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New draft tax code looks raw

The Ukrainian business community has spent the last few months in numerous struggles and discussions with governmental officials of different levels concerning the draft tax code. Initially planned as blitzkrieg operation the process involved business and political forces with opposing interests and started to be rather controversial. Shortly after the publication at the start of August of the latest draft for public discussion, Deputy Prime Minister Sergiy Tigipko came out with a public statement that there is an alternative version of the code elaborated by the government together with the business community.

The published version of the code softened the most odious pro-fiscal novelties of the initially adopted version of the draft code. In comparison with the first version the latest document seeks to restore the fragile balance between tax authorities and taxpayers that currently exists. Many of the newly suggested pro-fiscal powers of the tax authorities that had been widely criticized by Ukrainian businesses were eliminated or substantially restricted.

Such powers included (i) the almost unlimited right to seize a taxpayer’s original documentation, (ii) the right to inspect a taxpayer's premises and interrogate taxpayers without initiating relevant criminal proceedings, (iii) the right to conduct numerous audits and so-called "tax testing purchases" without prior notification, (iv) the right to limit money withdrawing operations from taxpayer's bank account, (v) the right to apply the so-called "indirect tax assessment techniques" without the relevant court ruling.

At the same time, the published draft fails to restore the currently existing balance in respect of the administration of taxes and rights of tax authorities versus the rights of taxpayers, despite the officially proclaimed intention of the government to do so. The document is still perceived by businesses as eliminating some of their freedoms.

The published version stipulates a procedure for control over unregistered permanent establishments of non-resident companies carrying out business in Ukraine and a procedure for approaching foreign tax authorities with a request to collect the Ukrainian tax abroad. The Ukrainian tax authorities were not active in pursuing such approaches previously.

Among the negative trends is that the recent version of the draft code does not contain a taxpayer's right to offset its tax liabilities against relevant financial liabilities of the state budget to the taxpayer.

Among the positive developments are (i) the softening of the previously suggested restrictions on interest and royalties tax deduction, (ii) the reduction of the corporate profit tax (CPT) rate to 20 percent starting from 2014 without any additional rates to be imposed by local authorities, (iii) the returning of the currently existing tax regime applying to transactions with securities, (iv) the setting-up of tax holidays for newly launched businesses, (v) the elimination of the previously suggested additional tax burden in respect of transactions between Ukrainian residents and non-residents registered in so-called "tax favorable jurisdictions," (vi) gradual reduction of VAT rate to 17 percent, (vii) the extension of currently existing tax exemption of individuals' interest income payable by banks.

Despite many expectations, the proposed code does not set up the wealth tax that had previously been publicly announced. In summary, the recent version of the draft code leaves an impression of a very raw document, which is inconsistent in several aspects.

Some suggestions for the draft code:

1. Pursuant to the current legislation a taxpayer is not obliged to comply with the request of the tax authority to provide the economic information and calculations regarding prices of the goods and services being purchased or sold by this taxpayer. The current version of the code does not contain such benefit. We suggest returning it.

2. It is also critical to return the currently existing regime of the consolidated payment of CPT. The idea of separate assessment and CPT payment by taxpayers' subdivisions is targeted to collect more taxes from businesses and is very unfavorable.

3. The current version of the draft code allows tax benefits stipulated by relevant double-tax treaties only in respect of non-residents being beneficial owners of the relevant Ukrainian sourced income. There is nothing wrong with this. Such requirement is generally in line with internationally accepted tax practices. However, there is no procedure for taxpayers to confirm whether the recipient of the income is its beneficial owner or not. There is no guarantee that as a matter of practice tax authorities will use this provision to disallow tax benefits stipulated by double-tax treaties.

The draft code provides for the possibility for big taxpayers to enter into an advance transfer-pricing agreement with the tax authorities. The code should provide the relevant guarantees and mechanisms that the tax payer is free to choose whether it should enter into such agreement or not. It might be harmful for the businesses if, as a matter of practice, such an option becomes obligatory.

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