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Full BEPS. How Many Fines Will Be Charged to Ukrainian Business for Tax Pranks in Europe
The meaning of the upcoming innovations is access to personal taxation of the individual beneficiary
The new tax year promises to be very busy. The Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Danylo Hetmantsev, perhaps by inertia, is already dragging the controversial Bill No. 1210 with its original tax innovations into the 2020 legislative year, passing it through the second reading on December 3. His colleague on the Committee, Nina Yuzhanina, believes Bill No. 1210 to be entailing “dire negative consequences for the entire economy,” which could lead to “the total closure of large and medium-sized businesses.” In turn, Finance Minister Oksana Markarova promises to start diagnostics of the domestic tax system from January 2020 in order to develop a new tax reform, which, if approved by the business, will be launched early next summer.
However, the likelihood of these rule-making moves in the tax direction is hardly predictable. And we would like to draw attention to the phenomena, which is, one might say, fateful for domestic entrepreneurs, and one way or another, will come in 2020, and their appearance will be felt by many. We are talking about the implementation of the BEPS (fight against unfair tax competition) rules and the two most important standards, which were previously adopted by Ukraine, into Ukrainian legislation: Common Reporting Standard (CRS, “Standard for Automatic Exchange of Information on Financial Accounts for Tax Purposes” and Controlled Foreign Companies (CFCs). The idea of introducing both standards is to return citizens’ money “to their historical homeland”, as well as to identify any foreign assets and impose “native” taxes on them, and for those who did not react in time or tried to evade – “native” fines.” And for this it is necessary to establish an effective exchange of information about the real owners of money in foreign accounts and accounts of foreign companies controlled by Ukrainian citizens.
These are not the first international fiscal initiatives in the BEPS context. On December 1 of this year, the Multilateral Convention on the implementation of measures related to the agreement on the avoidance of double taxation to prevent the erosion of the tax base and the transfer of profits (MLI) became effective in Ukraine. The introduction of the MLI standard directly correlates with controlled transactions within the transfer pricing, especially in terms of participation of foreign companies in the business processes of Ukrainian enterprises. Transfer pricing control is also an “overseas thing”, launched in Ukraine in 2013.
The client of K.A.C. Group in 2016 had a deal with a Polish partner (sp.z oo sp.k) for 12.5 million euros, and he did not indicate it in the transfer pricing report as controlled on the basis of Resolution of the Cabinet of Ministers of Ukraine No. 480 of July 4, 2017. But the State Fiscal Service, during the audit in 2018, proved that transactions with legal entities with the organizational and legal form of sp.z oo sp.k did not fall under the definition of controlled, provided that they were not associated with a resident of Ukraine.
The controllers, on the basis of an open Polish register, immediately proved that the Ukrainian and Polish enterprises were linked through one beneficiary. Result: for violation of the transfer pricing requirements – 1% of the transaction amount and a fine of UAH 755 thousand for failure to submit a report. In this case, the tax authorities tried to independently obtain information about the auditee, and after the adoption of the CRS, such information will be obtained automatically. And it can be used in conducting audits, which cover a period of as much as five years.
What are the results from the introduction of CFCs and CRS in developed countries? On October 11, the European Commission published a report “Assessment of International Tax Evasion by Individuals”, from which it follows that the volume of tax evasion among EU member states is at the level of 46 billion euros (0.3% of GDP). Germany is the locomotive of the European economy and is ahead, with 19% of the total.
In general, everything will ultimately rest on the beneficiary – a citizen of Ukraine, who, due to the adoption of the CRS and the CFCs, will have to go through the crucible of tax compliance and financial monitoring in the context of BEPS. This will affect almost every midsize entrepreneur and above. The result will be complete transparency of the assets and businesses of the beneficiaries – Ukrainian citizens, as well as the formation of a potentially huge base for the imposition of rather significant penalties for violation of tax legislation. This has already been felt by domestic entrepreneurs after the introduction of transfer pricing. By the way, there is information that it is planned to include information for 2018 in the CFC report (after the introduction of this rule into the legislative field of Ukraine).
What are the logical steps towards tax innovation? First of all, it is necessary to analyze in detail the connections that can be defined as “actual control” and, having properly prepared, independently define oneself as a” CFC controller”, without waiting for the SFS to do it with the help of CRS.
Adapt the structure of ownership and management of assets (especially foreign ones) to the conditions of the CFCs and transfer pricing, realizing that the point of all this is access to personal taxation of the individual beneficiary. In this connection, it is better to come to grips with the legalization of foreign assets (companies, accounts) in the Ukrainian legislative field, if necessary, changing the structure of foreign economic activity. Well, optimists can still hope for some time for the quiet sabotage of legislators, who will not rush to implement all the BEPS plan points, as they did before.
Director of the “Prime” Law Firm
Law “On Amendments to the Tax Code of Ukraine with the Purpose of Implementing the Plan to Combat Erosion of the Tax Base and Removal of Profits from Taxation” is essentially a law on controlled foreign companies (CFCs).
Its meaning boils down to the fact that a citizen of Ukraine is considered a controller of a foreign company if they are: an owner of the company by 50% or more; an owner of the company by 25% or more, and the company also has Ukrainian owners, who in total own 50% or more of the shares (stakes); a Ukrainian tax resident with other residents of Ukraine who actually control a foreign company; they have a power of attorney for more than a year with a wide range of powers; if they are indicated as the beneficiary of the company when opening a bank account. In this case, a citizen of Ukraine adds the adjusted profit (before tax) of their controlled enterprise to the amount of total income and pays income tax for individuals at a rate of 18% from the total income. In this case, the amount paid is reduced by the amount of corporate tax actually paid by the CFC in the country of registration.
In 2020, it is also planned to adopt the Law “On Amendments to the Tax Code of Ukraine Regarding the International Automatic Exchange of Information on Tax Issues – CRS-Standard of the BEPS Plan”, which will organically complement the CFC standard and ultimately render the use of conventional tax planning schemes meaningless.
Accepting the rules of total tax transparency of BEPS, CRS and CFCs, it is important to understand that all information about a citizen of Ukraine will be available and looped, starting from the data of the previous tax return, any income received in any country in the world as an individual or beneficial owner of companies, and ending with the amounts costs incurred. This includes such factors as the tax residence of the person, the center of their economic interests, applicable tax rates along the entire chain of structures up to the ultimate beneficiary. As a result, they receive an invoice for paying taxes, taking into account all of the above. Just like a monthly bill for payment of communal services from the housing office.