It looks like an order was issued to fill the budget at all cost
With a budget revenue shortfall expected this year due to the economic slowdown, there is an expectation that Ukraine’s tax administration will step up efforts to collect more taxes from citizens and corporations. In this interview, the Kyiv Post discussed this trend with Svitlana Musienko, head of the tax practice at the Ukrainian office of DLA Piper. DLA Piper is a global legal services provider backed by more than 3,700 lawyers working in 66 offices across the globe. More than 40 lawyers at DLA’s Kyiv office specialize in advising domestic and foreign companies operating in Ukraine.
KP: Do you expect the tax authorities to work extra hard this year to squeeze more tax payments out of tax payers in order to cover an expected budget shortfall?
SM: I definitely agree with such expectations. Moreover, it is already happening. We have heard this from our clients and colleagues at others companies.
It really looks like a command was issued to fill the budget at all cost. What we are hearing, is that when the taxman arrives for a visit, he comes with a plan in mind. He hasn’t checked the company books yet but already knows how much tax payments he has to collect.
KP: What methods are the tax authorities using to collect more money?
SM: They are using different strategies.
One strategy used by the tax authorities even before the economic crisis hit is becoming more prevalent now. They call an enterprise and either ask, demand or beg them to pay more taxes, to pay ahead of schedule, etc. They are doing this informally. At times they are asking, for example: “How much can you pay?”
We also heard from clients that tax inspectors are now paying more attention to those issues that are badly regulated in the laws. One example is tax treatment of foreign exchange losses. This issue is a burning one for practically all Ukrainian importers. Importers suffered currency exchange rate losses and want them to be reported as a deductible expense reducing their taxable profit. Tax authorities disagree with this, and they are after those importers that took a tax deduction of such losses.
Another problem involves customs clearance of goods. Ukraine’s state customs service recently started pressuring importers to include royalties payable to the [intellectual property rights] owners of goods to the customs value of these goods upon their customs clearance, when they are brought into Ukraine. This, of course, would increase the customs duties payment. But it’s not clearly established by law if such royalties should be included in the customs value of goods. Moreover, there is no clear procedure on how to take count of such royalties.
The customs service confesses that it does not know how to count it, other than saying: “Please, do it promptly. We don’t know how to, just do it, otherwise we’ll penalize you. If you did it, but we thought it was the wrong way to do it, then we will also will penalize you.”
In other words it’s all very unfair and unpredictable.
KP: Who do you think the main targets will be for the tax administration this year in their efforts to collect more tax receipts?
SM: I doubt ordinary citizens will suffer seriously from this. It is very rare that citizens actually pay taxes by themselves. Most often they receive salaries and their employers take care of the rest.
Small and medium-sized businesses are mobile and can easily simply drift into the shadows. They can switch to grey schemes such as splitting an enterprise into several physical persons-entrepreneurs which will, for example, pay a fixed Hr 600 tax each quarter. It will be hard, requiring much effort for little return for the tax administration to catch them.
The main targets will be large enterprises and companies with foreign investments. They can’t hide. This is one situation where size matters.
The administration will certainly try to collect the same amount of taxes or more from a large company despite the downturn. In short, it is always easier for tax authorities to try and squeeze one large amount from a large taxpayer than to waste its time forcing less out of smaller ones.
KP: It is commonly thought that many companies avoid paying their full share of taxes using various schemes and outright tax evasion. Do you think this is the year they should consider paying more of their fair share of taxes given the increased scrutiny by the tax administration?
SM: Those companies that considered so-called shadowy schemes as “a must” for their survival will continue to use them. They may become even more subtle. Otherwise they will have to close their business. Those enterprises, which use various schemes from time to time, could remove them for fear that the tax administration will now crack down. Those who didn’t use such schemes in the past will not start using them now.
KP: What should taxpayers do if they are being unfairly squeezed for additional tax revenue: yield to the pressure or defend their rights by going to the court?
SM: Sometimes companies go to court just to show the tax administration that they are not going to back down to unfair, so-called informal, bullying tactics. Sometimes an enterprise decides to let the tax administration win some points in a case in return for not putting up a fight on other points, a sort of compromise. I have seen more than enough of my share of such cases.
In the end, a business has to make a decision weighing the costs. Does it cost more to fight the case in court, with all the legal fees and a process which could spoil relations with the tax administration? Or does it cost more or less to pay the amount the tax authorities are seeking?
KP: How would you advise companies to prepare ahead of tax inspections this year?
SM: [Review] periods yourself, primarily periods of your operations which the tax inspectors have not yet checked within the last three years, the cutoff for when they have time to check.
You can make an audit yourself or hire an outside legal expert. Focus on your largest income and expense items. Make sure all documentation is suitable enough to presentation to the tax authorities. Track tax legislation to keep an eye on areas tax authorities are likely to strike at most. Detailed examination by an expert can take two-three months. Your major risk areas can be identified in a couple of weeks.
