In accordance with the established trade practices and legal requirements official importers of automobiles bear warranty repair expenses for the automobiles sold. The costs for warranty repairs and replacement of parts had always been treated as charges for tax purposes under appropriate laws.

With the adoption of the Tax Code of Ukraine the State Tax Administration of Ukraine (STAU) published its interpretation of the rule of para 140.1.4. Article 140 of the Tax Code on its website, according to which “charges for warranty repair (maintenance) or warranty replacement of products sold by a taxpayer to legal entities cannot be taken into account in determining the object of taxation, because this category of buyers is not subject to the rules of consumer protection legislation.” This “interpretation” by the STAU was not deemed an official generalizing consultation. However, it would entail the removal of the said category of costs from charges by tax inspectors during audits of taxpayers.

Given the ambiguous interpretation and application of the relevant provisions of the Tax Code by tax authorities, the car importer applied to the State Tax Service in Kyiv for official tax advice on the matter in question. In response, the STIS in Kyiv provided tax advice as of 17.06.2011 setting out an opinion similar to that of STAU, according to which only the costs of warranty repairs carried out for individual customers but not for purchasers that are legal entities can be referred to charges. In the opinion of the car importer, this attitude is unfounded and contrary to the law thus causing significant losses for the business, which is why the company decided to appeal against the tax advice to the District Administrative Court of Kyiv.

On January 26, 2012 the District Administrative Court of Kyiv passed a ruling in the case on the action of the car importer against STIS in Kyiv regarding the cancelation of tax advice, by which it declared illegal and abolished the given tax advice in the part of charges, namely that “charges for warranty repair (maintenance) or warranty replacement of products sold by a taxpayer to legal entities cannot be taken into account in determining the object of taxation, because this category of buyers is not subject to the rules of consumer protection legislation.” The court’s decision is justified by the fact that the tax authority interprets the rule of the law too narrowly thus violating the rights of a taxpayer and that consumer protection legislation does not regulate taxation issues.

This is a key court decision to all car manufacturers and importers that have warranty obligations towards purchasers of automobiles, as it may become a precedent and help in getting similar court decisions in situations where the STAU through local tax authorities will promote its position on the impossibility of attributing material costs to the said category of charges.

The interests of the car importer in this trial were represented by Arzinger’s litigation team, including Senior Associate Natalia Martynyuk lead by Senior Partner Sergiy Shklyar, Head of the Dispute Resolution practice.

“We are quite happy with the outcome of the case and glad that the court examined the materials of the case fully and in depth and supported the plaintiff’s arguments. In the light of the recent court practice, which fully supports the attitude of fiscal bodies, regardless of taxpayers’ arguments, the court decision in such a complex case restores our faith in Ukrainian courts that are still able to make fair and unbiased decisions. This court decision is very important not only for our client but also for the whole automobile market of Ukraine, which has just begun to rise from its knees after a lengthy crisis. The abolished clarification of the tax body actually forced the importers to lay the warranty repair costs in the final consumer price. Under the existing fierce competition, the struggle for each client’s loyalty and the ever-changing market-play conditions could actually make the car sales market collapse.