Tax amnesty. What for?

VOLODYMYR HARKUSHA

Managing Partner K.A.C. Group

We analyze the draft law on tax Amnesty, its practical functions and possible consequences

The draft law 1232 on tax Amnesty was launched in last September, and is a link in the chain of laws 2692, 2102, 2103, 1210, which are aimed at collecting data through automatic exchange of information, identifying all assets in the form of businesses, real estate, etc. (especially foreign) and their taxation in Ukraine at the level of the ultimate beneficiary – a citizen of Ukraine.

It was supposed that the law would be considered by the end of this year, but the President, in his letter to the Prime Minister dated May 20, insisted that the law be submitted to the Parliament within three months. Let’s try to figure out what this law provides and what its practical function is.

In short, all assets are legalized for 5 percent paid, both in Ukraine and abroad. “Cache”, including the phantom, i.e. not existing, and so, invented for the future, legalized for 10%. Quite humane. Large amounts can be pulled out through government bonds for 2.5%, but this is a “long” time variant. Separately described objects that cannot be amnestied if they were obtained by criminal means (corruption, criminality). Here, by the way, is interesting: with the introduction of the CRS standard (automatic exchange of information), when the ownership of any assets becomes transparent, objects that do not fall under the tax Amnesty (the list in paragraph 4 of draft Law 1232) will find their ultimate owner – a corrupt official with all the ensuing consequences.

The special Declaration on legalized assets does not require confirmation of sources for the acquisition of such assets. But it is required, for the tax purpose, confirmation of the value of assets (real estate, securities) in the form of expert evaluation. Here is the moment, whose expert opinion will be accepted? There are many such technical issues. For example: after paying 5% of the amount held in the Swiss account of a citizen of Ukraine who wants to be granted amnesty, what happens next? Can his euro and francs continue to be located in Zurich (with an annual report on them in the SFS), or should they move to the Kremenchug branch of Ukrpromzemugolbank? So there his money will be legally, but not for long. He actually escaped his money from such a prospect to the Swiss UBS. The Special Declaration mentioned in the Law 1232 provides not only for the legalization of income from which taxes were not paid, but also for assets that were acquired for such income.

Also, we should mention the correspondence of Law 1232 with the recently signed by the President Law 1210. Of course, we are talking about controlled foreign companies (CFCs). If a citizen of Ukraine controls a foreign company, which is used as an operating company in its export-import operations, then Law 1232 is a good option for legalizing his CFC. But what if the property in Ukraine is on the balance sheet of CFC? According to the Law 1210, the retained earnings of his CFC are included in the taxable income of a Ukrainian citizen. And how to estimate the value of a CFC when it is legalized? Indeed, the real estate in Ukraine does not belong directly to a citizen of Ukraine, but only shares of a foreign company, which can differ in value from the value of real estate, due to the company’s credit obligations, for example.

Now about the practical function of the Law. His ideologists publicly call the Law a tax amnesty tool, as a result of which the country’s budget will be filled with tax revenues from the amnestied assets, and the economy will accordingly be filled with investments in the form of returned capital. A bit of history. Argentina (the world leader in the number of tax amnesties) is in default. In Italy, tax amnesties are already prohibited at the legislative level. The heroic tax amnesty in Georgia in 2005 brought revenues to the Treasury … 35 thousand US dollars. Yes, there were positive examples (India), but the general trends are as follows. In our case, we should rather talk about the amnesty of assets (capital), a one-time amnesty with payment of 5% and subsequent fines and confiscations in case of their concealment. For example, the fine for concealment by a citizen of Ukraine of a foreign company controlled by him is UAH 2,000,000 per one.

Well, as a practical advice. In the light of Laws 1210 and 1232, one way or another, we are talking about the Declarations. Or the standard on the income of an individual, or a special Declaration on the legalization of assets (tax amnesty). It concerns, first of all, persons who have not submitted the Declaration before. For example, we offer our clients to prepare a Report “On the analysis of income and property” for individuals before preparing the Declarations. The report is prepared by the auditors and specialists in the field of financial monitoring in accordance with the International Standard for Related Services ISRS 4400 “Engagements to perform agreed upon procedures regarding financial information”, the 4th and 5th AML Directives of the EU, 40 FATF Recommendations with amendments for 2019, Moneyval Recommendations for 2019.

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