Crux (#01-02 January-February 2015)

Tax Reform: Deregulation or Turmoil

According to recently adopted changes to tax legislation, the number of taxes was reduced from 22 to 9, including 2 local duties. How does this affect tax administration?

Pavlo Khodakovsky,

partner, head of tax practice, Arzinger

Generally any step aimed at easing the tax burden and simplification of tax system should be welcomed. The commented initiative is of this range. At the same time, canceled and/or merged taxes either have relevance to a limited scope of businesses or their ratio in total tax payments is very low. In this situation the government followed the path of least resistance and applied a technical rather than substantive approach. 

Besides, a mere decrease in the number of taxes alone usually has a very limited effect on improving tax administration. More important are simplification of reporting procedures, introducing “de-shadowing” stimuli, orderly arrangement of the inspection procedures and generally taking measures to increase the level of transparency and cooperation between tax authorities and taxpayers.

From that perspective major improvements in tax administration are still ahead of us.

What is the impact of VAT reform on business? How would you comment on the coverage of VAT exemption treatment?

Sergiy Kirich,

counsel, FCLEX Law Firm

 

One of the main changes is the introduction of electronic VAT administration system. The system of electronic administration is being introduced gradually (from 1 January 2015 to 1 July 2015 — in test mode, and as from 1 July 2015 — on a regular basis). During the test mode taxpayers will not be subjected to penalties for failure to comply with the terms of registration of tax bills.

The system provides automatic accounting of the amounts paid by taxpayers, replenishment and balance of the funds on the accounts in the system of electronic administration, and so on.

This initiative will reduce the potential for abuse by taxpayers, complicate the way of obtaining illicit budgetary refund, and, accordingly, will provide filling of the budget. In this case the very system of electronic administration does not introduce significant changes to the general principles of VAT.

Changes in the Tax Code of Ukraine have abolished paper forms of tax bills and introduced VAT tax reporting in electronic form. The maximum amount of supply required for the registration of VAT payers has been increased from UAH 300,000 to UAH 1 million.

It is worth noting that on 1 January 2015 the budgetary refund will also extend to the negative VAT formed by the end of the fiscal month and, as a consequence, the VAT refund period is reduced compared with the rules that were in force prior to introduction of the changes. Also, changes have been made to the criteria for an automatic budgetary refund.

VAT exemption treatment for operations of supply of grain and industrial crops, supply of waste and scrap of ferrous and non-ferrous metals, have been prolonged.

Thus, the introduction of changes as to VAT administration will positively affect business in Ukraine.

On 25 December 2014 Parliament adopted the Act of Ukraine On Amendments to the Tax Code of Ukraine regarding Distinctions of Adjusting Tax Liabilities of Corporate Income Tax and Value Added Tax in Case of Tax Settlement, No.63-VIII. How can you evaluate the efficiency of this tax novelty?

Volodymyr Bevza,

deputy head of litigation department, senior associate, ILC EUCON

This Act came into effect on 17 January 2015. It provided for amendments to a number of the Codes of Ukraine regarding reaching a compromise — releasing tax- payers from financial, administrative and criminal liability for evasion of monetary obligations. The tax compromise will apply exclusively though a procedure of adjusted calculation of tax liabilities only under two taxes: income tax and value added tax, including the transactions, whose figures are being adjusted (the form of adjustment should be approved by the Ministry of Finance of Ukraine). Positive novelties of the Act on compromise include payment of 5% of the reduced tax liabilities without imposition of fines, penalties, and without qualification of such actions as criminal tax evasion. At the same time, those taxpayers taking advantage of such exemption from legal liability will face other risks as it is de facto recognition of illegal acts that may further be classified as other criminal offenses and recognition of a business model as one that leads to tax evasion. Taxpayers will not be able to apply the act concerning clarification of such indicators of reporting as the reduction of a negative taxable income, and the reduction of a negative VAT balance. The tax compromise will be used only to reduce monetary liabilities, and other indicators of the tax return will not be adjusted.

 

Recent tax reform has changed the number of single taxpayers groups to 4. What kind of companies may become single taxpayers in the new future?

Maria Zagryadskaya,

associate, ILF Integrites

The Act of Ukraine On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Tax Reform of 28 December 2014, No.71-VIII introduced changes regarding the reduced number of single taxpayer groups that came into force on 1 January 2015.

The single taxpayers who belong to groups three-six, who were registered in the control bodies before 1 January 2015, are considered to be single taxpayers belonging to group three from 1 January and there is no need to re-register. And the fixed agricultural tax was changed into the single tax of the fourth group.

A legal entity or sole proprietor can choose the simplified system of taxation, if they comply with the requirements of the following groups:

  1. UAH 300,000;
  2. UAH 1.5 million.
  3. UAH 20 million.
  4. agricultural producers with the share of agricultural commodities for the previous tax (reporting) year that equals or exceeds 75%.

