Court confirmed legality of tax notifications-decisions for 52.15 million UAHChapter: News

Cassation administrative court as a part of the Supreme Court supported conclusions of courts of previous instance and position of the Eastern Interregional Directorate of the State Tax Service for work with large taxpayers in case No. 805/15952/13-a that during operations for provision of natural gas imported to the customs territory of Ukraine, the VAT base is determined based on their contractual (contract) value, but not lower than the customs value of products (Clause 3 of Paragraph 188.1 Article 188 of the Tax Code of Ukraine).

Clause 3 of Paragraph 188.1 Article 188 of the Tax Code of Ukraine stipulates that tax base of operations for provision of products imported by the payer to the customs territory of Ukraine is determined based on their contractual (contract) value, but not lower than the customs value of the products, from which the taxes and levies paid during their customs clearance were determined, taking into account the excise tax and import duty, with exception of the value added tax, which are included in the price of products/services according to the law.

Panel of judges of the Supreme Court noted that according to the Laws of Ukraine "On principles of functioning of the natural gas market", "On natural monopolies", "On prices and pricing", "On pipeline transport", "On oil and gas", Decree of the President of Ukraine No. 213 as of 14.03.1995 "On measures to ensure activities of the National commission for regulation of the electricity industry of Ukraine" (with amendments), Decree of the Cabinet of Ministers of Ukraine No. 167-p as of 28.05.2005 "On approval of a comprehensive plan of measures to ensure financial stabilization of enterprises of the fuel and energy complex" and in order to ensure transparency of procedure for making socially important decisions regarding level of tariffs, the National Electricity Regulatory Commission of Ukraine approved Procedure for forming tariffs for transportation, distribution, supply, pumping, storage and selection of natural gas, approved by Resolution of the National Electricity Regulatory Commission of Ukraine No. 1384 as of 07.28.2011 (hereinafter - Order No. 1384).

National commission for state regulation in the energy sector, in Regulations approved by Decree of the President of Ukraine No. 1059/2011 as of 23.11.2011, is defined as a body for state regulation of activities in the energy sector, main task of which is, in particular, state regulation of activities, in particular, business entities conducting activities on the natural gas markets; ensuring implementation of price and tariff policy in the energy sphere and the oil and gas complex.

According to the assigned tasks, the National commission, which carries out state regulation in the energy sphere, has authority to establish, in particular, limit prices for natural gas for consumers – institutions and organizations financed from the state and local budgets, industrial consumers and for other business entities.

At the same time, Paragraph 1.4 of Order No. 1384 defines that the tariff for provision of natural gas under the regulated tariff is established amount of payment by the customer for the cost of provision services by the gas supply company and Paragraph 2.10 of this Procedure defines that the tariff for provision of natural gas according to the regulated tariff is a fixed amount of payment by the customer of service in territory of licensed activity of relevant gas provision company and is used by this company in calculations with the customer of service. In turn, Paragraph 6 Article 1 of the Law of Ukraine "On principles of functioning of the natural gas market" defines gas provision company as a business entity that provides natural gas directly to consumers according to concluded contracts on the basis of license.

Therefore, the tariff for provision of natural gas at the regulated tariff per 1000 cubic meters determined by the National commission, which carries out state regulation in the energy sphere, is a fixed amount of payment in the territory of carrying out only licensed activity of relevant gas provision company, which is applied by such gas provision company – business entity supplying natural gas directly to consumers on the basis of license.

Courts of previous instances noted that the plaintiff does not have license for provision of natural gas during a period of gas provision to the counterparty, which is confirmed by a letter from the National commission, which carries out state regulation in the energy sphere and communal services.

The courts also established that the plaintiff did not provide evidence that the counterparty to whom the natural gas was sold is a direct consumer of the natural gas purchased from the plaintiff in relevant period under the contract for the purchase and sale of natural gas.

Supreme Court noted that decision of the Supreme Court as of 20.11.2018 in case No. 826/20929/14 concluded that presence of a license for the natural gas supplier is obligatory and absence of such license for the business entity excludes possibility of carrying out natural gas provision.

Panel of judges agrees with conclusions of the courts of previous instances that when carrying out provision of natural gas imported to the customs territory of Ukraine, the plaintiff should have determined basis of VAT taxation, guided by Clause 3 of Paragraph 188.1 Article 188 of the Tax Code of Ukraine, which is a special norm in determined taxation bases of provision of products imported by the payer to the customs territory of Ukraine.

Cassation administrative court summarizes that the plaintiff, determining the value added taxation basis based on the contractual sales value of natural gas, which is lower than the customs value, mistakenly believed that he provides products (gas) at the regulated prices (tariffs), since as already mentioned, regulation of gas prices (tariff) is carried out according to the established Procedure by authorized bodies, and extends to procedure of providing natural gas to consumers on the basis of license that the plaintiff does not have.

Therefore, by ruling of the Cassation administrative court as a part of the Supreme Court as of 18.05.2023 in case No. 805/15952/13-a, the taxpayer’s cassation appeal was dismissed, decisions of the courts of first instance and appellate instances, which refused to satisfy claims for recognition as illegal and annulment of tax notifications-decisions for the total amount of 52.15 million UAH – left unchanged.