Column of Chairman of the State Tax Service of Ukraine Oleksiy Lyubchenko in edition "Dzerkalo tyzhnya"Chapter: News
Fairness, transparency, convenience: how to improve tax regulation in Ukraine
2020 was a year of tangible progress in efficiency of new State Tax Service of Ukraine. Given the downward dynamics of economic activity, which manifested itself in the second half of 2019, and the growth of nominal GDP by 5.4% in 2020 (fall in real output was 4%) revenues to the state and local budgets, as well as single social contribution increased by 13.5% in 2020 and the balance of revenues from value added tax increased by 36.8%. Indicative figures of tax revenues were exceeded by 49.2 billion UAH (+ 10.7%) in 2020. With 10.3% growth of supplies of goods and services (VAT tax base) by 10.3% comparing to January – February 2020, the balance of VAT revenues increased 1.5 times (from 17.8 billion to 25.8 billion UAH). This was made possible by effective expansion of the tax base through the shadow economy.
At the same time, the state’s counteraction against the tax abuse is still far from over. According to the State Tax Service of Ukraine, Ukraine’s losses from the application of tax evasion (minimization) schemes amounted to 7.7 billion USD per year. Among such schemes there are: salaries in the “envelopes” totaling 4.3 billion USD, “scrolls” and conversion centers – 1.5 billion USD, offshore – 0.8 billion USD, excisable goods – 1.0 billion USD, losses of state enterprises – 0.1 billion USD. For example, total income of population in 2020, excluding taxes, amounted to 3.4 trillion UAH, of which 1.9 trillion UAH is wages and other labor incomes. At the same time, revenues of trade enterprises recorded through cash registers in 2020 amounted to less than 1.3 trillion UAH. This means that only 38% of household expenditures are recorded through a fiscal check with payment of appropriate taxes and fees.
It is important to understand that success of measures to reform the tax system and effectively overcome tax schemes depends not so much on extensive efforts to increase tax control, but on building a reliable model of interaction between taxpayers and the state, to which both parties of tax relationship will have trust. To implement these steps, it is necessary to ensure that the state adheres to several key principles in taxation sphere, which, in our opinion, should be: fairness (equality of all taxpayers before the law, prevention of any manifestations of tax discrimination), transparency (exchange of information between tax agents and tax authorities; attention to the nature of operations, not their form) and convenience in cooperation with the tax authorities (it should be profitable to pay taxes honestly, the Tax service provides quality service to the taxpayers). Implementation of these principles, in my opinion, will create natural conditions for solving problem of tax regulation in Ukraine and ensure compliance with legislative requirements by economic entities regarding payment of taxes.
In practice, implementation of the above mentioned principles should include those steps that will implement the best international experience in reforming and improving the tax system.
F – fairness
Worldwide tax evasion schemes by structuring business activities through the low-tax jurisdictions are also popular in our country. In order to counter this phenomenon, Ukraine joined the BEPS Enhanced Cooperation Program on the 1st of January 2017, committing itself to implementation of the BEPS Minimum Standard Action Plan (Actions 5, 6, 13, 14). In fulfillment of international obligations and in order to implement international tax rules, the Law of Ukraine №466-IX on the implementation of main recommendations of the OECD on combating the tax base erosion and transfer of income abroad (BEPS Action Plan) was adopted.
Full implementation of the Law will expand the tax base in our country through taxation of income of tax residents of Ukraine, which accumulate in accounts of the offshore companies for “double non-taxation” and provide a fair tax system for entities operating in Ukraine. It is important in this context to introduce the information exchange with tax authorities of other countries automatically and according to a single international standard, which will allow the tax authorities of Ukraine to identify and take timely action against violators of tax legislation. Steps in this direction should be:
introduction of taxation of controlled foreign companies (according to the OECD recommendations and within deadlines set by the Law of Ukraine №466-IX) and country-by-country reporting for international groups of companies, work on which was recently completed by the Ministry of Finance;
accession to the MCAA CRS agreement (multilateral convention on mutual administrative assistance in tax matters and transfer of tax information according to a single standard);
negotiating and signing bilateral agreements on automatic exchange of information with key countries – trading partners and the low-tax jurisdictions;
compliance with technical requirements for the automatic exchange of information (with the OECD compliance audit).
