Parallelly, criminal
liability for illicit enrichment comes into effect.
However, politicians are
very creative in finding ways to avoid both publicity of their assets and
questions regarding the sources of their incomes. Their solution seems to be
hiding allegedly corrupt assets within the framework of the voluntary asset
disclosure program (so called one-time or “zero” declarations) and subsequent
comprehensive control over expenses of each and every Ukrainian.
The general idea of
the program is as follows: firstly, give all Ukrainians an opportunity to
disclose their assets with guarantees against administrative and criminal
liability; secondly, impose a low tax rate on declared assets; and lastly –
introduce a system of control over all expenses in order to tax amounts that
exceed declared assets.
The idea is not
uncommon. Programs for voluntary disclosure of assets are run in at least 47
countries all over the world (including most European Union member states) and are intended
to make compliance, rather than non-compliance, more preferable to taxpayers.
However, in the case
of Ukraine specific features of the program turn it into a new tool for
corruption. The way the program was drafted proves that politicians not only
realize corruption risks, but actually aim at introducing them.
The
origin of the idea
The respective draft law was
developed by the President’s Administration and was offered as a response to
the offshore Panama Papers scandal.
The draft law was offered for adoption to a
special working group on counteracting offshore money laundering. The working
group included legislators, public officials (including those from the Ministry
of Finance) and experts from the civic sector and business.
However, as soon as
experts started to criticize the draft and demanded amendments be made, the
head of the working group and the head of the parliamentary committee on
taxation, Nina Yuzhanina, refused to publicize any more drafts of the law.
As of now, Yuzhanina
states that final draft law will not even be presented to members of the
working group until political decision on its adoption is taken. Taking into
account on how fast the Ukrainian parliament adopts laws driven by “political
will,” the public will see final provisions of the draft law a few days or even
hours before its adoption, and legislators will be left without an opportunity
to offer amendments.
The political will for the draft law will be seen as early
as July.
A new tool for corruption
According to the
available version of the draft law, it offers all Ukrainians, including those
who are public officials, to submit a voluntary, one-time declaration of all
assets (also known as zero declaration). Subject to declaration are savings
(including that in cash), immovable property, costly movable property,
securities, other material and nonmaterial assets. It is not clearly defined
what should be considered as a costly movable property for the purpose of
taxation. It could end up being that rural Ukrainians will have to declare
cows.
Declarations should be
submitted within a very short period of time – 3 months. This can hardly be
administered by tax authorities, which create long lines at every regular
reporting period, even with a 10 times less declarants.
Voluntary disclosure
is supposed to be promoted through financial incentives.
After paying 5 percent of the
value of assets, the declarant may not be subject to any other tax penalties.
This is much cheaper than the regular 18 percent income tax and all respective
penalties that are applied if tax non-compliance is detected.
However, there is
neither a clear guidance on how to calculate the value, from which the tax must be paid, nor guarantees against
double taxation of assets that have already been properly taxed.
At the same
time, the tax authorities preserve all opportunities to question the amount of
tax that must be paid as a consequence of voluntary disclosure. Therefore, the
submission of an asset disclosure declaration still creates additional fiscal
risks.
Everyone who does not submit the declaration is presumed to possess Hr 1 million (approximately $37, 000)
with no exceptions. There is no guarantee against non-taxation of these
virtual Hr 1 million.
However, the purpose
of a one-time declaration goes further than to identify and tax assets. Officials
aim to introduce a system of total control over expenses and lifestyle of the
population.
Fiscal invasion
The draft law offers
to oblige businesses, notaries and banks to report every case of provision of
goods and services for individuals, as well as every transaction among
individuals worth more than Hr 150, 000 ($5,500) per item to fiscal
authorities. For every individual, the tax authorities are supposed to compare
the yearly value of his/her transactions with his/her declared assets (or Hr 1 million, if declaration was not submitted) and, after an imperfect verification
procedure, tax the difference.
However, businesses
and anticorruption activists have long been claiming that the State Fiscal
Service, under Roman Nasirov, tends to be very selective in identifying underpaid
taxes. For example, officials of the SFS supposedly overlooked as much as Hr 60 million of underpaid taxes of a
company owned by Nasirov’s father-in-law.
Moreover, tax
authorities obviously have neither the resources nor the capacity to introduce such a comprehensive control
over the expenses of 26.6 million people (economically active population). Therefore,
control will inevitably turn out to be selective. The tax authorities receive
an additional tool of pressure on each and every Ukrainian.
The draft law is also
sold as a measure to treat the shadow economy and a remedy for deficit of
budget revenues as part of tax reform. But will the economy benefit? Unlikely.
