Under the guise of closing a loophole, the State Tax Administration changed interpretation of some laws that could help them squeeze foreigners in Ukraine.
Under the guise of closing a loophole, the State Tax Administration has recently changed its interpretation of tax laws in a way that could help them squeeze more taxes out of foreign companies or citizens doing business in Ukraine.
The tax authorities are now demanding that foreigners working in Ukraine obtain a tax residence certificate in order to be taxed at 15 percent, rather than the 30 percent rate that non-residents pay. The foreign business community is split on whether or not this is a case of the authorities taking advantage of grey areas in the law to boost dwindling revenues, as tax experts expressed concern the decision could be applied retroactively.
“The State Tax Administration is looking to raise as much revenue as possible,” said Ron Barden, a partner at the Kyiv offices of PricewaterhouseCoopers, one of the world’s so-called Big Four accounting and auditing firms. “Wherever the law is unclear, they are interpreting it negatively and enforcing it in favor of maximizing revenues.”
Under a 2004 decision by the tax administration, foreigners living and working in Ukraine were required to pay an income tax of 15 percent. But in recent months the tax authority has begun demanding that foreigners obtain a tax residence certificate in order to be taxed at 15 percent on income earned in Ukraine and worldwide, rather than the 30 percent rate on local income for non-residents.
In a letter to the European Business Association on Sept. 22, the tax administration wrote that the 2004 order cannot prevail over the law, and in any case is in the process of being changed. Penalties for non-compliance can run at 200 percent of the unpaid amount, and Barden said a number of international firms are going to court to fight tax claims that run to “over $1 million.”
Barden said the firms are likely to win, as the regulation is not clearly stated as law, but that some firms are likely to pay up to avoid the cost and hassle of going to court.
Serhiy Vlasenko, former deputy head of the tax administration and now its representative in parliament, played down talk of a squeeze on foreigners, saying that the authorities were simply closing a loophole. But the chief financial officer of one foreign company said there is a trend toward closing loopholes and tapping new tax streams in order to boost revenues, which are struggling because of the economic crisis.
The critical question is whether tax officials will attempt to apply the rules on tax residence retroactively. Barden said some court cases center on the attempts by tax officials to apply the rule as far back as three years.
Volodymyr Kotenko, head of tax and legal services at Ernst & Young, one of the Big Four accounting and auditing firms, said it may go back even further than three years. “They are targeting additional tax collections from past years. They are conscious that no one can fix it retroactively,” he added.
But a source in the foreign business community who commonly interacts with Ukraine’s authorities said there was “no need to sound the alarm bells.” The source said this was more of a “bureaucratic mess” than “a big conspiracy to squeeze expats.”
Jorge Zukoski, president of theAmerican Chamber of Commerce in Ukraine, said there is a need for clarity from tax authorities, but he sees no orchestrated attack on foreigners.
“We are addressing this tax issue and are requesting additional official clarification from the tax authorities to bring more clarity. While there may be some extraordinary incidents, we don’t at this moment see this tax issue amounting to an unfair attempt by Ukrainian authorities trying to fill budget coffers by squeezing more taxes out of foreigners who are doing business or residing in Ukraine,” he said.
Vlasenko said the Supreme Court will ultimately decide whether the regulation can be applied retroactively. “Nobody knows for sure if this is going to be retroactive. The cases are at the Appeals Court, and until there is a case at the Supreme Court, we will not have court practice,” he said.