Harmonization of taxation systems for financial sector instruments and passive income of individuals will also contribute to the establishment of a fairer taxation system in Ukraine. The “lion’s” share of income of the richest households is provided by passive income, including through their ownership of corporate rights and cash through investment funds, which significantly reduces the effective tax rate for such individuals. This creates opportunities for tax optimization, including through the use of collective investment institutions and also violates principle of fair taxation for all participants in the financial sector and financial instruments. In view of this, it is necessary to bring rates of the personal income tax received from dividends or operations with securities (including certificates of investment funds) to level of the standard rate of personal income tax. This will restore healthy proportions of the personal income taxation and savings, reduce tax inequality, as a result of which the poorer sections of population pay more taxes (relative to their income level) than the rich.
T – transparency
Only amount of hryvnia cash in Ukraine’s economy has grown by 34% since the beginning of 2020, but it is difficult to determine what share of this growth is due to prudent behavior of economic agents against the quarantine restrictions, and what – as a result of increasing shadow turnover. At the same time, it is well known that schemes to “optimize” the tax burden are implemented through cash payments, because in this case it is impossible to identify business activities through bank monitoring mechanisms. In such circumstances, the non-cash payments should be encouraged, including by reducing the limits on cash payments and improving the control system over cash payments.
Control over activities of individuals – entrepreneurs and counteraction to the abuse of simplified taxation system also need to be strengthened, as it is known that practice of the large-scale business and trade networks carrying out their activities under the guise of private individuals is widespread. This requires intensification of analytical work to identify cases of intentional “fragmentation” of enterprises and networks and the dissemination of requirements for the use of fiscal registrars of calculated (settlement) operations by individuals – entrepreneurs.
Effective work of tax authorities will be facilitated by the establishment of information exchange between regulators of financial sector (the National Bank of Ukraine, National Commission on Securities and Stock Market), banks and the State Tax Service of Ukraine. To do this, it is necessary to determine the perimeter of information assets required by the State Tax Service of Ukraine for effective implementation of powers and make necessary changes to legislation and regulations governing the exchange of information between government agencies (if necessary to sign memorandum of of cooperation) and adjust technical parameters information (including cryptographic protection) for the transfer of information assets in electronic form.
Territorial communities and local authorities, whose financial capacity has increased significantly as a result of decentralization reform, also have significant potential in stimulating the un-shadowing economic activity. Average monthly balance on deposit accounts in banks of regional and local government bodies amounted to more than 10.5 billion UAH in July – November 2020. Their share in financing capital investments in Ukraine in 2020 increased to 10.4%. Increasing transparency and efficiency of the use of local community funds, including through the establishment of local responsibility centers, will help to increase the role of local communities in ensuring economic growth and improving the quality of life in regions.
C – convenience
We should not forget that paying taxes should be convenient for taxpayers and strengthening control over the non-payment of taxes should not increase the burden on “white” business. Tax authorities should introduce an automated system of risk control of entities belonging to the high-risk group, including those that carry out operations with excisable goods (products). Improving control over the movement and sale of excisable goods without increasing the burden on honest taxpayers is possible by digitizing the relevant procedures and strengthening the analytical capacity of tax authorities.
Improving legislation regarding activities of tax agents during the taxation of securities operations will help to simplify activities of banks, non-banking financial institutions and consumers of their services and increase the demand for financial instruments of savings and investments.
These and other changes aimed at practical implementation of basic principles of the state tax system will ensure achievement of public consensus in building a reliable and mutually beneficial model of interaction between the state and taxpayers.
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