For the sake of stability
Another year has passed under the slogan of tax reform. However, the issue did not take a step further than conceptual discussion. Business still expects: reform first and the predictability and stability of tax regulation in the longer term
Today, tax reform is on the lips of not only politicians, international advisers, representatives of business, but the whole of society. However, while the process is at the stage of discussion of developed documents and their coordination, business lives by the rules that are in effect, including the innovations implemented at the end of last year and more recent separate corrections, a considerable number of which were also accumulated.
Boththe business sector and experts in the field of tax law, despite the positive opinions regarding the idea of introducing new mechanisms for tax regulation, talked about the imperfections of the Law of Ukraine “On Amendments being made to the Tax Code and some other legislative acts of Ukraine concerning tax reform» No. 71-VIII dd. December 28, 2014 and a number of other “tax” laws virtually on the first days of their coming into legal force. Among the most discussed topics is the tax compromise, the introduction of electronic administration of VAT, change in the rates and the procedure for levying the unified social tax (UST), profits tax and personal income tax. Moreover, the rules for transfer pricing (TP) have also undergone significant changes.
“Improvement” of the TP system by Parliament has given rise to more questions than preferences for business. In fact, the bill, which among others provides for reducing the criteria for operations to be determined as controlled to 20 million UAH, was registered with Parliament, but it was adopted only in June of this year.
Business should again prepare for the intensification of regulations in this field as far as the final package of OECD measures under the BEPS plan (Declaration on combating the base erosion) was published at the beginning of October. Larisa Vrublevskaya, auditor, partner, manager of the TP practice at the International Legal Center EUCON, explains that four out of fifteen actions specified by the plan are devoted to transfer pricing. The introduction of changes in the basic reference and guidance document in the field of TP – OECD Recommendations for tax administrations and multinational companies is implied.
“For example, a number of requirements for the composition and structure of the documentation for controlled transactions is envisaged. Documentation should be extremely detailed and should consist of a master file (Master File) presenting an overview of business and the nature of operations, a local file (Local File) containing information on specific transactions between the companies and a report Country-by-Country which will be submitted for the corresponding period starting from 2016”, the expert points out.
Such standards of a BEPS project must be implemented into national legislation. Besides, changes to the procedure for determining the tax base under the transactions with intangible assets are envisaged. Ms.Vrublevskaya also notes that the idea of the economic owner of assets is being suggested for use, according to which the ultimate beneficial owner of the intangible asset cannot claim the full amount of income from its use in case another company supports, develops and protects this asset. In case of operations with commodities determining the value according to market quotations is being proposed.
“On a related note, our legislation in the field of TP now even now provides for such mechanisms for determining prices in controlled transactions for commodities. While characterizing the tendencies in general one can say that we should expect control over transactions and operations qualification to be stepped up in accordance with the principle of “dominance of essence over form”. According to OECD recommendations, the transactions may be reclassified for taxation purposes in the event of nonconformity to the contractual terms”, says Ms.Vrublevskaya.
Lack of administration
If business in the TP field should focus on a new OECD plan, the introduction of such a new mechanism as the system of electronic VAT administration is of a purely national and technical nature. And it is no secret that business has a variety of difficulties with it.
“The main problem is the fact of large-scale blockage of access for taxpayers to the Unified Register of Tax Invoices by the supervisory authorities, often in manual’ mode. The tax authorities account for these facts as technical problems”, says Anna Poddubnaya, partner of Law Firm Dinastiya. According to her, the main reasons for blocking access is the presence of a negative balance on the electronic accounts of the taxpayers after resetting of the system, discrepancies of VAT with counterparts that in most cases are connected with unfair practices of counterparts, or failure by the tax authorities to accept the revised amounts to such tax invoices.
“The very fact of mandatory registration of tax invoices has led to wide-scale abuses with regard to taxpayers. Numerous applications to the tax authorities in the procedure of administrative appeal of such facts did not provide positive results, whereby the courts appeared to be overloaded by lawsuits related to disputing such actions. At the same time, employees of the regulatory agencies often forgot about the existence of the judgment of the European Court of Human Rights dd. January 22, 2009 in the ‘Bulves v. Bulgaria’” case in terms of absence of the taxpayer’s obligation to monitor the tax compliance of counterparts, as well as about subparagraph 56.21 Article 56 of the Tax Code of Ukraine regarding making a decision in favour of the taxpayer if the circumstances in which the disputed situation could be resolved both in favour of the taxpayer and in favour of the regulatory agency are identified” says Ms. Poddubnaya.
At the same time the situation can, in her opinion, be improved due to the software upgrade expressed in the terms of conflict elimination in the Registry’s columns during the registration of tax invoices and adjustment calculations.
