Tax Amnesty: Is It Safe to Submit Declarations?

Already in the summer, owners of the stashes hidden from the state will have to decide whether to reveal their untaxed income or take the risk and leave everything as it is. The government promises not to prosecute declarants for non-payment of taxes on “exposed” valuables and to give them the opportunity to pay at a minimum.

The managing partner of KAC Group Volodymyr Harkusha shared with the Ministry of Finance what the authorities tend to be silent about and the nuances of the bill drafts that will help make the right decision.

What Kind of Amnesty Wealthy Ukrainians Are Interested In

The bills on tax amnesty (No. 5153, 5154, 5155 and 5156, previously tested in the form of Draft No. 1232), were registered by the President in the Verkhovna Rada. They offer citizens to submit a one-time (special) voluntary declaration in the period from July 1, 2021 to July 1, 2022.

The declarant will have to indicate all assets belonging to them, from which taxes and fees have not been paid, and/or those which have not been declared during any of the tax periods before January 1, 2021.

Briefly, the essence of the amnesty is as follows  ?  the declarant will have to pay:

• 5% ?  from currency values ??placed on accounts in banks of Ukraine and other assets located in the country;
• 9% ?  from foreign currency in bank accounts and other assets located abroad, as well as the right to claim money against non-residents;
• 5% ?  from domestic government bonds purchased in the period from January 01, 2021 to June 06, 2022 prior to filing the declaration.

The ideologist of the tax amnesty, Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Danylo Hetmantsev defined the main goal of the amnesty: “I believe it will be a victory if we legalize up to $20 billion”.

For reference, India is considered one of the most successful examples of the tax amnesty. There, about $ 9.5 billion was returned to the country, but in Italy tax amnesties are prohibited by law: they are ineffectual and have essentially become outdated.

Therefore, experts’ treatment of the deputy’s statements can be compared to that of a soldier who has visited a circus: it is not funny.

It is more rational to look for the practical meaning of the amnesty not in a one-time filling of the country’s budget with tax revenues from amnestied assets, not in investments in the form of returned capital, but as of a part of a “long game”. Namely, it is preferable to legalize capital and have a permanent controlled and predictable object of taxation. Thus, we are talking not of a tax amnesty, but a capital amnesty. Wealthy citizens are also thinking about the possibility of switching to official salaries in order to adapt to modern reality, which places all of us in a dynamic system of rules for financial monitoring, exchange of information and striving for total tax control. Now let us dwell on some of the less obvious nuances of the mentioned draft laws.

Who Will Not Be Forgiven?

Legislators will not extend a friendly amnesty hand to everyone. It is quite logical that the amnesty will not apply to the assets of an individual obtained as a result of a criminal offense (except for those related to tax evasion and violations in the field of currency legislation).

Moreover, all categories of PEP (Politically Exposed Persons) are not eligible for amnesty, i.e., officials, deputies, prosecutors and judges who have filed an income tax return since 2005 at least once. The legal “disfranchised” also include persons who, in accordance with the law on the prevention of corruption, are considered close persons of PEPs, and there are as many as 64 categories in the BEPS classification.

Here comes an interesting point: with the introduction of a CRS (common reporting standard), when the ownership of any assets becomes transparent, objects that do not fall under the tax amnesty will reveal their ultimate corrupted owner with all the ensuing consequences.

Why the 5% Rate Will Not Work

The initial version of the draft amnesty law (No. 1232) provided for a general 5% rate on legalized assets, both Ukrainian and foreign ones. Now it is intended to charge 9% from foreign assets. By and large, the 5% rate is unlikely to be successful at all.

Firstly, it is difficult to imagine “ownerless” millions in Ukrainian bank accounts, which have acquired a true owner. After all, the financial monitoring regime in domestic financial institutions has existed for several years. The same goes for real estate and corporate rights.

Secondly, it is not possible to get money “from under the mattress” either, as the issue of legalizing “cash” is closed. In the original version, phantom cash was recognized as real cash for 10%. Now real cash, for the purpose of legalization, will have to be cleared through the bank. The first question you are asked there is highly confusing: “indicate the source of the funds.”

What Are Other Risks for the Declarant?

There are some peculiarities of declaring foreign assets. On the one hand, even according to above-mentioned Hetmantsev, one will have to provide an adequate justification for the cost, for example, of a house in Spain: contract under which it was purchased, expert’s assessment, stock exchange summary of similar real estate in this region, etc. However, domestic tax authorities may have their own opinion on how to determine the value of the declared asset. In this case, the declarant will be charged a tax of 18% for the difference between the price set by the tax office and the one indicated in the submitted documents.

There is another important question, which has not yet been answered: what to do with the amnesty funds associated with the obligations? Suppose they are in an investment portfolio with a time horizon of four years that goes beyond the end date of the end of the amnesty. A unilateral exit from investment programs entails heavy fines.

