In a nation with a $50 billion state budget, any rash changes in revenue or tax regulation can have a big effect on the national economy.
Vladimir Kotenko, head of tax and law at EY Ukraine, talked to the Kyiv Post about how new changes in Ukrainian tax legislation may influence businesses operating in Ukraine.
Kyiv Post: What is the biggest change in tax legislation for business in the past six months?
Vladimir Kotenko: Undoubtedly, it is the adoption of the law on improving tax administration. It can be compared to a tectonic move in taxes. It will take a lot of time and effort for business, lawyers, tax consultants and authorities to study all the nuances. This law is a mix of good, bad and still unclear norms, but it is definitely the most important one and will remain so for the next several years. Currently the law is under correction as there were many questions and weak spots in it. There are some optimistic expectations that changes will be adopted in the nearest future.
KP: Why the law on improving tax administration is so resonant?
VK: The law is multi-layered. It touches businesses broadly since many norms on tax administration have changed. The law toughens measures to erode the tax base, including income taxes, and also focuses on cross-border transactions aimed to avoid double taxation.
Among one of the most discussed parts of the law is the introduction of rules for taxation of controlled foreign companies. These rules are very unusual. People got used to live in the same regulation for 30 years, and now there are so many changes.
KP: How long have Ukrainian businesses been waiting for this law?
VK: It’s better to talk about how long businesses were afraid of it. These new rules are closing loopholes such as selling shares of Ukrainian companies whose property consists mainly of real estate. It also ends profit withdrawal schemes that were disguised as paying interest on loans.
The number of countries with such rules is not large so far, around 40 countries, but it grows fast. But the question remains whether blindly copying even the best legal practices will be useful for the tax system of a particular country, for example Ukraine. The discussion of tax legislation should begin with a quality discussion about the goals that need to be achieved. There was no quality discussion, in my opinion.
KP: What positive norms do you already see in this law?
VK: Among the positive ones I can name significantly decreased fines, including retrospective fines. It was a great solution and business welcomed it. First of all, it affected fines for late registration of value-added tax invoices. Previously, many companies ended up trapped: When invoices were not registered on time, they were expecting these fines with horror. If not for this law, their expenses on fines would be very high. This law also allows to use accelerated depreciation, so the costs spent for acquiring expensive assets can be written off faster in order to reduce the tax base from which income taxes are paid.
KP: What does the “business purpose” in this law mean and why it confuses businesses so much?
VK: It is the most debatable question: What can be counted as the so-called “business purpose.” It is not clear in the law. As a result of possible abuse of this norm by tax authorities, even honest taxpayers will be at risk to get an unfair punishment. In today’s law almost any transaction can be made as one that supposedly has no signs of a business purpose. For example, our taxpayers have to calculate whether prices in transactions they do fit into the range of market prices. When taxpayers can’t determine the market price correctly, and it might be just a little bit lower, tax authorities may potentially disqualify all operations made previously as transactions that didn’t have a “business purpose.”
KP: Will the new norms of law significantly help the state budget?
VK: I can’t say how it will influence the budget but it’s hard to expect that the tax income will come as fast as before, after the law introduces higher rates or additional control mechanisms. In the nearest future, it’s even possible that we will have a negative effect (on tax collection), but after a while, we may see an increase of tax incomes into the budget.
KP: Just recently President Volodymyr Zelensky supported the idea of introducing an exit capital tax. What do you think about this step?
VK: This idea has been circulating for many years. And different presidents in different ways supported this idea.
Source: National Bank of Ukraine, Cabinet of Ministers
We’ve seen many loud statements supporting it from the government’s side, as well as many arguments against this idea. Let’s see whether this idea is implemented, or not. I personally heard from some businesses that they want it for 100%, other businesses don’t want it as they are already fine with what they currently have, and others say that it might be interesting but there are several additional questions like “when it is introduced, will other taxes be raised?” The absence of clear answers for additional questions causes the lack of single opinion among businesses.
KP: Did business in Ukraine have enough tax relief during the COVID-19 quarantine?
VK: In conditions when many business activities were limited due to quarantine measures, state assistance was insufficient. It is obvious. Tax breaks are not enough, as well as some small tax reliefs. There is a general feeling that support from the government could have been greater. In other countries, for example, governments provide grants to support businesses that have suffered from the crisis. Some countries reduce tax rates for a significant period. It would be great from the government side to collect businesses’ opinions regarding what reliefs which industries needed. We do not see this. It’s possible that such an analysis was made but they decided not to implement what they learned.
UkrGazVydobuvannya has headed the list of the largest taxpayers in Ukraine. The top five taxpayers also include energy firm Naftogaz, cigarette company Philip Morris Ukraine, national bank PrivatBank, and railroad monopoly Ukrzaliznytsia. (Fiscal Service, State Tax Servic)
KP: Do you see any progress in tax agencies and their work for the past five years?
VK: In some cases, we see that the level of tax controllers’ competence has decreased. If in the past these specialists were very intelligent, now we don’t always feel the confidence that the controllers will understand what we are telling them. On the other hand, the controllers became more accessible, open, digitized. They are now available on Facebook, holding roundtables, and it’s easy to talk to them.
KP: What barriers can prevent new tax laws from working properly in Ukraine?
VK: The practical use of any laws, even if they are written by King Solomon, can be ruined by institutional failure. The adequate implementation of laws requires the proper operation of regulatory authorities and the judiciary. We don’t see this now. Until the controlling tax authorities become competent and neutral, focusing on securing budget incomes, the hated status quo will remain. Until this happens, even the best laws will be disregarded at every opportunity. But most importantly, if we want to have a different tax system, perceived by business as simple and fair, then we need to start not with tax legislation, but with the state’s fiscal goals. Do not put the cart in front of the horse.
