LAW FIRM DIRECTORY

Tax Practice

Legislative sequels

Global trends in taxation, such as implementation of the provisions of the BEPS plan, set out the vector of development in Ukrainian tax legislation. One of the most dynamically changing ones is the area of transfer pricing. Also, business was concerned this year about tax administration; some legislative proposals, including introduction of the disinvestment tax, arouse extensive discussions. The vast majority of appeals to lawyers regard the settlement of disputes with the tax authorities: the option of administrative appeal is used rather actively along with legal proceedings

SVETLANA TARASOVA

The beginning of this year was marked by loud statements of certain members of parliament regarding the early implementation of provisions in the BEPS plan in Ukrainian tax legislation. A reminder that Ukraine joined the Program of Extended Cooperation within the framework of OECD on 1 January, 2017 and undertook to implement the minimum standard of the BEPS plan: four mandatory measures out of 15.

But while the Ministry of Finance of Ukraine is implementing the roadmap of the BEPS plan, presented to experts on 15 May of last year,  Ukrainian business has to conduct its activities in existing legal realities.

On the first day of the new year, as is traditional, regular changes in tax legislation came into effect. In such a manner, on 1 January of last year, the Law of Ukraine On Amendments to the Tax Code of Ukraine to Improve the Investment Climate in Ukraine (the Law) came into force. By the way, the provisions of the BEPS plan on transfer pricing (TP) were already implemented in part in this document.

 

VALUABLE PRICING

Today, we can call the strengthening of the role of the tax authorities in the TP area one of the main trends present in international tax policy. At the same time, experts regard Ukrainian tax legislation in this area as rather favorable for taxpayers (even taking into account all the changes) despite some inaccuracies and the sky-high penalties.

In particular, as Larisa Vrublevskaya, auditor and head of the transfer pricing practice at EUCON International Legal Center notes, the extension of the reporting campaign term till 1 October gives an opportunity to prepare qualitative documentation on transfer pricing by using updated information from databases: "As a rule, databases are updated with the financial information of legal entities for the previous financial year at the end of August."

The changes also affected the way the list of the low-tax jurisdictions and the list of controlled non-residents according the criteria of business legal structures, to be approved by the Cabinet of Ministers of Ukraine, are drawn up. As experts expected, the latter list was approved six months later after the Law came into force. It should be noted that transactions with the counterparties added to the list were already regarded as controlled last year when cost criteria were reached.

Another important and long-expected provision, which came into force on 1 January, was differentiation in the amounts of fines for failure to pay or for late filing of reports in the TP area. Nevertheless, it is precisely these new provisions related to the imposition of punitive sanctions that contain the largest number of pitfalls.

As Larisa Vrublevskaya explains, certain nuances arise in practice which show that legislators did not calculate penalties in figures. "New differentiated penalties for the late submission of reports and declaration of controlled transactions are considered to be liberal and encourage taxpayers to correct their mistakes. However, if an enterprise, for example, one year after the submission of a report discovers an undeclared transaction amounting to 1 million UAH, the self-declaration will cost it 480,000 UAH (the penalty is imposed in the amount of one living minimum wage per each calendar day of delay, but no more than 300-fold of the amount in question). But if the supervisory authority reveals an undeclared transaction during the inspection, the penalty will be 1% of the transaction amount, i.e. 100,000 UAH. If an undeclared transaction is 20,000-30,000 UAH, which happens often enough, when in the total number of transactions something is missing, the difference in the sums of penalties incurred is even more significant. Thus, the choice that taxpayers is obvious: additional self-declaration is of no interest to them," Larisa Vrublevskaya says commenting.

Moreover, current legislation contains technical inaccuracies. The issue here is the deadline for submission of reports (1 October) and the deadline for filing the requested information (1 May). It is worth noting that the State Fiscal Service (SFS) also agrees with this technical embarrassment. In addition, the regulator has announced that the tax authority has, in accordance with this provision, the right to request documentation before 1 May. That is, before the actual receipt of the report, but this opportunity was used only once because of the identification of certain risks during a scheduled inspection.

"Technical changes in the interrelated provisions after the adoption of the provisions on postponing the reporting term until 1 October are very important. Primarily, it is the possibility to correct tax declaration by 1 October 1 and not by 1 May without punitive sanctions being applied, as happens now. These changes were prepared; they are a part of the draft law developed in unison by the Ministry of Finance of Ukraine and the SFS. This draft law also contains provisions in terms of documents prepared in accordance with the provisions of the BEPS plan," Larisa Vrublevskaya says about future changes in the TP field.

According to the first results of new mechanisms, it follows that, despite the tightening of certain rules, legislators did listen to the business and improved the conditions for submitting reports on transfer pricing.

 

BLOCK SET

The situation in the area of tax administration is very different. Having partially resolved the problem with the value added tax (VAT) reimbursement system, legislators provided new opportunities for the exertion of pressure on business.

