Tax Trends 2021
Tax Trends 2021
Author – Vladyslav Sokolovskyi, Managing Partner of Sokolovskyi and Partners Law Firm
Changes in Operations of Tax Authorities and Impact Upon Business and Tax Payment
Fiscal trends cannot be separated from the processes that are rushing all of us through the epoch of COVID-19 and lockdowns.
The coronavirus has undeniably driven lots of tax tendencies of the last years. End of the offshore era and stricter control over transfer pricing are only a part of the global changes to fight the tax “shadows”.
Introduction of the interstate financial information exchange will deprive of an opportunity to find a quiet harbour hidden from the customs authorities.
In the Ukrainian environment, these international processes are intensified by an increase in the budget shortfall. The government will keep tightening the screws, often twice clockwise and then once counter-clockwise.
BEPS, КІК, Permanent Representative Offices
The multi-national companies have long been using gaps and inconsistencies in the tax rules. The global trends of struggle against base erosion and profit shifting (BEPS) have developed in Ukraine as well.
In 2013, the Council of the Organisation for Economic Co-operation and Development (OECD) developed the BEPS draft that provides for counteraction to abuse of special taxation schemes and conventions for the avoidance of double taxation.
The programme has already been joined by more than 100 countries from all over the world; Ukraine has been a member since 1 January 2017. The amendments were wade to the Ukrainian laws in 2020 in order to take eight steps out of fifteen actions in the BEPS plan.
New Reporting for Individual Entrepreneurs
They were associated with the following: disclosure by the individuals being residents of Ukraine of their interest in their controlled foreign corporations (CFC) and rules for tax assessment for the CFC; limitation of expenses for financial transactions with related parties; prevention of abuse in connection with use of treaties on the avoidance of double taxation; prevention of artificial acknowledgement of the status of a permanent representative office; enhanced control over transfer pricing; reporting rules in terms of countries for international company groups.
Implementation of international tax rules into the “body” of the Ukrainian fiscal system in 2021 will be a new driver increasing the tax authorities’ interest in the CFC structures, permanent representative offices, and control over transfer pricing.
However, there will be certain relaxation of the rules for CFC this year: reporting of income gained in 2022 has been adjourned until 2023.
The residents providing certain intermediary services to non-residents now have a higher risk of being assigned the status of a permanent representative office. It may result in additional tax burden and fines.
The content of transfer pricing has been extended since 2021: the new concepts “international company group”, “parent company of the international company group” and “authorised member” have been introduced.
There is an obligation to inform the regulatory authority of membership with the international company group and to submit a report in terms of the countries of the international company group.
The list of the transfer pricing documents has been expanded, and the tax authorities now may demand global documents on transfer pricing (master file).
The condition of the good economic reason for (business purpose of) the controlled transaction has been introduced: the tax payer will have to prove it not only during the inspection, but also while preparing documents on transfer pricing.
Interstate Fiscal Information Exchange
An important element of financial relationships between Ukraine and other countries is exchange of fiscal information based on the Convention on Mutual Administrative Assistance in Tax Matters and corresponding Conventions (Treaties) on the Avoidance of Double Taxation.
The countries exchange information by each other’s request, automatically or spontaneously.
For instance, starting from 2021, the Tax Code of Ukraine provides for automated exchange of tax and financial information with other countries in terms of the report of the international company group submitted within the transfer pricing framework.
The new US Anti-Money Laundering Act also prescribes a number of actions to obtain information from the respondent banks and tax authorities of other countries.
Also, Ukraine is planning to accede to the OECD common reporting standard (CRS) for automated tax information exchange with other jurisdictions in the short run. In a year or two, the Ukrainian fiscal authorities and their foreign colleagues will have all the information on economic transactions conducted in any jurisdiction or income gained, both by legal entities and individuals.
Zero Tax Return. Universal Submission of Tax Returns
The government is also considering capital amnesty and submission of zero tax returns by individuals.