It should be noted while choosing the simplified system of taxation that the Tax Code stipulates certain restrictions to persons intending to become single tax payers. For example, legal entities cannot be single taxpayers if their participants/shareholders holding 25% or more in the share capital are not payers of the single tax.

What changes does new legislation provide for the payers of the fixed agricultural tax?

Anna Saliy,

senior associate, AstapovLawyers

The fixed agricultural tax was abolished with effect from 1 January 2015. However, another change of the single tax regime has resulted in the creation of a special fourth agricultural group of single taxpayers.

The main principles of administration applicable to the single tax for agricultural suppliers are equivalent to those applied earlier to the fixed agricultural tax. The said group of single taxpayers includes agricultural producers with a more than 75% share of agricultural production in a previous year. Subject to taxation is an area of agricultural land. Tax calculation is based on an estimated standard monetary value of one hectare of agricultural land.

To benefit from the single tax regime, agricultural producers should provide the authorities with the same set of documents that they used to provide annually to confirm their special status of a fixed agricultural taxpayer (namely, a general tax return for total taxable land plots, a separate tax return for each land plot, a calculation of a share of agricultural production in a previous year, plus relevant land plot details).

Tax rates vary for different types of land plots. But these rates of the single tax are higher than those of the fixed agricultural tax (for instance, rates for arable and underwater land have been increased from 0.15 to 0.45 and from 0.45 to 1.35, respectively). Overall, agricultural producers should be prepared for an increase in their tax liabilities due to such higher rates.

Could you name positive and negative scenarios of the single social contribution reform?

Alexander Shemiatkin,

partner, WTS Tax Legal Consulting

Tetiana Suchyk,

counsel, WTS Tax Legal Consulting

 

From 1 January 2015 reform of the tax and single social contribution (the contribution) has begun in Ukraine. The purpose of the reform appeared to be very trivial — to receive financing from the IMF. In fact, the introduced changes neither solve the problem of complexity of the tax accounting nor make the investment climate in Ukraine more attractive nor help to bring 60% of business out of the shadow sector, which was the government’s objective. The announced reduction in the contribution from 2016 (by applying to the contribution rate the reductive coefficient of 0.6) is conceived with a grain of salt. As a rule, the Ukrainian government is not fulfilling its promises to reduce the tax burden. For example, beneficial 10-year treatment, which was promised to investors, was cancelled within just a few years. It mattered not that investors planned their activity due to such preferences and put millions in so as to start and develop business in Ukraine.

The attempt to reduce the contribution burden starting from this year (by applying to the contribution rate the reductive coefficient of 0.4) was the initiative of few parliamentarians, rather than a systemic approach by the government. In fact, this attempt was completely neglected as the legislator set specific conditions, which must be met by a contribution payer, in order to apply the coefficient of 0.4. The calculations show that it is practically impossible for honest payers, which pay official wages, to meet the required conditions. As to “dishonest” payers, it is very doubtful that they will bring out of the shadow sector their business in view of the lack of confidence in the promises made by the government. Moreover, we must add that the tax burden on individuals has been increased. In particular, the rate of personal income tax has been raised to 20% and the payment of the war fee (1.5% of a person’s income) has been extended for an indefinite period.

This month showed that the set conditions, which enable the reductive coefficient to be applied, do not work. It is most likely that they will be reviewed in the near future. As we know, the following conditions are planned: 20% contribution base rise per person compared to 2014; the taxpayer cannot expand staff by more than 200% (as for now, hiring new employees is the only way for an honest business to increase the contribution base and meet the conditions).

What recent tax changes could entail further tax disputes?

Tetyana Matsyuk,

associate, Vasil Kisil & Partners

At the end of 2014, the Ukrainian Parliament adopted several new Acts which introduced considerable changes to the Tax Code of Ukraine that came into force on 1 January 2015. Since many amendments are ambiguous and possess several uncertainties, there is a risk that they may be interpreted by tax authorities in a quite fiscal way. That will definitely lead to quite a few tax disputes arising.

First of all, the new Acts eliminated most of the restrictions on the deductibility of costs for corporate income taxpayers, such as costs related to advertising, education, business trips, etc. With regard to court practice, it is quite likely that the tax authorities will still claim that it in order for the costs to be deducted, they should pursue business purpose.

Another source of disputes is hidden in the Transitional provisions (Subsection 9-2) with regard to the “tax compromise”. The exemption from criminal liability is only limited to Article 212 (tax evasion) of the Criminal Code of Ukraine (CCU), while nothing secures business from the commencement of criminal proceedings on the ground of Artic- les 190, 191, 205, 364, 367 of the CCU.

Finally, regulation of a new and controversial electronic VAT administration system contains several rules that are in conflict with laws. Taken together with expiration on 1 July 2015, the tax authorities may cause quite a few headaches for business in this regard.

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