A new procedure of VAT administration was approved by the Government in January 2017 in accordance with clause 200.7.1 of the Tax Code (TC) of Ukraine (as amended). In particular, the procedure provides that creation and maintenance of a register of applications on the refund of budgetary compensation amount shall be maintained on the basis of data from the SFS and State Treasury. In addition, applications are entered into the register automatically during a transaction day in chronological order. The agreed amounts of budgetary compensation are returned in the same chronological sequence.

By the way, together with the introduction of the new procedure, the number of complaints submitted to the Business Ombudsman’s Council against the SFS on the part of business has decreased. At the same time, the number of complaints made against the unjustified blocking of VAT invoices has increased dramatically. That is exactly what the business sector feared, as it spoke about such consequences at the stage of discussion of this legislative initiative.

The SFS takes the opposite opinion: several months after the fully-fledged startup of the monitoring system for risk assessment criteria,  representatives of the SFS repeatedly noted that income from value-added tax to the state budget increased significantly due to the efficient operation of the system.

But representatives of business do not agree with this view. "The system of blocking VAT invoices was originally aimed at solving problems associated with schemes for obtaining an unreasonable tax benefit. At the beginning of September, the SFS announced that only 0.5 % of all VAT invoices were blocked during the first period of the system’s operation (July-August). And this is 3.1 billion UAH worth of VAT! In the first days of October, this sum had already reached 7.6 billion UAH," Larisa Antoshchuk, attorney and head of the tax disputes settlement practice at KPMG Law, says.

According to her, attempts to unblock registration before and at the stage of administrative appeal revealed that the amount of work with documents for business has increased significantly. "Copying hundreds of pages of primary documents, correctly filling out the table, duplicating documents electronically and in writing does not guarantee pre-trial protection for those who were ‘lucky’ to get into the experiment of purification of the market from dishonest taxpayers and to be the subject of criteria approved by Ministry of Finance Order No. 567, dated 13 June, 2017. This did not make life easier for most enterprises (farming companies, manufacturers) and after the introduction of amendments via Ministry of Finance orders No. 654, dated 21 July, 2017, and No. 776, dated 18 September, 2017, almost 50% of taxpayers' complaints at the stage of pre-trial appeal are found ‘in a hung state’ and all the deadlines for consideration of complaints are violated," the expert explains.

At the same time, according to Mrs. Antoshchuk, new initiatives by the Ministry of Finance of Ukraine are aimed rather at tuning up the system’s operation or putting it into "test mode" again and only then at its adjustment. "Representatives of the legislative branch  state publicly that in reality the system gave rise to new schemes making small and medium enterprises hostages of the situation," Mrs. Antoshchuk said summing up.

The return to test mode is provided for by draft law No. 7115 On Amendments to Division 2 of Section XX ‘Transitional Provisions’  of the Tax Code of Ukraine Regarding the Suspension of Registration of VAT Invoice/Calculation of the Adjustment in the Unified Register of VAT Invoices. According to the document, automatic blocking shall be canceled until the risk criteria are improved. Never­theless, this draft law does not solve the problem.

 

THE SHADOW OF COURT

The shift of emphasis in legislative work has resulted in a rise in the number of judicial disputes despite the introduction of the new mechanism of administrative appeal in 2016. It is worth noting that the procedure of administrative appeal has indeed become more transparent and efficient and many decisions were adopted in favor of taxpayers, but the business sector still distrusts this opportunity and prefers to resolve its disputes with the regulator through legal means.

"During the first half of 2017, the Kyiv District Administrative Court received 2,073 legal claims regarding the administration of taxes, fees, payments and supervision of compliance with the requirements of tax legislation. This is almost 20 % more than during the same period in 2016," Konstantin Pashchenko, judge of the Kyiv District Administrative Court, says clarifying the situation. According to him, the increase in these quantitative indicators was affected by the latest legislative changes. Moreover, representatives of the judicial authorities expect these figures to increase significantly by the end of the year.

"Today, the most active and high-profile category in judicial practice is disputes on claims by business entities against the SFS on suspension of registration and non-acceptance of VAT invoices in accordance with clause 201.16 of Article 201 of the Tax Code of Ukraine. Judicial practice in these disputes is now actively formed by the courts of the first and appellate instances," Konstantin Pashchenko adds.

According to Larisa Antoshchuk, court rulings regarding the system’s operation appeared in August, and today most of them are delivered in favor of taxpayers. "The first conclusions drawn by judges speak for themselves: the SFS crudely violates the provisions of sub-clause 201.16.1 of clause 201.16 of Article 201 of the Tax Code of Ukraine, since it does not indicate a specific list of risks assessment sufficient to suspend registration of a VAT invoice or calculation of adjustments in receipt No. 2. In addition, judges pay attention to the fact that receipt No. 1, in general terms, contains vague and incomprehensible wording and taxpayers cannot objectively understand exactly which of their primary documents are drawn up in violation of the law or which documents are missing so to make a decision on the registration of VAT invoices. But all the problems identified by the courts have not yet passed to the stage of legislative changes," Mrs. Antoshchuk stressed.

