Violations of Excise Tax Legislation: An Overview and Recent Trends in Judicial Practice

Judicial practice has long been sending a clear message to tax authorities: an on-site (factual) audit is not a universal control tool and not a way to simply “drop in and see what’s going on.” It is an exceptional measure, permissible only where there is a clear, specific, and duly substantiated legal ground.

In the area of excise taxation, this is felt particularly acutely. Businesses dealing with alcohol, tobacco products, or fuel regularly face sudden on-site inspections—at warehouses, retail outlets, points of sale, or locations involving cash transactions.

Here it is crucial to fix one key point: the mere fact of operating with excisable goods does not give the tax authority a “fast-track pass” to conduct a factual audit. This is not a universal ground for control, even if such an approach is more convenient for inspectors.

In its rulings in cases No. 1440/2045/18 of 11 June 2019, No. 820/4895/18 of 18 December 2018, and No. 640/21536/19 of 8 September 2020, the Supreme Court formulated a legal position that has, in practice, become a kind of shield for businesses.

The Supreme Court expressly stated that a factual audit may be initiated only where there is specific factual information indicating a possible violation of tax legislation , and where such information existed at the time the decision to conduct the audit was made. This is precisely the requirement that “breaks” most template-based audits.

The Court emphasized that generic wording such as “available tax information,” or a formal reference to a provision of the Tax Code without describing the actual factual circumstances, does not constitute a lawful ground for an audit. The tax authority must clearly explain what specific information triggered the audit, what the alleged violation consists of, and why this particular taxpayer was selected for control. If there is no answer to even one of these questions, the audit order may be annulled by a court.

In the absence of such specificity, courts recognize the order to conduct a factual audit as unlawful, and the audit itself as one that produces no legal consequences. This is not a theoretical construct.

Even if an audit results in an inspection report, a tax notice-decision , or significant additional assessments and penalties, all of these are subject to cancellation as derivatives of an unlawful audit. This approach has been confirmed by the Supreme Court in cases No. 1570/7146/12, No. 808/1746/15, No. 821/1274/18, and No. 520/8836/18: evidence obtained in violation of procedural requirements cannot be used against a taxpayer.

Put simply, if an audit is unlawful from the outset, all of its results legally “do not exist.”

In tax disputes involving alleged violations in the field of excise taxation, courts closely examine what specific factual data the controlling authority possessed at the time the audit order was issued, whether such data are reflected directly in the order itself rather than in abstract “internal materials,” and whether the actions of the inspectors correspond to the formally stated grounds for the audit.

If the tax authority is unable to logically and documentarily substantiate why a particular taxpayer was selected for a factual audit and on the basis of which specific data, the chances of having both the audit order and the audit results upheld as lawful become minimal.

For businesses, this judicial approach is of fundamental importance, as it allows the very logic of a dispute with the tax authority to be reframed. The issue is no longer limited to whether a violation occurred, but rather whether the state authority had the legal right to initiate the audit at all. Even in the area of excise taxation, where control has traditionally been strict, tax authorities are not permitted to act mechanically or on the basis of generalized suspicions.

Where an order for a factual audit is issued without proper specificity, the taxpayer gains an effective defensive tool: by proving the unlawfulness of the audit, the taxpayer nullifies all of its consequences—from the audit report to additional tax assessments .

This is precisely why timely analysis of the grounds for an audit and the procedural actions of the tax authority is often no less important for a business than refuting the substantive findings of the audit itself. If an audit is unlawful from the outset, its conclusions cease to be decisive.

One of the core principles of judicial practice in tax disputes can be expressed in a simple—but uncomfortable for tax authorities—formula: if an audit is conducted with procedural violations, all of its results are legally void.

Not “partially questionable,” not “requiring clarification,” but unlawful and unfit for use against the taxpayer. This approach was articulated as early as in the decisions of the Supreme Court of Ukraine of 16 February 2016 in case No. 826/12651/14 and of 4 February 2019 in case No. 807/242/14, and has since been consistently reaffirmed.

Courts proceed from the understanding that compliance with procedure is not a mere formality, but a key guarantee of taxpayers’ rights. If an audit order does not meet statutory requirements—if there is no proper legal ground, the audit period is not defined, the information serving as the basis for the audit is not specified, or the audit is conducted by an official acting outside the scope of their authority—this automatically deprives the entire subsequent process of legitimacy.