Again, the original version provided for a 2.5% tax on legalized funds that are invested in domestic government bonds without specifying the placement period. Some have already come up with a scheme with the purchase of “short-term” securities (with a maturity of three months). The final version stipulated for a year. All the same, not a single foreign bank will give a guaranteed 3.48% per annum in USD, where a negative rate of 0.3% on an amount over a million has been practiced for a long time.

Kept on the Hook by the State

It will be possible to submit a voluntary declaration with legalized assets in an anonymized manner (without identifying the declarant) through a specially authorized representative  ?  a notary. The declaration form and the procedure for declaring will be established by the Cabinet of Ministers of Ukraine. Nevertheless, in personal communication with notaries, it did not express much enthusiasm in this regard.

It suspects that it will act as a tax agent in such cases, just as in real estate transactions. However, one will have to deal with the intricacies of determining the value of the declared property, but there are many nuances (described above) and great responsibility.

The state guarantees non-disclosure of information contained in one-time (special) voluntary declarations and prohibits the use of this information, except (attention here!) cases when it is expressly provided for by laws or a court decision.

Our experienced citizens interpret this point unambiguously: figuratively speaking, they will be robbed. Fiscal or law enforcement agencies will not miss on the opportunity to use the information provided to organize a criminal case not under a tax or currency law article, but, for instance, an economic one, to which the amnesty does not apply.

In any case, quoting Danylo Hetmantsev again, “2021 is actually the last year to legalize salaries freely.” This can be done in two ways: by taking advantage of the tax amnesty or through Law 466 – IX, i.e., tax-free legalization of foreign assets of a liquidated controlled foreign company.

Those who have not declared all income and property by H-hour will have to get ready for fines and confiscations. The final logical point will be the establishment of total informational control over all assets anywhere in the world through the introduction of a CRS (common reporting standard).

Zero Declaration Algorithm

Declaration object: assets in Ukraine and/or abroad acquired from income that were not declared for any tax period as of January 01, 2021.

Subjects:

• individual residents,
• individual non-residents who were residents at the time of acquisition of assets/income.

Persons prohibited from filing a declaration:

• minors/underage or disabled persons;
• persons who, for any year, starting from January 01, 2005, filed or must file declarations in accordance with anti-corruption legislation (except for those who submitted such declarations in connection with the completion of relevant competitions/procedures and were not appointed or elected to relevant positions).

Submission form:

electronic personal or impersonal (submitted through a notary, the declarant is personified through a special code).

Assets subject to declaration:

any assets, including movable/immovable property, securities, corporate rights, in respect of which the subject of declaration is the owner, or from which they have the right to receive income.

Assets that cannot be declared:

• Assets received as a result of criminal offenses, excluding those received from evasion of taxes/fees or violations of currency legislation;
• Assets of persons in respect of whom there is an open court proceeding under Articles 209 (legalization of proceeds from crime), 258-5 (financing of terrorism) and 306, Parts 1-2 368-4, 369 and 369-2 of the Criminal Code of Ukraine;

Deadline for filing a special declaration:

from July 01, 2021 to July 01, 2022 inclusive.

Taxable base for assets:

• For currency values ??and monetary claims ?  the monetary or nominal value that must be documented,
• For other assets ?  acquisition costs, appraised value, market value or independently determined value for movable property located (registered) in Ukraine, with the exception of vehicles and precious metals.

Asset value documents:

• currency and the right of a monetary claim are to be submitted,
• other assets that are located (registered) in Ukraine are to be submitted at the discretion of the declarant,
• other assets that are located (registered) abroad are to be submitted.

Rates:

5%  ?  for currency values ??placed in bank accounts and other assets that are located (registered) in Ukraine,

9%  ?  for currency in bank accounts and other assets located abroad, the right to monetary claims against non-residents,

2.5% – for domestic government bonds purchased in the period from January 01, 2021 to June 20, 2022 before the submission of the declaration.

Special requirements. Funds in Ukraine shall be placed in special accounts.

Tax payment deadline. Within 10 calendar days from the date of filing the declaration.

Tax audit of a special declaration: a desk audit under a special procedure, the source of income is not checked.

Assets not subject to obligatory declaration:

real estate in Ukraine in accordance with state registers in the form of:

• an apartment up to 120 sq. m or property rights to such an apartment;
• a residential building up to 240 sq. m or its construction in progress, subject to ownership of the land plot;
• non-residential real estate (including unfinished one) for non-commercial purposes up to 60 sq. m;
• land plots within the standards of free privatization;
• one vehicle included in the register (except for a vehicle intended for the carriage of 10 people or more, or except the case the vehicle engine volume is at least 3000 cubic cm, or its average market value is 375 minimum salaries, motorcycle ?  800 cubic cm, aircraft, helicopter, yachts, boats),
• other assets with a total value not exceeding UAH 400 thousand.

Mirror

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