Range of Issues We Focus on
"The fiscal authorities are capitalising on their freed-up time to run more sophisticated inspections." Serhiy Verlanov, partner at Sayenko Kharenko, comments on the most recent trend.
— What is the place of tax practice within the entire structure of a full-service law firm? And who are your main competitors [on the legal service market]?
— It is customary for the tax practice within a full-service law firm to evolve into an independent practice. At Sayenko Kharenko, it is a separate partner-led team whichdeals solely with tax matters. The team consists of tax advisors, legal practitioners and criminal defence lawyers. That is, we take a comprehensive, all-encompassing approach to advising on tax matters. Virtually, our target is to provide a full range of tax services by assigning lawyer(s) in each specific area.
There are three main categories of competitors. The first are Big Four firms; the second – other full-service firms that have a tax practice, and the third – large firms specializing predominantly in tax matters.
— What are the benefits of getting tax advice from a big law firm than from a non-diversified consultingboutique?
— Definitely, these are the firm's expertise and consistency as well as a full range of services. In any sphere so-called 'time in the air' is critical. A big law firm with a steady flow of clientele and an array of projects offers a tax professional unparalleled opportunities to practise in various areas of law. Consequently, while working on projects the professionals expand their expertise so that it may in future be successfully applied to meet new challenges.
Also, I would like to remind you that a big law firm has enough capabilities to provide a full range of services. Moreover, customarily tax law follows on from the tax assessment of the respective transaction or the decision made by the business. It is a derivative assessment. If you work for a big law firm you may rely on the advice of the team of lawyers in properly assessing the substance of the transaction or making a sane decision.
Boutique firms may face problems as they lack specialization in material law.
— What services do clients mainly ask for – consulting or settlement of a dispute that has already arose?
This year the share of advice [on tax matters] is higher and this is inspiring. The share of disputes decreased; however, now the disputes are more sophisticated, and the range of issues is broader than last year. It is conditioned by various factors in unison, including manifestations of crisis in the economy, and that budget targets are met mainly due to the devaluation of the Hryvnia rather than active inspections. As a result, fiscal authorities have some additional time for carrying out more sophisticated inspections. There are certain concerns about transfer pricing and even standard prices (as the tax service applies today’s concepts to previous periods). Beneficiary owners are another serious concern. The tax service takes a more detailed approach when analysing whether certain services are included in gross expenses rather than assessing solely formal characteristics or initial documents.
— Do you agree with the statement that there are more problems with the tax authorities?
The tax authorities are constantly improving their work; and this progress is evident. The fiscal policy landscape has changed, though not critically, only incrementally. It is difficult to answer the question as to whether there are fewer problems. Virtually, they are less in number but differ in quality. And since there are new problems it may seem that their number has increased.
— What are main mistakes made by business in the process of tax planning? Are there any general recommendations?
There is a tendency for due diligence to decline, though the issue remains important. Every year the practice of applying the concept of due diligence improves; the problem somehow lessened upon introduction of VAT e-management. Our advice is to implement the 'know your client' system, employ its elements in internal processes and have your finger on the pulse.
The second and deeper problem is that of content prevailing over form. I believe that shortly it will become one of the most topical issues as historically business in Ukraine was based on the forms of a legally-binding transaction, economic operation, without proper consideration of its content. Documents were executed as a mere formality and interpretation of tax consequences was formalistic too. We should remind you about the practice of the High Administrative Court of Ukraine in respect of such category of disputes, and that the concept has its roots in the Law of Ukraine “On accounting and financial statements in Ukraine”. Therefore, we would recommend focusing on the content of an economic operation.
The third problem is the level of documentation of transactions. Having had enough training on 'fictitious' transactions, the tax services taught inspectors to assess the level of recording of transactions. By the way, in my practice I come across audit reports specifying with sufficient argumentation the defects found in transaction documents. Consequently, it is required to identify the level of documentation as the target at the initial stage, and further control the quality of documentation.
Also, today we see on the market the consequences of aggressive international tax planning. Nobody has ever paid attention to it since businesses in Ukraine were taught to treat such risks as existing solely in theory. I believe that in the course of integration with the European Union the tax authorities will further address the issues of aggressive tax planning, diluted taxable base, transfer pricing and that of content prevailing over form.
In what situations it is reasonable to run tax due diligence?
— Due diligence is reasonable for cross-border transactions, but they are not numerous. At the same time, it is necessary to take into account half-year and quarterly tax audits carried out by tax advisors. Virtually they do add value to a business, demonstrating the readiness of businesses to inspections and sales.
In early September amendments to the Tax Code of Ukraine took effect, which provide for an easing of certain requirements on condition of submission by businesses of updated declarations within a short period of time. Such liberalisation demonstrates that the state welcomes independent identification of mistakes and their correction by businesses.
What do you expect from subsequent tax reform?
— There were many swords crossed, and even more will cross, as the process involved many stakeholders and the driving forces of reforms.
I would recommend focusing on the targets set by the International Monetary Fund.
Basically, a good case may be made that the harmonized tax system will be somehow refashioned; potentially the [existing] fixed agricultural tax will be abolished or transformed. At the same time, I do not expect the profit tax and VAT to significantly change. I should say that due to its size it is rather difficult and quite risky for Ukraine to use the recipes offered by countries with a significantly smaller population as the problems faced by those countries at the stage of implementation of reforms that are currently implemented in Ukraine will have tenfold magnitude for Ukraine.
A sort of consensus seemed to be reached regarding the reduction of the tax burden on the wages fund, the only issue is the figures. And the rest is as surprising as Christmas presents.