In other words, an unlawful “start” of an audit renders everything that follows unlawful as well.

In this context, courts expressly state that an audit report prepared as a result of an unlawful procedure does not constitute proper and admissible evidence. If such a report is based on an unlawful audit order or was drawn up in violation of the prescribed procedure, it cannot be used as evidence in a tax dispute, regardless of the substance of the “violations” recorded therein.

Accordingly, tax notice-decisions issued on the basis of such a report are unlawful and subject to cancellation, since inadmissible evidence produces no legal consequences.

It is critically important that courts also reject attempts by tax authorities to “justify the result” by overlooking procedural violations. Tax authorities are not entitled to benefit from their own mistakes or to rely on evidence obtained in breach of the law. Such an approach directly contradicts the principles of the rule of law and equality of arms in public-law disputes.

Subsequent case law in cases No. 0440/5997/18, No. 826/17123/18, and No. 804/8855/14 has only reinforced this position.

Courts emphasize that material procedural violations which affect the taxpayer’s rights or undermine the possibility of forming a proper evidentiary basis deprive an audit of any legal effect. Materials obtained as a result of such an audit cannot be used as admissible evidence, either in administrative proceedings or in court.

For businesses, this approach is particularly important, as it confirms that a tax dispute is not merely about figures and additional assessments. It is, first and foremost, about compliance with procedure.

And where the state itself violates the rules it has established, courts are increasingly willing to side with the taxpayer—even in complex and fiscally sensitive cases.

One of the most common arguments advanced by tax authorities in disputes with businesses remains the claim: “you allowed the inspectors in—therefore, you agreed to the audit.” Judicial practice has put a definitive end to this line of reasoning.

In legal positions formed by the Supreme Court as early as 2015–2016 (cases No. 21-425а14 and No. 816/3238/15), a fundamental rule was established: the mere fact of admitting officials to an audit does not deprive a taxpayer of the right to challenge its lawfulness.

Courts proceed from the understanding that allowing inspectors access is merely a technical action and cannot be interpreted as the taxpayer’s consent to the grounds, purpose, or procedure of the audit. It does not confirm the legality of the tax authority’s actions and does not “legalize” an audit that was unlawful from the outset.

Accordingly, admission does not deprive the taxpayer of the right to challenge the audit order, the actions of the inspectors, or the results of the audit itself.

The Supreme Court places particular emphasis on the practical reality: in most cases, admission is compelled rather than voluntary.

Businesses often allow inspectors access not because they agree with the audit, but in order to avoid conflict, pressure, disruption of business operations, or the risk of a forceful scenario. Treating such admission as a voluntary waiver of the right to defense is legally incorrect and dangerous from the perspective of taxpayer guarantees.

For this reason, courts assess the lawfulness of an audit independently of the taxpayer’s behavior. They examine whether there was a proper legal basis for the audit, whether the order complied with statutory requirements, and whether the prescribed procedure was followed. Whether or not the taxpayer admitted the inspectors is not decisive and does not affect the assessment of the tax authority’s actions.

The consequences of this approach for businesses are significant. A taxpayer retains the full scope of procedural rights even after an audit has been conducted. This includes the right to seek annulment of the audit order, recognition of the tax authority’s actions as unlawful, exclusion of the audit report as inadmissible evidence, and cancellation of tax notice-decisions issued on its basis.

This legal position remains fully relevant today. The Supreme Court consistently confirms that admission to an audit is not a capitulation, but merely a reaction to the physical presence of a controlling authority.

The right to challenge violations and to protect one’s interests is preserved regardless of how the audit began. For businesses, this means one thing: even if an audit has already taken place, the legal battle is only beginning.

The issue of the moratorium on penalties during martial law has become one of the most controversial aspects of tax audits in recent years.

Formally, the provision limiting liability has existed for a long time; however, it was judicial practice in 2022–2024 that gave it a clear and practical interpretation—particularly in disputes related to the use of cash registers (RRO) and the circulation of goods.

A key provision is paragraph 12 of the Final and Transitional Provisions of the Law of Ukraine “On the Use of Cash Registers (RRO),” which establishes a moratorium on the application of penalties during the period of martial law. Courts consistently proceed from the view that this rule is special in nature and aimed at supporting businesses during wartime and, therefore, must be interpreted in favor of the taxpayer rather than the controlling authority.

