Published 13 October 2016. Some rules have changed since; ask us for the current position.
Dear colleagues,
On 29 September 2016, the tax committee of the Ukrainian Chamber of Commerce and Industry (ТПП) held a round table on the bill to improve the tax system. Participants included representatives of Parliament (MP Oleksandr Kirsh), the Ministry of Finance (adviser to the Minister Yana Buhrimova) and Rostyslav Kulish, head of the audit firm Key Solutions.
We support most of the bill's initiatives, for the reasons set out below.
First, the proposed changes to tax administration will help reduce corruption risks and save businesses time and money. For example, partly transferring administrative functions to the regional level of the State Fiscal Service (ДФС) and to the Ministry of Finance (in particular, maintaining databases) will add the transparency that the State Fiscal Service does not provide today. An electronic taxpayer account will make paying taxes and dealing with the tax authorities much simpler.
Merging the VAT registers and transferring them to the Ministry of Finance will also improve transparency and efficiency. Had the State Fiscal Service managed to run two registers properly, a merger might not have been needed. Even so, there is no point in keeping them separate, since all applications should be processed in chronological order whichever register they go to.
Second, the bill gives priority to the Ministry of Finance's general tax rulings. Individual provisions of the law are often interpreted in different ways. General clarifications from the Ministry will help remove a number of inconsistencies between the actions of taxpayers and the authorities that supervise them, and narrow the room for divergent readings and discretion.
Third, on corporate income tax, the Ministry of Finance is once again trying to introduce tax breaks for small businesses in the Tax Code. Any incentive that gives small businesses a different tax base helps them grow, whether the business is a sole proprietor (ФОП) or a small company. Our country simply needs a healthy small business sector, free from pressure by the fiscal authorities.
In particular, the automatic blocking of taxpayers' tax invoice registration needs a carefully calibrated risk assessment system. The current system leads to mass blocking of taxpayers' operations and more room for corruption, and unfortunately does not always prevent abuse effectively. In our view, any alternative system should first run in test mode to confirm that it really identifies offenders (VAT fraud schemes known as "skrutky") with a high degree of accuracy. A system that casts too wide a net, with a huge field of "red flags", lets inspectors overlook the actual "offenders". We are ready to take part in testing this model.
For sole proprietors on the general tax system, we ask that a simplified way of recognising expenses be considered, with a set percentage deemed to be expenses. This would create a system that is attractive for its simplicity and free from officials' discretion over which expenses are recognised.
In our view, further steps will be needed at later stages, such as introducing a tax on withdrawn capital (a tax on distributed profits). This would position Ukraine as a country where doing business pays and where companies plan their own liquidity, with the option of redirecting tax savings to reinvestment within the business.
This matters because Ukraine is gradually building a fiscal control system that will bring businesses out of the shadow economy. The government's measures (the electronic VAT administration system already in place, the planned automatic exchange of information for international taxation, indirect methods and a one-off declaration of personal income, and legislation on controlled foreign companies) will improve tax collection and/or raise compliance. At the same time, Ukraine's tax legislation needs rules that let companies redistribute their tax burden lawfully so that rising taxes do not push them into losses.
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