Tax Amnesty: How to Deal with Fiscal Inspectors and Financial Monitoring

Опубликовано: 26.08.2021

12 days are left until the start of filing zero declarations. From September 1, citizens can declare income from which the relevant taxes and fees have not been paid before. The “Minfin” website, with the participation of Tetiana Kuzmych, considers arguments for and against taking this opportunity.

Who Needs It?

The state will benefit from the tax amnesty no matter what. The Head of the Parliamentary Committee on Finance, Tax and Customs Policy Danylo Hetmantsev has repeatedly stated: the purpose of the tax amnesty is to bring money back to the Ukrainian economy.

Still, the mercantile interest is also there. According to Hetmantsev, citizens now own over $50 billion undeclared. He is sure that even if legalizing at least a part of this money will already be a success. This is understandable, because in this case, the budget will receive millions paid from the “exposed” assets by declarants.

In theory, the tax amnesty will also make it possible to assess the real volume of the economy, including the actual income of the population. This means, for example, that completely different figures of the minimum wage, living wage, etc. will be introduced as a basis when planning the budget.

For instance, the system and methodology for calculating subsidies can radically change; all indicators that are now used by official statistics and government agencies will become different.

However, the benefit of citizens, whose tax repentance is so awaited by the state, is not as clear. The tax amnesty still looks like a walk through a minefield for them.

On the one hand, it is profitable to start relations with the state from scratch. This enables a declarant to freely use their property in the future, which is important when the state begins to compare the income of its citizens with their expenses. Under these circumstances, buying a house or another large asset for a million, when your income is UAH 10 thousand, will become impossible at best (though still feasible thanks to established schemes) and will lead to fines or imprisonment at worst.

“If you know that in the future you will definitely acquire expensive property or other valuable assets worth over UAH 400 thousand, it is better to declare, since tax authorities will still clarify their source of origin in the future. If there is no declaration, the State Tax Service will oblige you to pay in any case,” Ihor Yasko, Managing Partner of the “Winner” Law Firm, explains.

Danylo Hetmantsev announced on his Facebook page that the government is already preparing a bill on indirect methods of tax control.

Nevertheless, this may still not be enough.

“We will have to declare the moment an effective cost control mechanism is actually launched. To do this, it is necessary, at least, to legalize the entire trade turnover. Hetmantsev himself admitted in one of his interviews that clothes or leather goods are 100% illegal turnover. The property that is subject to registration – such as real estate, transport – is checked, control is possible for it, but what about the rest? There is no control over the entry of goods, so who can force to declare them?”, Head of the Global Payment Security Association in Ukraine, Oleksii Troinikov, asks.

And yet, sooner or later, the state will resolve this question too. On the other hand, it will be possible to end up in jail or under the continuous pressure of law enforcement officers by submitting a declaration. After all, the amnesty exempts from liability for tax and single social security contributions evasion, violations in the field of the currency legislation and the protection of economic competition. However, if the agencies so desire, the declarant can be held accountable for other “economic” articles. Another thing is that such cases, most likely, will not be widespread, but will be opened point-wise, following someone else’s order.

This is just the tip of the iceberg of the dilemmas faced by potential declarants. In fact, as practicing lawyers say, the risks of declaring, as well as the benefits of participating in it, are much greater.

Bank’s Financial Monitoring Will Ask You About the Origin of Money Anyway

The number of those whom the state wants to see among the participants in the declaration campaign is significant. For example, this list includes:

  • employees of companies who received high salaries “in envelopes” or worked without official registration;
  • entrepreneurs who have not paid taxes or have minimized taxation;
  • persons conducting independent professional activities – notaries, lawyers, artists, doctors;
  • migrant workers who have worked without official employment.

The lawyers say that a lot of their clients are seriously considering the possibility of whitewashing assets purchased with untaxed income and cash stored “under the mattress”. Still, even the initial introduction to the proposed rules completely discourages many people from getting involved in this procedure.

“Tax authorities will not check the source of the funds, which, in fact, is presented to the public as a guarantee of the absence of any further persecution by the regulatory authorities.

However, the law establishes a clear obligation: in order to declare cash, it must be deposited into a special account in the bank. As for the banks, the National Bank of Ukraine issued a separate regulation on August 5, 2021, which obliges banks to establish the source of the origin of funds that will be deposited into a special account,” Vasyl Andrusiak, Partner at “Moris”, explains.

“Stron Legal Services” Lawyer Kateryna Strukova believes that the norms of the said resolution of the National Bank cast doubt on the very possibility of the amnesty.

If citizens have confirmation of the legality of the funds placed on the account (sale of real estate, gift, inheritance, interest on deposits, etc.), taxes have already been paid from them. This means that these funds cannot be “amnestied” again with the payment of the appropriate fees.

“Otherwise, the bank may restrict operations with monetary assets if the declarant cannot convince the bank of the legitimacy of their sources of origin,” Kateryna Strukova says.

Yuliia Fedosiuk, Partner of the Tax and Corporate Law Practice at “Asa Group”, adds that it will be possible to transfer money from a special account to a current account, withdraw it or use a special account as a regular current account only after the confirmation of the sources of origin of the funds. As such, those who intend to declare money by placing it on a special account run the risk of losing it altogether.