In practice, courts have clearly delineated the limits of the tax authority’s powers. During martial law, the imposition of penalties for violations related to the sale of non-excisable goods is not permitted. This includes, in particular, sanctions for excess cash on hand, absence or improper use of RRO, and errors in settlement operations—provided that such violations are not related to the circulation of excisable products. Any attempts by tax authorities to ignore this distinction are deemed unlawful by courts, and audit reports are recognized as producing no legal consequences.

At the same time, courts emphasize a fundamentally important point: the tax authority cannot simply “assume” that goods are excisable. The burden of proof rests with the controlling authority. It is the tax authority that must demonstrate that the violation concerns the sale of excisable goods rather than the taxpayer’s general business activity. In the absence of such proof, the imposition of penalties contradicts the moratorium.

Against this background, tax authorities often refer to paragraph 18 of subparagraph 69.2 of paragraph 69 of subsection 10 of Section XX of the Tax Code of Ukraine (as amended by Law No. 2260-IX), arguing that as of 27 May 2022 the so-called “COVID-19 quarantine” moratorium on penalties was abolished. This is indeed correct: the general tax moratorium introduced in connection with COVID-19 no longer applies. Taxpayers remain liable, inter alia, for failure to file returns, non-payment of agreed tax liabilities, or understatement of taxes under Articles 120, 123, and 124 of the Tax Code of Ukraine.

However, courts clearly distinguish between these two regimes. The abolition of the “quarantine” moratorium does not automatically cancel the special moratorium provided for by the Law on RRO, which applies specifically during martial law and operates selectively—depending on the nature of the violation and the type of goods involved. These are different legal mechanisms with different purposes and scopes of application, and conflating them is a common mistake made by tax authorities.

As a result, judicial practice in 2022–2024 has formed a fairly clear approach: during martial law, penalties for violations unrelated to excisable goods are not applied; the tax authority bears the burden of proving that a violation concerns excisable products; and decisions adopted in violation of this moratorium are subject to cancellation.

For businesses, this means one crucial thing: even in a period of intensified fiscal control, the state is not relieved of its obligation to comply with the restrictions it has itself imposed for the duration of the war.

In cases such as Rysovskyy v. Ukraine, Beyeler v. Italy, Öneryıldız v. Turkey, Megadat.com v. Moldova, Moskal v. Poland, Lelas v. Croatia, and Toscuta v. Romania, the European Court of Human Rights has developed what is now commonly referred to as the doctrine of good governance. Although these judgments are not “tax cases” in the narrow sense, their legal reasoning is actively applied by national courts when adjudicating tax disputes, including those arising under excise tax legislation.

The ECHR consistently emphasizes several core principles that are directly relevant to the relationship between businesses and tax authorities. First, the state is required to act in a timely, transparent, and consistent manner. Second, public authorities may not derive any benefit from their own mistakes, negligence, or procedural violations. Third, procedural failures on the part of state bodies must not result in negative consequences for taxpayers.

These approaches have become an integral part of national judicial practice: where a tax authority has violated audit procedures or improperly formalized the results of an audit, it is the state that must bear the legal consequences of such actions.

In excise tax disputes, the principle of good governance is of particular importance. It serves as a safeguard for businesses, preventing the use of evidence obtained in violation of the law and protecting taxpayers from unlawful decisions of tax authorities.

Courts essentially emphasize that the state cannot demand unconditional compliance from businesses if it fails to comply with its own procedural obligations.

Judicial practice in disputes concerning violations of excise tax legislation over recent years has established fairly clear and predictable rules of the game. The Supreme Court consistently emphasizes that a factual (on-site) audit is an exceptional instrument of tax control and is permissible only where there is a specific and properly documented legal basis. Formal or abstract references by tax authorities cannot serve as lawful grounds for interference in business activities.

Courts are equally unequivocal regarding procedural violations. Where tax authorities depart from the established procedure when appointing or conducting an audit, its results lose their legal force: audit reports are not recognized as admissible evidence, and tax notice-decisions are subject to cancellation.

An additional layer of protection is provided by the doctrine of good governance developed in the case law of the European Court of Human Rights. Courts proceed on the basis that any doubts concerning evidence or procedure must be interpreted in favor of the taxpayer. The same approach applies during martial law: penalties for transactions involving non-excisable goods may not be imposed in violation of the statutory moratorium.

Overall, judicial practice has formed an effective mechanism for protecting businesses from unjustified audits and unlawful decisions of tax authorities, ensuring lawful, predictable, and transparent tax control.