Although the legislative initiative regarding the imposition of a disinvestment tax was introduced in 2015, the first attempt to implement it actually failed. However, the discussion continues, and if the National Council for Reforms supports the draft law on the imposition of a distributed profit tax developed by the Ministry of Finance, then the implementation of this idea will be possible in the near future
Imposition of a disinvestment tax was supposed to be one of the measures aimed at improving the investment climate in Ukraine. According to the tax reform implemented in the provisions of Law No. 1797-VIII, dated 21 December, 2016, the Cabinet of Ministers of Ukraine was to submit the corresponding draft law to Parliament on 1 July, 2017. However, finalization of the document is still continuing; the Ministry of Finance has prepared the draft law, but the Cabinet of Ministers of Ukraine has not yet approved it. We will try to figure out whether the next stage of the reform will meet the expectations of Ukrainian business.
The main idea of the draft law is to replace the profit tax with a disinvestment tax and to scrap in full the withholding tax. The inefficiency of the latter made the authors of the legislative initiative focus their attention on Estonia’s experience.
The difference between the disinvestment tax and the profit tax is that it is not levied on profits received by the taxpayer where the profit is equal to the income less expenses. The disinvestment tax is imposed on dividends or payments and transactions equivalent to the distribution of profit. The draft law offers three basic tax rates: 5%, 15% and 20%.
ADVANTAGES FOR BUSINESS
As a result of abolition of the profit tax, advance installments on it are also canceled. Therefore, the disinvestment tax would significantly simplify administration. Reduction in the tax burden on business can, indeed, improve the investment attractiveness of Ukraine.
However, taking into account the practice of working with supervisory authorities and the fact that the proposed draft law provides for transactions equivalent to disinvestment with a higher tax rate, we can forecast special interest on the part of supervisory authorities in such transactions. Therefore, businesses now have to actively study the proposed innovations and prepare themselves thoroughly for a more reasoned confirmation of their payments (expenses) through primary documents and agreements, as well as by relevant reports confirming such expenses.
By the way, the innovation will please the very investors receiving dividends. When receiving any payments from the taxpayer for disinvestment, taking into account its payment, the founders, owners of corporate rights and shares, will be exempt from paying personal income tax.
CONTROL AND ADMINISTRATIVE LOAD
Gaps in current tax legislation result in different interpretations by the supervisory authorities: calculation of the profit tax is based on accounting, and the supervisory authorities still have imperfect knowledge of accounting standards. As a result, Ukrainian business finds itself under constant stress during inspections and communication with the tax authorities and often has to seek protection in the courts. The departure from the practice of inspecting financial statements and determining profit quarterly or annually is now being proposed. Instead, there is a rule to submit statements and records for the period (quarter, year) during which taxable transactions were carried out.
The draft law also provides for the right to request information during an inspection on the conformity of the value of goods and capital assets with the level of the regular price. At the same time, the supervisory authority is charged with providing the "burden of proof" in such a discrepancy. And if a regular price refers to the agreed price, then, when establishing new rules for determining a regular price, then not only disinvestment transactions but also any other VATable transactions can be subject to control.
As for the administrative load, the valid terms for drawing up, submitting statements and records and paying income tax remain the same: quarterly and yearly. And these terms do not depend on the amount of profit, but on the content of transactions. The calendar quarter is established for disinvestment transactions and transactions equivalent to them. A reminder that the term for submitting quarterly statements is 40 days and there will be no increase in the terms for the new tax. At the same time, it is necessary to submit annual statements for those transactions which are defined as controlled ones, but do not correspond to the ‘arm's length’ principle, and also in cases when payment of funds to fulfill debt obligations to a non-resident associated person was carried out.
REPLACEMENT OF ACCOUNTING STANDARDS
The authors of the idea to introduce a disinvestment tax say that such reform will solve the problem of tax evasion. Nevertheless, the tax assessment base may increase dramatically. This is due to the fact that the tax is levied on the value of the transaction and does not take into account loss. At the same time, when carrying out completely legal transactions, an enterprise may be charged with the responsibility to pay quite a large amount of tax without receiving profit. Such transactions include, for example, charity or payment of royalty, foreign investments. Thus, quite bona fide enterprises that do not earn profit may become payers of the new tax.
Generally, dividing transactions into disinvestment ones and those equivalent to them seems quite strange. The very phrase "disinvestment" suggests that such transactions conceal schemes for capital outflow to low-tax jurisdictions and tax evasion. But analysis of the very transactions shows the opposite: transactions equivalent to disinvestment ones, as a rule, conceal such schemes. Considering the quite negative perception of the name of the tax, the state that wishes to ease pressure on business and, at the same time, preserve capital and taxes within the country, should think about a more creative name. As they say, nomen est omen (meaning the sign is a name).
In addition, the abolition of the profit tax will affect the entire fiscal accounting system which was adjusted over a sufficiently long period, even by Ukrainian standards. Such radical reform entails the need to make amendments to accounting standards. In particular, it will be necessary to completely abolish the Regulations (standard) of accounting 17 "Profit Tax." From this perspective, the draft law under consideration should have taken into consideration the procedure for accounting of deferred tax liabilities accrued following the results of the last accounting period for the profit tax.
In my opinion, introduction of a disinvestment tax model is disadvantageous for Ukraine at the present time. World experience has shown that this provides for a temporary difference in the cash inflow to the budget. Moreover, introduction of such a system may worsen the already adverse economic situation in the country.
The risk is that the imperfections present in the new tax system, which are specific to everything that’s newly implemented in our country (for example, suffice to mention the situation with the blocking of VAT invoices on the electronic administration system), can lead to broad use of tools for tax evasion and reduce medium-term profits, unless such "gaps" are closed.
Nevertheless, a series of high-profile scandals due to the disclosure by journalists of schemes for moving funds offshore for the purposes of tax evasion involving officials and oligarchs as well as public pressure, have made the Ukrainian Government act more resolutely. In April, Ukrainian President Petro Poroshenko signed a decree on the development of measures to combat the outflow of capital. Therefore, after the National Council for Reforms has given its support for the draft law on introduction of the disinvestment tax, there is a good chance that the idea will be implemented in the near future. Taking into account the domestic traditions of changing tax legislation, we can forecast that it will begin in 2018.