Of course, the task of bank’s financial monitoring is to detect terrorists, corrupt officials, or, say, those who received money from the aggressor state.

“Nonetheless, giving explanations to the bank along the lines of “I received the envelope salary”, “I was a migrant worker”, “I traded for cash” is risky, given the level of information protection in Ukraine and the possibility of its leakage both to law enforcement agencies and to criminals (and you can imagine the results of such a leakage). Moreover, it is not known whether the banks themselves will be ready to believe such explanations,” Vasyl Andrusiak warns.

Therefore, he advises those who decide to declare cash through a special account anyway to collect as much evidence as possible that their funds have nothing to do with money laundering or terrorist financing.

“Let’s say, if we are talking about migrant workers, it will be possible to show facts of crossing the border: there are marks in the passport, invitations to work, tickets, probably even information from personal pages in social networks, where certain facts are recorded.”

There is still hope that the state will make life easier for the declarants. On July 27, at the Tax Amnesty 2021 Forum, Danylo Hetmantsev announced the preparation of a number of documents, which, among other things, will facilitate the process of bank’s financial monitoring. Until they appear, the declaration of cash should not be rushed.

Another risk of placing funds on a special account is the ability of the tax office to conduct an unscheduled documentary audit during the year if violations in the procedure for such placement or the absence of the required documents are revealed.

At first glance, everything looks proper: the tax authority sends a request, and within the next 15 working days the fiscal authorities need to provide the required explanations or requested documents.

“However, if for some reason you have not received the request (due to a vacation or being abroad, etc.), and the request was returned to the addressee (the practice of working with individual entrepreneurs and legal entities shows that the request in this case is considered to be handed over), you will automatically be appointed to an unscheduled check and obliged to pay the full rate of personal income tax of 18%.

The same applies to cases where, in the opinion of the tax authorities, not all documents or not all explanations have been provided. There are many “ors” that carry the risk of turning the fee of 5%, 6%, 9% and 11.5% into an 18% personal income tax within 365 days,” Anna Ihnatenko, Partner at “ID Legal Group”, says.

She, nevertheless, also hopes that the tax authorities will provide clear explanations on this issue and establish a strict framework for the application of this particular provision of the law.

As Ihnatenko comments on the current state of affairs, “We are only getting oral assurances that there will be no checks.”

This is another argument why you should not rush to place money on special accounts. Additionally, there is still a whole year ahead to do it.

Who Will Benefit from Declaration?

And yet, there are cases when citizens can benefit from participation in one-time declaration, for example, to significantly save on taxes. How does this work?

Imagine you have received income from investment activities, remuneration under civil law contracts, acquired assets, etc., this year. In this case, if there had been no tax amnesty, by May 1 of the next year you would have had to file a declaration of property status and pay personal income tax at a full rate.

Now the same can be done with the help of a one-time declaration, and tax can be paid at preferential rates.

The authors of the law say that they tried to do so to prevent such a possibility, and, therefore, formulated the following provisions: only the assets acquired before January 1, 2021 can be declared. Despite this, the lawyers argue the relevant rule was written out carelessly, and it can be interpreted in such a way that the funds for which assets have been acquired already this year should have been earned until January 1, 2021.

In Yuliia Fedosiuk’s words, “One of the principles of tax legislation is the principle of the legality of the decisions of the taxpayer if the norm of the law presupposes an ambiguous or multiple interpretation of their rights and obligations.

Therefore, in the case of the assets acquired in 2021, such ambiguity of the norm may theoretically be used to declare these assets within the framework of the tax amnesty. At the same time, it is necessary to be prepared for a dispute with the tax authorities and going to court. Still, the judicial practice provides for good chances for the declarant to win in such disputes.”

The lawyers also state that declaration will help to avoid claims of a foreign financial monetary authority and other regulatory authorities against Ukrainian residents who own foreign assets. Still, there are also certain nuances.

Tetiana Kuzmych, Senior Partner at “K.A.C. Group”, told the “Minfin” that the IMF and the EBRD are not really fond of amnestied “gray” money, which is considered to be an improper competitive discrimination against the money earned in international business in an “honest” way and used to pay taxes. This casts a shadow over the entire system.

“Under international law, amnestied assets are considered “clean”, and their origin and taxes paid on them earlier cannot be questioned. In practice, though, issues may arise.

Let us say a Ukrainian citizen applies for investment citizenship in Malta, wants to buy real estate in Spain, or intends to open an investment account in a Swiss bank. Of course, the police will not be involved, but the completion of the compliance procedures will be obligatory. Although, most likely, you will simply get rejected,” she says.

Hryhorii Tripulskyi, founder and Director of the “De Jure” Legal Consulting Company, says that, by having legalized funds located abroad, our citizen does not necessarily escape the prosecution by the Western financial monitoring or tax service.

“While Ukrainian tax authorities have no further questions about the origin of the money after receiving the declaration on capital amnesty, a foreign bank can easily arrest the account and demand to explain how money appeared on the account and what origin it has. But it will not be difficult to open a new account abroad and provide a tax amnesty declaration as the origin of the money,” he adds.

