Tax on Losses?
Positive trends are being observed in state fiscal policy, but due to the declarative nature of some initiatives and lack of comprehensive and coherent approaches to statutory reform of the taxation sphere, taxpayers have not yet felt a positive effect. The high tax burden, complex, non-transparent administration and corruption risks remain major constraints on business development and improvement of the investment climate in Ukraine
Speaking about the current fiscal environment, business representatives have concluded that despite all legislative efforts, the tax system in Ukraine regarding both the fiscal burden and tax administration remains one of the most perfect in the world. Only a comprehensive approach to solving existing problems can improve the situation.
Legal practitioners emphasize that Ukraine’s position in the field of taxation had not changed much over the last year. Oleksandr Minin, Senior Partner at BTC Consulting, points to the evaluation of the Ukrainian tax system back in late 2013. According to ratings carried out by the World Bank, Ukraine was in 164th place for total tax burdens, while Russia was in 56th place and even Belarus was in 133rd spot. “Unfortunately, recent developments will not change the situation significantly; moreover, the situation may get even worse”, Mr. Minin forecasts.
Furthermore, in terms of public spending as a proportion of GDP, Ukraine is closer to the top of the world list: more than 50% of GDP goes through the state for redistribution. “It means a lot, and most experts believe that such a large proportion of withdrawal and redistribution through the state oppresses the economy. Thus, the main problem for Ukraine in taxation is not just some technical changes, but a radical reduction of withdrawal of funds by the state from the economy. No movements in this direction over the past year have been observed”, Oleksandr Minin says.
SCOPE OF THE PROBLEM
Representatives of the business believe that, first and foremost, it is necessary to reducethe fiscal burdenof the payroll budget. “The average world burden is about 16%, in the European Union it has reached30%-32% over the past year, while in Ukraine this figure is consistentlyhigh and comes to about 50%”, notes Anatoliy Kinakh, President of the UkrainianUnion of Industrialistsand Entrepreneurs (UUIE) and MP of the II-VIIconvocations in the Ukrainian Parliament. The existingfiscal burdenon wagesis the main reason for real wages moving into the shadow sector and the fall in buying power felt by citizens. The reduction in the latter against the background ofa systemic crisis has resulted in a deterioration of retail turnoverin Ukrainewhich, in the words ofAnatoliyKinakh, fell by almost5.3% in September of 2014, which is the first such fall inthe last 10 years. “Where there is no effective demandandeffectivemarket, there are no incentivesfor the production ofcompetitive productsand services. It isa very serious problem for Ukraine”, the expert emphasizes.
In Mr. Kinakh’s opinion, the next aspect of the problem is transfer pricing: the question is the inadmissibility of various corruption schemes of capital withdrawal abroad and minimization of taxable profit. “Throughout the world the broader the tax assessment basis, the greater the opportunities there are to implement stimulative taxation policy. Unfortunately, in our country the tax assessment basis is very wide, also due to the fact that corruption schemes in transfer pricing remained”, the UUIEPresident says.
Furthermore, income tax prepayments and the imperfect system of tax administration have a negative effect on doing business. “In Ukraine, we actually have a system of double bookkeeping and tax accounting. For adaptation to European standards it is crucial that we adopt international standards of accounting as soon as possible. The current system causes a large number of conflicts between fiscal authorities and taxpayers, and taking into account the realities of the judicial system, all this has a negative impact on the business environment”, Anatoliy Kinakh says.
The above problems must be solved following the “do no harm” principle, without being attached to the election campaign, as has been observed recently. “Regardless of the political situation, it must be systematic work aimed at implementing European standards in the fiscal system, which is an essential component of improving the investment climate. This is one of the priorities that the authorities are facing now, and it must be solved through dialogue between business and the authorities. No decision affecting the business environment must be made without the assessments of expert from the relevant associations and unions. This mechanism of social dialogue is applicable throughout the world, and it is very effective”, Mr. Kinakh says, summing up.
As in previous years, this year tax legislation was not characterized by consistency: provisions of the Tax Code of Ukraine were corrected about 20 times. Analyzing the key amendments, Larisa Vrublevskaya, auditor, Associate Partner, Head of Transfer Pricing Department at ILC EUCON, points out that chronologically the first were the March innovations in the Law of Ukraine “On Prevention of Financial Disaster and Creation of Preconditions for Economic Growth in Ukraine”. The Law provided for the introduction of 0.5% fee of the transaction amount for the purchase of foreign currency, 7% VAT on transactions involving the supply of medicines and medical products and tax on personal income for pensions exceeding UAH 10,000. In addition, the Law provided for stabilization of VAT rates at 20% and income tax at 18%. “Prior to this, tax legislation stipulated reduction of these rates. In 2014, the VAT rate should have been 17% and income tax 16%. Many investors were dissatisfied by another violation of stability of the tax legislation, because their commercial activities were planned taking into account a gradual reduction in rates”, the expert notes, adding that it could be a reason for freezing investment activity in the current year.
Anatoliy Kinakh, who also points out that the said tax today “depletes” the circulating assets of enterprises, shares the opinion stated above. “We lack a regulated system of compensation of negative balance to VAT payers, and the existing mechanisms are extremely corrupt. If we consider the VAT rate, at the present time enterprises actually grant interest-free loans to the state budget. In the absence of access to credit funds this drastically reduces their competitiveness”, the UUIEPresident says.