Thus, despite established practice in certain categories of disputes, the courts face new challenges almost every year.

 

SIMPLICITY ITSELF

Another set of legislative changes that came into force on 1 January last year is aimed at simplifying the payment of tax. The Cabinet of Ministers of Ukraine is charged with the duty of adopting a number of legislative instruments within six months to regulate procedures for the fully-fledged launch of the taxpayers account and the introduction of a single account for the payment of taxes and fees. The first step in this direction has already been taken: the procedure for operation of the taxpayer’s account was approved by Ministry of Finance of Ukraine Order No. 637, dated 14 July, 2017, which defines the general principles of functioning of the information and telecommunications system. The system becomes fully operational from 1 January, 2018, since by the Order of the Ministry of Finance, the SFS is entrusted with the responsibility to establish an "E-Account" information and telecommunication system on the basis of the existing Taxpayer Account electronic service precisely before this date.

As to the introduction of the single account, the Government has submitted two draft bills for consideration by Parliament on amendments to certain laws of Ukraine regarding the introduction of a single account to pay taxes, fees and Unified Social Tax (draft laws No. 7034 and No. 7035). It is hard to say when these documents will be adopted.

In any case, taxpayers will have to prepare to use the updated service and, as practice shows, in most cases, technical innovations often fail at the first stage of their launch.

 

FINAL MOVE

It seems there is a pause in the permanent reform of the taxation field. Well, at least MPs are saying that only technical changes to tax legislation are being prepared.

At the same time, there are a number of promising legislative developments on the part of the Government; including  proposals on the disinvestment tax and regulation of the taxation of income of controlled foreign companies.

By the way, these draft bills are being developed as part of the implementation of the Ministry of Finance’s roadmap on implementation of the BEPS plan. The next steps in this direction are joining the Multilateral Instrument, which was to happen before the end of last year.

Practice Leaders. Tax

Authorities

 

Volodymyr Kotenko (EY Ukraine)

Alexander Minin (KM Partners)

Leading Individuals

 

1

Yaroslav Romanchuk (EUCON)

2

Hennadiy Voytsitskyi (Baker McKenzie)

3

Alexander Shemiatkin (KM Partners)

4

Serhiy Verlanov (Sayenko Kharenko)

5

Sergey Popov (KPMG Ukraine)

Other Notable Practitioners

Listed in alphabetical order

Oleg Chayka (KPMG Ukraine)

Serhiy Chuyev (EQUITY)

Igor Davydenko (Dentons)

Valentyn Gvozdiy (GOLAW)

Andriy Hrynchuk (Hrynchuk & Partners)

Pavlo Khodakovskyy (Arzinger)

Alexey Khomyakov (Asters)

Dmytro Korbut (Sayenko Kharenko)

Natalia Kurilenko (Sokolovskyi & Partners)

Denis Lysenko (AEQUO)

Oleh Marchenko (Marchenko Danevych)

Vadim Medvedev (AVELLUM)

Dmitriy Mikhailenko (OMP Tax & Legal)

Volodymyr Misechko (Misechko & Partners)

Andrey Pronchenko (PwC Legal)

Eugene Shkrebets (Shkrebets & Partners)

Vladyslav Sokolovskyi (Sokolovskyi & Partners)

Andriy Stelmashchuk (Vasil Kisil & Partners)

Illya Sverdlov (DLA Piper Ukraine)

Volodymyr Vashchenko (VB PARTNERS)

Oleg Vdovychen (Vdovychen & Partners)

Nataliya Ulyanova (ICF Legal Service)

Yuriy Zaluskyy (Baker McKenzie)

Leading Firms. TaxConsulting

1

KM Partners

2

EY Ukraine

3

KPMG Ukraine

4

Baker McKenzie

5

DLA Piper Ukraine

Other Established Practices

Listed in alphabetical order

AEQUO

Arzinger

Asters

AVELLUM

EUCON

ICF Legal Service

Sayenko Kharenko

Leading Firms. Tax Litigation

1

KM Partners

2

EUCON

3

Vasil Kisil & Partners

4

PwC Legal

5

Sayenko Kharenko

Other Established Practices

Listed in alphabetical order

Arzinger

DLA Piper Ukraine

EY Ukraine

EQUITY

GOLAW

Gramatskiy & Partners

Ilyashev & Partners

KPMG Ukraine

Marchenko Danevych

MORIS GROUP

Shkrebets & Partners

Sokolovskyi & Partners

VB PARTNERS

Notable Practitioners Transfer Pricing.

Listed in alphabetical order

Volodymyr Chizhikov (KPMG Ukraine)

Igor Chufarov (EY Ukraine)

Konstantin Karpushin (KPMG Ukraine)

Yaroslav Romanchuk (EUCON)

Ivan Shynkarenko (KM Partners)

Illya Sverdlov (DLA Piper Ukraine)

Olga Trifonova (PwC Ukraine)

Vyacheslav Vlasov (PwC Ukraine)

Hennadiy Voytsitskyi (Baker McKenzie)

Larysa Vrublevska (EUCON)