In other words, if the money is already in a foreign bank account, then it is better to keep silent about it. Alternatively, if you are going to transfer funds abroad and cooperate with foreign banks, the tax amnesty will greatly simplify this task.

Should One Reveal Their Untaxed Salary?

According to of the State Statistics Service, every eighth employee receives an envelope salary in Kyiv, and every fifth employee receives it in the rest of Ukraine. Economists at Ukraine Economic Outlook established that this figure is even higher and reaches 30-40% at minimum. Considering that there are about 16 million workers in Ukraine, the question of whether or not to declare such shadow income is now faced by nearly 5 million Ukrainians.

Even experts do not have an unequivocal solution to this matter.

“When answering the question “is it worth it for employees to take part in declaration?”, we need to clearly understand that, by receiving an envelope salary, an employee actually becomes an accomplice in the crime. Therefore, they are obliged to declare the funds received and pay tax on them,” Andrii Timonov, Lawyer of the “Riyako & Partners” Law Firm, believes.

His colleague does not share this opinion. Stanislav Klimov, Partner at “Kodex” International Law Firm, explains: “The Tax Code obliges a taxpayer to submit an annual declaration of property and income, but such an obligation is considered fulfilled if the person received income in the form of an official salary, as in this case, they received income from a tax agent (employer), who pays taxes for their employee. It is the employer who will be held liable for violation of the requirements of the legislation on the official employment.”

To make the right decision, one needs to consider a few more details. First, the legislation does not oblige the declarant to disclose the source of income, so, theoretically, an unscrupulous employer can remain undisclosed. However, if declaration of cash through placement on a special account in a bank is carried out, information about it will most likely come to light.

Secondly, the law exempts from liability only the individuals declaring, but not legal entities. Consequently, if the name of the company that does not comply with labor laws comes up, it will not escape responsibility.

Finally, the government is preparing legislative proposals that will strengthen the responsibility of legal entities for such violations. This means that top figures of such companies will have to come face-to-face with many unpleasant moments.

What Does the Law Say about Zero Declaration?

Who can use declaration:

resident natural persons, including self-employed persons, as well as non-resident natural persons who were residents at the time of acquisition of objects of declaration or at the time of receipt of such income.

Who cannot be a declarant:

  • minors,
  • persons against whom Ukraine has applied special economic and other restrictive measures (sanctions),
  • persons who, in any year starting from January 1, 2005, have filed or should have filed a declaration in accordance with the anti-corruption laws.

What assets can be declared:

  • currency valuables,
  • immovable and movable property (vehicles, objects of art or antiques, precious metals, jewelry),
  • property rights to objects of intellectual property,
  • securities and/or financial instruments determined by law,
  • rights to receive dividends,
  • other assets of an individual, including property, banking metals, except for those not placed on accounts.

What assets are not subject to declaration (due to being considered already amnestied):

  • assets the total value of which does not exceed UAH 400 thousand as of August 31, 2022;
  • one vehicle for personal non-commercial use, with the exception of a vehicle designed to carry 10 or more people, a passenger car with an engine capacity of at least 3 thousand cubic cm or the average market value of more than 375 times the minimum wage, a motorcycle with an engine capacity of more than 800 cubic cm, aircraft, helicopter, yacht and boat, the ownership of which was registered at the time of declaration;
  • real estate on the territory of Ukraine, which, as of August 31, 2022, belonged to an individual on the right of ownership, which is confirmed by the data of the relevant state registers, including:
  1. a) residential real estate:

apartments/flats with the total area of ​​up to 120 sq. m or property rights to such an apartment or apartments in the apartment building under construction, confirmed by relevant documents;

residential house/houses (including unfinished construction if an individual has the right of ownership to a land plot of the corresponding designated purpose) with the total area of ​​up to 240 sq. m;

  1. b) non-residential buildings for non-commercial purposes and/or non-residential buildings of unfinished construction for non-commercial purposes, the total area of ​​which does not exceed 60 sq. m;
  2. c) land plots, the aggregate size of which for each individual plot does not exceed the free transfer rate specified in Article 121 of the Land Code of Ukraine.

Deadlines for filing a special declaration:

The deadline for filing a special declaration on amnestied income is one year: from September 1, 2021 to September 1, 2022.

What taxes must be paid for a one-time declaration:

Within 30 calendar days from the date of submission of the declaration, one must pay a special fee in the amount of:

5% – for objects located and registered in Ukraine, in particular, currency valuables placed ​​in Ukrainian banks;

7% – for assets located abroad, if the declaration is filed before March 1, 2022 (the rate is reduced to motivate for prompt disclosure)*;

9% – for assets located abroad, if the declaration is filed after March 1, 2022*;

2.5% – for income used to purchase government bonds from September 1, 2021 to August 31, 2022*, with a maturity period of over 365 days without the right to advanced repayment.

* It is possible to apply an increased rate (+ 2.5%) with payment by three equal annual installments. The due date for payment of the fee will also be changed accordingly.



Read more:

Tax Amnesty in Detail

Tax Amnesty: Is It Safe to Submit Declarations?


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