysis we can see that the administrative courts correct the situation but bad practice of the state fiscal service continues to exist.
8. It is very progressive that there are Letters of Higher administrative courts of Ukraine, because it the best way to establish judicial-tax doctrines but not all of them are mentioned which could be changed if new letter would be adopted with a list of the main applicable judicial-tax doctrines.
Case of Bulves AD v. Bulgaria, access via Internet: http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-90792 (referred on 29 December 2014)
Case of Shchokin v. Ukraine, access via Internet: http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-100944 (referred on 29 December 2014)
Gregory v. Helvering, 293 U.S. 465 (1935), access via Internet: https://supreme.justia.com/cases/federal/us/293/465/case.html (referred on 29 December 2014)
Helvering v. F. & R. Lazarus & Co. — 308 U.S. 252 (1939), access via Internet: https://supreme.justia.com/cases/federal/us/308/252/case.html (referred on 29 December 2014)
Intersplav v. Ukraine, access via Internet: http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-78872 (referred on 29 December 2014)
Steven J. Willis Top 40 Tax Doctrines, access via Internet http://www.nersp.osg.ufl.edu/~acadian/brianpage/course/Top40Doctrines/TOP40.pdf (no direct access — only via google, referred on 29 December 2014)
U.S. Code: Title 26 — Internal Revenue Code, access via Internet: http://www.law.cornell.edu/uscode/text/26 (referred on 29 December 2014)
Блажівська Н.Є. Генезис податково-правових доктрин в судовій практиці США, access via Internet: http://www.dk.ua/download/2286e17b1a3b03001e8b4f17c30c50612d4/ (referred on 29 December 2014)
Оніщик, Ю. В., (2011) Розмежування законних і незаконних діянь у податковій сфері: досвід Італії, Науковий вісник Національного університету ДПС України (економіка, право), 2(53) — pp. 155-159
Податковий кодекс України, access via Internet: http://zakon2.rada.gov.ua/laws/show/2755-17 (referred on 29 December 2014)
Постанова ВАСУ від 26.01.2012 р. у справі №К-12059/09, access via Internet: http://reyestr.court.gov.ua/Review/21533455 (referred on 29 December 2014)
Постанова Вищого адміністративного суду України №К/9991/50772/12 від 14 листопада 2012 р, access via Internet: http://reyestr.court.gov.ua/Review/27477204 (referred on 29 December 2014)
Постанова Львівського окружного адміністративного суду №813/5765/13-а від 26 листопада 2013, access via Internet: http://reyestr.court.gov.ua/Review/35663651 (referred on 29 December 2014)
Постанова Сумського окружного адміністративного суду № 2a-1870/533/12, access via Internet: http://reyestr.court.gov.ua/Review/21690710 (referred on 29 December 2014)
Проект Закону про внесення змін до Податкового кодексу України та деяких законів України (щодо податкової реформи), access via Internet: http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=53072 (referred on 29 December 2014)
Ухвала Вищого адміністративного суду України №К/9991/79764/11 від 12 лютого 2013, access via Internet: http://reyestr.court.gov.ua/Review/29681518 (referred on 29 December 2014)
Щодо однакового застосування адміністративними судами окремих приписів Податкового кодексу України та Кодексу адміністративного судочинства України : Лист ВАСУ від від 02.06.2011 №742/11/13-11, access via Internet: http://zakon4.rada.gov.ua/laws/show/v0742760-11 (referred on 29 December 2014)
Щодо підтвердження даних податкового обліку : Лист ВАСУ від 01.11.2011 № 1936/11/13-11, access via Internet: http://zakon4.rada.gov.ua/laws/show/v1936760-11 (referred on 29 December 2014)