New Laws Put a Spotlight on Tax Compliance in Personnel Matters
On 16 June 2010 the Law "On Amendments to Certain Legislative Acts of Ukraine" became effective introducing a number of important amendments to tax laws. One of the most sensitive changes relates to the widening authority of tax offices in the review of employment arrangements of Ukrainian businesses. The consequences may be painful for many businesses in Ukraine that use private entrepreneurs in their tax planning strategies.
Will employment matters be subject to heightened tax scrutiny?
The amended laws authorize tax inspectorates to audit employers' compliance with labour laws, the competence previously exercised almost exclusively by the special inspectorate of the Ministry of Labour. Now a more efficient tax service is authorized and encouraged by the new amendments to thoroughly look into employment matters. This new function of the tax administration is further reinforced by the new powers granted to the tax police to conduct unannounced inspections of the premises and documents of the employer if "information that the particular employer is engaged in tax evasion becomes available to the authorities". Authorities are not required to disclose the source of such information and to notify the employer about the date of the audit.
What business practices are at risk?
The new law points at a specific situation in which these extraordinary powers can be used, which is tax avoidance resulting from employers' failure to enter into a labour agreement with the employee. Apparently the new law targets those employers who receive services from individuals without formally hiring them as employees.
These norms can have an impact not only on those employers who fail to have any record of employment but also those who classify individuals working for them as civil law contractors rather than as hired employees under labour law. Currently many employers use labor of individuals registered as private entrepreneurs and thus benefiting from the simplified tax system that allows employers to cap their tax burden at UAH 200 of a monthly payment per each such quasi-employee. Often such private entrepreneurs are treated as employees for all practical purposes: they are subject to the fixed workday requirements, are entitled to regular annual leaves, and receive a fixed monthly fee rather than fee depended on the quantity and quality of services performed. Because of these similarities with hired employees, the tax authorities may take the view that such private entrepreneurs are in fact hired employees without a formal labour agreement rather than independent contractors under civil law and assess additional payroll taxes.
What to expect from the new Tax Code for self-employed individuals paying single tax?
Besides raising the tax pressure on employers, the government also has plans to eliminate the simplified tax system applicable to private entrepreneurs. Under the draft Tax Code approved by the Parliament in first reading the system would not apply to many types of business, including the following:
How can employers get ready?
Given these major changes, all employers will have to look closely at their personnel policies to check whether they comply with tax laws. The new law has the potential to dramatically change the level of attention which labour law issues receive and deserve to receive from employers and their legal advisers.
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