It has been discussed in Ukraine for at least four years. Many statements were made at the end of 2020 regarding adoption of the law in spring this year.
It is still not clear whether the Verkhovna Rada will consider one of the registered draft laws soon, or a new one will be submitted.
The registered draft laws provide for different approaches to submission of tax returns and procedures for and consequences thereof. It is highly probable that the draft law developed by Danylo Hetmantsev, the chairman of the specialised committee of the Verkhovna Rada, will be put to vote.
This draft law provides for payment of 5-10% tax of the income that has not been declared before.
Capital amnesty is a forerunner of the law on universal submission of tax returns on their income by all the “active” citizens of Ukraine. The question is when it will be adopted rather than whether it will be adopted or not.
Tax Inspections. Financial Liability
COVID-19 has also adjusted tax control. There is a moratorium on scheduled and most unscheduled and actual tax inspections for the period of the quarantine restrictions imposed by the Cabinet of Ministers.
The State Tax Service has published the scheduled inspection plan that already covers March 2021.
However, tax payers should not cheer that the tax authorities have lost their chance to inspect 2017 owing to the quarantine moratorium. The point is that the time limitation (1095 days) of inspection has been suspended for its period.
The fiscal authorities have not ceased unscheduled inspections of the companies that specified the tax credit of UAH 100 thousand or more in the VAT return since the ban does not apply to them.
Financial penalties for offences have been accrued in another manner starting from 1 January. In some cases, in order to calculate the fine, the State Tax Service has to consider the tax payer’s guilt of the tax offence.
For instance, if the tax authority additionally assesses the monetary liability following the inspection, but does establish the intention to commit the offence, the fine will be 10% of the calculated amount. The intention increases the fine up to 25%. On the other hand, the offence committed without limitation through the fault of the regulatory authority or under the influence of force majeure circumstances releases the tax payer from any financial liability.
The situation associated with performance of the “under-liquidated” tax police is unsatisfactory. Its officers keep making life a nightmare for businesses by means of instituted criminal proceedings.
Also, they make searches, seize property and documents, interrogate businessmen, and freeze company accounts.
From January to December 2020, the tax police had 910 criminal proceedings based on Article 212 of the Criminal Code of Ukraine.
Ten charging documents were filed to court, 28 motions to release from criminal liability were submitted, and 124 proceedings were terminated.
The conclusion based on the statistics is sad: the tax police keep instituting most criminal proceedings without sufficient legal grounds!
Tax Police vs BES
Attorneys and businessmen have a rhetoric question: will the Bureau of Economic Security (BES) be able to improve the situation dramatically?
This authority is supposed to replace the tax police. On 28 January, the Verkhovna Rada adopted draft Law No. 3087-д “On the Bureau of Economic Security of Ukraine” in the second reading and in general.
The staff of the Bureau shall not exceed four thousand. Former tax police officers will be able to “be transferred” to the Bureau if they pass the competition and psychological tests.
Contrary to the expectations, the BES will be not only an “analytical”, but also a “law enforcement” authority and will be entitled to use physical force, riot control weapons and fire arms.
In fact, the Bureau will discharge the same operational, search and investigative functions as the tax police. The latter must be finally liquidated within six months after the BES law enters into force.
The competence of the Bureau has not been finally determined yet. The amendments to the Criminal Procedural Code that will prescribe the crimes within its competence have been adopted by the Parliament in the first reading only.
This draft law also supplements the Criminal Code with new Article 222-2 “VAT Fraud” and enhances liability for tax evasion. Therefore, many reasonably fear that good old tax police will be reincarnated behind the new beautiful façade.
Ukraine bound by the inter-state treaties, requirements of international financial institutions and budget challenges cannot cease its struggle against tax evasion.
In this contest, the government will keep reducing opportunities for tax manoeuvres, both for businesses common ordinary citizens.
This global tendency must be perceived calmly, with knowledge and best practices adopted to the new fiscal conditions.
We must remember that the tax world is changing at the incredible pace, and the existing business experience does not work in the full scope any more!