Case Study: Tax Disputes
Axel Legal overturned the State Tax Service’s decision to reduce the negative VAT balance—even in cases where the audit had formally “identified” discrepancies
The Axel Legal team successfully defended the interests of a Ukrainian business—a supplier of medical and laboratory equipment—in a dispute with the Main Directorate of the State Tax Service in Kyiv. Two courts ruled that the tax assessment notice, which reduced the company’s VAT credit, was unlawful.
The Essence of the Dispute
The tax authority conducted an unscheduled on-site audit of the company’s records regarding the reporting of a negative VAT balance for a specific reporting period.
The basis for this decision was the results of the inventory count: the regulatory authority found discrepancies between the actual quantity of certain inventory items and the accounting records. On this basis, the State Tax Service concluded that the VAT credit had been overstated and issued a tax assessment notice. The company disagreed with this and filed a lawsuit.
Key Defense Strategy: Challenge Not Only the Merits but Also the Procedure
In most tax disputes, businesses focus on one thing: proving that no violation occurred—that the goods exist, the accounting is accurate, and the transactions are genuine. This is the right approach, but it is not enough.
The Axel Legal team has added a second, independent line of defense—challenging the legality of the audit itself. A documentary unscheduled audit is possible only if there is a clear basis under the Tax Code of Ukraine and exclusively within the scope specified therein. The tax authority does not have the right to use general supervisory powers as a blanket justification for any audit.
The Defense's Position: Two Independent Grounds for Reversal
1. Error in the basis for the audit. Budgetary VAT refunds and negative VAT balances are different items on the tax return with different legal significance. The tax authority cannot substitute the subject of the audit or arbitrarily expand its scope.
2. The conclusions are unfounded on their merits. The State Tax Service effectively equated the results of an inventory conducted after the end of the reporting period with a violation occurring specifically during the period under audit. The physical absence of a portion of the goods at a single storage location as of the inventory date does not in itself prove that the goods were removed from business operations or that the negative balance was overstated—especially since the company provided documents confirming that the remaining inventory was held in secure storage by a counterparty. This evidence should have been examined on its merits rather than ignored.
Result
The trial court granted the claim in full and overturned the tax assessment notice as unlawful. The appellate court upheld this decision and dismissed the tax authority’s appeal.
Why This Is Important for Business
The main practical takeaway from this case: in a dispute with the State Tax Service, it is not enough to defend yourself solely on the merits of the claims. The illegality of the audit itself is an independent—and often underestimated—ground for overturning a decision. Before delving into the evidence on the merits, it is worth checking:
● Did the tax authority have a legal basis for conducting the audit?
● Whether the scope and limits of the audit have been correctly defined;
● Did the regulatory agency exceed its authority?;
● Do the findings pertain specifically to the reporting period that was audited?
● Whether the taxpayer's documents and explanations were properly taken into account.
A comprehensive analysis of the entire procedure—from the order to conduct the inspection to the content of the report and the decision itself—often paves the way for a reversal in cases where a defense “on the merits” would be significantly more difficult.
Axel Legal provides legal support to businesses in tax disputes—from analyzing the legality of tax audits to full legal representation in all courts.
Author of the article: Vitaliy Bodiuk