Turning the shadow economy into a black market
The introduction of
such an extensive mechanism of control without proper reform of the SFS may not
bring Ukraine closer to eliminating the shadow economy and developing a culture
of paying taxes. The result may be contrary to that proclaimed.
Firstly, the
disclosure of assets will not bring expected revenues. Given the extremely low
level of public trust to tax authorities (and authorities in general), people
simply will not declare their assets. In the Russian Federation in 2016, a similar campaign on
the voluntary disclosure of assets was launched and thus far has resulted in 2,500 submitted declarations, while administrative pressure on people to declare
assets was huge. In 2015, Ukraine has already failed at an
attempt to implement a corporate profit tax amnesty program – so called fiscal
compromise – for which only 6,764 entities applied (most of which were already subject
to administrative and/or criminal proceedings for tax offenses).
Secondly, control over expenses will not increase public
incomes. Selective application of the procedure allows for “overlooking”
unjustified expenses of moneyed people.
Lastly, de-shadowing of the
economy is not going to happen. The demand for opportunities to hide
transactions from fiscal authorities will bring about an immense supply of
semi-legal operations with assets and property. The number of undetectable cash
transactions is estimated to increase, thus bringing more of the economy into
the shadows. On the contrary, the legal market of immovable property and the
banking system are likely to suffer from lack of resources.
But
who may benefit from one-time declaration of assets?
The answer seems to be
– corrupt public officials and those possessing illegal assets. The most
important incentive for the disclosure of assets is guarantees against
liability. Anyone who submits the declarations may not be subject to
administrative liability; for example, a public official may not be charged
with an offense of submitting false declarations of assets (a special
declaration for public officials). The declarations should be classified and
will be restricted for use of fiscal authorities only. This will limit chances
for bodies such as the Anti-Corruption Bureau and the Agency for the Prevention
of Corruption to detect unjustified assets and open investigations. Declarants
will not be obliged to provide explanations on the sources of their incomes for
acquiring assets.
Most importantly, the
declaration may not be presented as evidence in сriminal proceedings.
Authors
of the draft tried to soften the latter provision by allowing the use of a
declaration as evidence when it is proven that declared assets were acquired as
a result of some corruption-related felonies.
However, lawyers stress that this
still prohibits using a declaration to support prosecution: a declaration may
be presented only after everything is proven by other means.
A declaration, under
any circumstances, may not be used to prove money laundering and seizure of
property through abuse of office. The latter is in breach of FATF
recommendations, that clearly prohibit tax compliance programs from allowing
any exemptions from anti-money laundering regulations and liability.
These guarantees apply
to public officials as well, despite the fact that public officials are subject
to limitations and criminal liability for illicit enrichment. The same
guarantees are offered to people who did not pay taxes from legally acquired
assets – and those who allegedly stole money or resources from the state.
Such incentives for
programs of voluntary asset disclosure are absolutely uncommon for most
countries. A general approach to motivating people to disclose assets is
through opportunity to avoid imprisonment for tax-related crimes and no, or
substantially decreased monetary penalties. Even an opportunity to pay less
taxes on voluntary disclosed assets is not a common rule. There is no foreign
example of incentives for voluntary disclosure that include guarantees against
liability for non-tax-related misconducts.
This considered, the
campaign on voluntary disclosure is designed to provide amnesty for illegal
assets. Corrupt public officials receive an opportunity to secretly legalize
assets for a moderate price of 5%, and
in return to avoid criminal liability for illicit enrichment and false
statements in asset declarations. Essentially, the state loses an opportunity
to recover the assets allegedly stolen from it, while corrupt tax authorities
are given a tool to become even more corrupt.
It is ironic how the president linked the described initiative to the Panama scandal. After the Panama scandal the public
demanded politicians and other wealthy people to make their assets public
instead of hiding them offshore. The President took the demand for more
transparency seriously, understanding it as a threat to such possessions and in
turn offering a new opportunity to hide and secure assets.
The proposed system of
voluntary disclosure of assets is also part of a cynical lie to the EU and the
IMF. With one hand the President signs commitments to introduce control over
and publicize the declarations of public officials, to enact criminal liability
for illicit enrichment and money laundering and to resource independent
investigative and anti-corruption bodies with all the necessary tools and
capacities.
These commitments are part of the visa liberalization action plan and memorandums with the IMF. The President never misses a chance to
claim that Ukraine has accomplished its obligations and is waiting for her
international partners to take their steps.
Yet at the same time, the other
hand of the president introduces a voluntary declaration program that
completely undermines the online e-declaration system for state officials, and
decimates the capacities of the newly launched anti-corrruption bodies to
identify and prosecute the illicit enrichment and money laundering by state
officials.
Anastasia
Krasnosilska is a lawyer and advocacy offers for the Anti-Corruption Action Center in Kyiv.
