Changes in the tax sphere of Ukraine can be compared with a whirligig. Whirl it or not, but every year you are going to get a new tax picture. It is both intriguing and tiring at the same time. No matter how you “keep your ear to the ground”, you still get something unexpected to deal with. Either the text is shocking either the timing of the entry into force of individual rules, or their inconsistency may surprise you.
The Tax Code is already 20 years old. It entered into force on December 2, 2010 and had 340 articles. By the end of 2019, the number of articles increased slightly – up to 357, but at the same time the Code survived 126 editions, where each of these editions redrafted the document in a new way. The most frequently it was edited in 2012 and 2015, least of all – in 2016 and 2018.
The changes that the country expects in 2020 are going to be tremendous. They will force not only large, but also medium-sized businesses to review their corporate and tax structures. Law 1210 is still awaiting to face its fate in the Supreme Council. However, the tax vector chosen by our state is unambiguous – the large-scale implementation of BEPS (Base Erosion and Profit Shifting), the fight against offshore companies, control of business beneficiaries’ income and transparency of tax structures.
In addition to the following tax reform, business need to deal with the new puzzles:
- MLI Convention, which entered into force on December 1, 2019 and amended a number of double taxation conventions,
- new changes in the legislation on payment transactions registers that affect Individual-Entrepreneurs as early as April 19, 2020,
- changes in financial monitoring that will come into force in April 2020,
- last year’s changes in the legislation on cash payments.
Expected from day to day, the exchange of tax information CRS (Common Reporting Standard) will be the final “icing on the tax cake”, as it will provide fiscal access to information regarding balances and turnover on accounts of Ukrainians in foreign banks. It is already dangerous for business to ignore these alarming changes.
Controlled Transactions and Transfer Pricing
The changes expected in transfer pricing standards will certainly affect companies that are required to report on controlled transactions. They should expect three-level reporting system (a Master file and a Report by country are added), as well as additional and expanded requirements for Documentation.
A chance to receive a request for a Master file the company can expect when the total turnover of the group where it belongs is more than 50 million euros. And regarding Report by country, tax authorities can request it from companies that belong to the group with a turnover of more than 750 million euros, if the given company is additionally the parent company of the group, or the parent company authorized it to submit such a report, or there is no exchange of Reports by country with the jurisdiction of the foreign parent company.
In the Transfer Pricing (TP) section, there are much more changes than a three-level reporting system. Throughout the world, inspections for TP are one of the most “expensive” inspections for payers, since they end with huge additional charges.
Controlled Foreign Companies (CFC)
This is a new doctrine for Ukraine, that already successfully works in all EU countries, except Switzerland (at the level of law, but not at the judicial practice level).
CFC applies to all beneficiaries of foreign structures with a 50% or more ownership share (in some cases, 10% or more), as well as the actual controllers of such structures. The criteria for whether you have a CFC is more than just ownership. Therefore, you need to analyze carefully. At the same time, ownership can be both direct and indirect.
If you are the lucky owner of a foreign company, and it falls under the CFC, then you will have to submit a report, calculate the adjusted CFC profit and pay corporate income tax or personal income tax. In some cases, there is no requirement to pay taxes, for example, if the total income of all the CFCs of one controlling person does not exceed 2 million euros, or your CFC is a public company that is traded on a recognized exchange.
You have one year left to review the CFC structures, because the forecast day for the CFC standards to enter into force is January 1, 2021.
Constructive dividends and changes in the “beneficial owner”
This innovation is worth paying attention to the business with controlled operations, as well as those companies that plan to reduce their registered capital or withdraw from the authorized capital of the company.
Constructive dividends are an additional opportunity for the tax authorities to find payer’s income in the form of dividends where it wasn’t before, for example, when a legal entity bought out corporate rights in its own authorized capital.
The new edition of the “beneficial owner” definition will affect those businesses that use Double Taxation Agreements for passive income such as dividends or royalties.
Adjustment of the “business purpose” principle will affect all large and medium payers, without exaggeration. The absence of a “business purpose” in transactions is often used by the tax authorities as a reason for additional charges, which is clearly reflected in judicial practice.
The MLI Convention and the OECD Model Convention contain an improved version of the principle purpose test. And our legislators decided to make the best out of a good definition in the Code. We are waiting for the addition of the article on the “business purpose”. A “reasonable economic reason” will appear in the definition to confirm the business purpose of the transaction or payer’s structure.
The new edition of the “business purpose principle” is worded in an extremely poor way, and may give tax authorities some new reasons to review almost every transaction of the payer, if its result was to “decrease taxable income of the payer”.
Changing the definition of foreign representation can lead to more foreign representations. And taking into account a fine of 100,000 UAH for non-registration of a foreign representative office, it is better to find its signs by yourself than to wait for a tax authority to do this, or it is necessary to change the work model.
It is worth to revise the agency and intermediary schemes, to calculate the stay period of foreign non-resident employees at your construction sites. For example as one of the innovations is that, if an intermediary who works on behalf of a non-resident still has agreements with associated persons of non-resident, then such an intermediary can be considered as not only a representative office of a non-resident, but also as a representative office of all its related parties.
Person recognized as a foreign representative automatically bares obligations to pay taxes from all non-resident income gained in Ukraine.
Changes in the definition of income with a source from Ukraine is another important possible change that may affect businesses the own real estate in Ukraine. If the change comes into force, then from July 1, 2020, when selling corporate rights / shares of a foreign company, it will be necessary to analyze if 50% of such corporate rights value is formed by the participation in Ukrainian legal entity and more than 50% of the value is formed from the real estate value, then the obligation to pay taxes on such transactions in Ukraine and according to Ukrainian rates will appear. It is also important to consider that these conditions must coincide at any time within 365 days before the sale of such corporate rights.
The principle of guilt and fiscal officials’ liability
This is one of few positive provisions, as it adds some job to fiscal officials. While bringing charges on a number of violations, the tax authorities will have to prove your guilt. If they do not, then financial liability does not occur.
The guilt will be sought according to the the violations specified in the code: paragraph 119.3 (reporting by tax agents on individuals), 123.2-123.5 (deliberate actions of the payer provoking the need to determine the amount of tax liability and / or other obligations by the STS), 124.2, 124.3 (deliberate non-payment of agreed tax liabilities’ amounts), 125.2-125.4 (intentional tax non-withholding by tax agents).
The Code also defines circumstances that enable the taxpayer to avoid financial liability:
- end of limitation period;
- individual tax consultation, general tax consultation, conclusion of the joint chamber, the Grand Chamber of the Supreme Court, the legal decisions of the Supreme Court, amended by the Grand Chamber of the Supreme Court;
- illegal decisions of regulatory authorities that guided the payer;
- the fault of the bank, payment, treasury, acquirer (for violations of Art. 124, 125), as well as the postal operator regarding tax statements filing;
- methodological errors or technical failure of the payer’s electronic account, etc.
The wrongfulness of the fiscal officials’ decisions, as well as the extent of the damage, still have to be proved through the court procedure in order to recover the damage in full.
In addition to global changes, may take pace many more important point adjustments to the Code, as well as to increase the size of some penalties, somewhere, 3-4 times.
Business needs to make a serious preparation for changes. It is unlikely that after 2020 tax “shocking therapy” for business will end, and the era of public private tax consensus will come after the epochs of primary accumulation of capital and fiscal chaos.