Besides, the necessary factor of effective work with the Unified Register of Tax Invoices is observance of current Ukrainian legislation and practice of the European Court by the State Fiscal Service of Ukraine as the registrar-depository.
“Disregard of the stated circumstances will certainly lead domestic business to decay; due to the ‘run in’ of electronic VAT administration taxpayers are forced to withdraw funds from the company’s turnover and pay VAT, including several times for the same business transactions”, the expert assures.
Another innovation faced by taxpayers this year is the institution of the tax compromise. This mechanism was available for use by taxpayers from January 17 to April 16 of this year. Moreover, experts have repeatedly stated that the use of the tax compromise would not pay off for such a period. Thus, according to official data of SFS 5119 taxpayers (including 2,236 applications related to unagreed tax liabilities that find themselves in the appeal process) expressed their willingness to use this mechanism. A compromise was reached in 1,511 cases, 170 criminal proceedings were closed, and the budget received 138.1 million UAH. In general, due to the application of the tax compromise procedure, the budget received 358.8 million UAH. At the same time, the stakes were put on the fact that the majority of taxpayers would use the proposed mechanism and the budget would receive an additional 3 billion UAH.
Apparently, this was one of the reasons for the failure to adopt a bill aimed at extending the deadline of the tax compromise’s application by Parliament.
Invitation to dialogue
Economic stability and improvement in the investment climate are largely dependent on the confidence of business in the fiscal authorities and the availability of a meaningful dialogue between them. However, as practice shows, they have not been able to establish such a dialogue in spite of numerous attempts.
At the instigation of the State Fiscal Service of Ukraine, the institution of the Authorized Representative for entrepreneurship issues was created at the agency. It is an additional tool of communication regarding all suggestions, questions and complaints directed to the Fiscal Service by taxpayers.
Not much time has passed since the start of work of the tax ombudsman; therefore, it is too early to talk about its effectiveness. However, it should be noted that such a tool can help to improve the procedure of administrative appeal and, consequently, reduce the caseload on administrative courts. Moreover, the options of engaging representatives of administrative courts and experts are being considered. The purpose of this is to reduce the caseload level in the courts.
Will the reform go ahead?
One of the key reform elements which are of particular interest to business is reorganization of the State Fiscal Service of Ukraine. The administrative appeal against decisions made by the tax authorities is very important in this process.
Besides, failing to wait for the government bill on tax reform, more than 100 people’s deputies submitted bill No.3357 to Parliament. It is already possible to trace the changes in the procedure for administrative appeal in this document. However, experts have a number of remarks to make about the bill. Thus, according to Vladislav Kochkarov, Managing Partner of Prove Group Legal Company, maintaining the two-level appeal procedure is ineffective. “We have repeatedly stated that the bodies of the Fiscal Services and SFS, as the central authority, are not able to ensure the fair investigation of the relevant complaints. Within the last few years decisions in favor of the taxpayers were taken by SFS on three to five occasions out of 100 cases”, Mr.Kochkarov notes. The expert believes that it would be more appropriate to provide such a way out of the conflict as the achievement of a compromise in the tax dispute.
The proposal regarding the authority of SFS to provide individual tax advice, including that related to the application of the law, is criticized. “In our opinion, SFS cannot be the subject of determining the only law-enforcement practice as it is not a body within the executive branch that is authorized to form tax and customs policy. Understanding this, we propose to consider the issue of introducing the exclusive competence of the Ministry of Finance on the issue of general (individual) advice as well as to initiate the creation of the Expert Council at the said Ministry, which would consist of the relevant committees representatives of the Verkhovna Rada of Ukraine, the scientific community, Fiscal Service, Taxpayers Association of Ukraine and individuals engaged in analysis of case law in the superior specialized court system. In our opinion, only the collegial approach can ensure the objective process of formation of law-enforcement practice”, Vladislav Kochkarov said in his comments.
The business sector believes that tax reform should not be limited to the administrative appeal mechanism or the STS authorities. It is necessary to ensure the uniformity of parliamentary and government actions in the process of reform as a general principle. However, there is still no unifying vision of what tax reform should be like as the proposals put forward by the Ministry of Finance to business are unacceptable in many aspects, and the relevant Ministry does not agree with a number of proposals developed by experts from business.
In any case, even if the registered bill becomes the basis for the work of Parliament and the government in the appropriate direction, business expects, first and foremost, significant reform of the tax authorities, dissolution of the Tax Police and the making of actual changes to the taxation system.
However, no matter what compromise will be reached by the developers of the reforms (and another New Year’s “tax surprise” cannot be excluded), they must remember that in addition to positive changes the understanding of predictability and stability of tax legislation is important for business.
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