Ms. Vrublevskaya attributes the military tax to important tax changes: an extra 1.5% burden on salaries and other benefits related to labor relations. At the same time, she believes the new electronic VAT administration procedure, which will come into effect at the beginning of next year, to be the most revolutionary innovation. “Beginning on January 1, 2015, special accounts in the electronic VAT administration system will be opened automatically for all taxpayers. This account will be credited from a personal current account of the taxpayer in case of VAT receipts from clients during trade for cash, or for replenishing the balance. To draw up a tax invoice, the taxpayer will need to have the same amount on the special account. If the funds are insufficient, the account will have to be topped up. Expenses from the account make up payments to the budget. Payment will be made after declaring the presence of a positive tax value. If the value is negative, the taxpayer will be provided with compensation immediately. To do this, new approaches have been established: claims based on the amount of salary have been excluded, but criteria according to the residual value of fixed assets have been introduced”, the auditor explains.
Lawmakers intended a new mechanism to prevent the misuse of VAT refunds, to make the system more transparent and independent of the human factor. “However, positive elements are leveled as taxpayers will feel the lack of working capital, and it may destroy some of them”, Larisa Vrublevskaya adds.
Oleksandr Minin shares this concern as he believes that the introduction of special VAT accounts as the main negative consequence of lawmaking in tax this year. “If introduction of this rule from January 1 next year is not cancelled, then the economy will face a serious blow due to erosion of working capital”, he predicts. In general, the expert assesses tax legislation development trends in the past year as negative, not knowing whether at least one branch of business experienced positive changes. He notes further that adjustment of legislation was very spontaneous, in violation of stability of the taxation system and was imperfect even technically and that is without mentioning simple counting of the possible adverse effects of innovations.
SUGGESTING POSITIVE CHANGES
Positive developments have, in the opinion of experts, been observed in tax, though this was achieved not through the efforts of taxmen or lawmakers, as the reason lies in the change of state policy. “The previous regime has been broken now. At present it makes sense to challenge decisions, also in courts, and all public agencies have become more sensitive to the needs of society, so that applications from taxpayers receive at least some response. In many cases courts began to decide each case on its merits and really judge (from the word “judgment”) rather than churn out decisions as previously according to the principle of ‘what do you need’”, Mr. Minin notes.
The efforts of taxmen have resulted in minor, but still positive, changes regarding mitigation of criminal risks in tax disputes. Previously, almost any additional charge based on the results of tax audit for amounts exceeding the threshold for criminal liability immediately resulted in a pre-trial investigation. In the summer of this year the tax guidelines were amended, and now investigation is delayed at least until the end of the administrative appeal. “However, this is not enough, because in most cases as a result of administrative appeal a taxpayer receives regular formal replies (here the approach of the tax service has not changed much). It would be correct if initiation of pre-trial investigation was tied to mutual approval of liabilities if they are not paid within the statutory period. Otherwise, any tax dispute still has every chance of becoming a criminal pre-trial investigation”, Oleksandr Minin emphasizes.
It is no secret that the tax system will be among the priority areas for reform in the future. The government recently introduced the Concept of reforming the tax system of Ukraine, which inter aliaproposed to reduce thenumber of taxesfrom 22 to9.However, experts believe, what is at issue here are only changes on the surface aimed atunification andconsolidation oftax rulesand declarations, and there is no question of breakthrough approachesinthe field of taxation.
Larisa Vrublevskaya calls superficial the Concept of reforming the tax system aimed at reducing the number of taxes because taxes were combined and renamed. “I believe that reform must consist of a set of simple but effective solutions allowing the stimulating of economic development in the country. In the meantime, there are no such solutions. Although, in my opinion, the best idea in the Concept is convergence of taxation and accounting. It has long been discussed and was finally implemented. According to the proposed wording of section III of the Tax Code, the object of taxation is calculated on the basis of the financial result before tax based on accounting data adjusted for tax differences. Initially, everybody hoped for a few such tax differences, but the draft law registered in Parliament proved that the hopes were in vain”, the expert said.
Oleksand Minin shares this opinion and believes the government’s proposed Concept of reforming the tax system to be an attempt to “equivocate without introducing actual change”. “Is rearrangement of terms really so important if the amount remains unchanged or even increases? So, instead of state duty when applying to a court we began to pay a court fee, and has anything changed essentially for a taxpayer?” the expert asks.
Talking about what needs to be done as priority, also in the context of harmonization of the Ukrainian tax system with EU standards, Mr. Minin points to the following steps. It shall be set out in the Constitution of Ukraine that the expenditure budget (taking into account the funds, which are essentially public) must not exceed 35%. A transitional period (let’s say two years) shall be set, during which tax and other legislation must be brought in line with this rule, and unnecessary withdrawals must be avoided. “If tax legislation is drafted by the government according to the principle ‘we will collect as much as we need’ (and the state uses more than half of GDP), it is not worth expecting real tax reform”, Oleksandr Minin says, summing up.
Practice Leaders. Tax
|Leading FIRMS. Consulting|
|3||DLA Piper Ukraine|
|Leading FIRMS. Litigation|
|2||International Legal Center EUCON|
|3||Lavrynovych & Partners|
|4||Vasil Kisil & Partners|
(International Legal Center EUCON)
(DLA Piper Ukraine)
(Baker & McKenzie)
|OTHER NOTABLE PRACTITIONERS*|
(Jurimex Law Firm)
(Gvozdiy & Oberkovych)
(Hrynchuk, Mazur & Partners)
(Lavrynovych & Partners)
(Law Offices of OMP)
(Misechko & Partners)
(Sokolovskyi & Partners)
(Vasil Kisil & Partners)
(Vasil Kisil & Partners)
* — Listed in alphabetical order.
Practice Leaders (by Ukrainian Law Firms 2014)