Offshore reform: on a common “picture of the world” for Ukrainian beneficiaries

Around the bill number 1210, which introduces the rules of control over transfer pricing (TP) and the withdrawal of capital in low-income jurisdictions, there is a lot of talk. However, this document is only one of many that introduces stringent conditions for beneficial owners of companies.

About the general logical chain of tax innovations for 2019–2020 and what to expect for company owners, said Mind senior partner of KAS Group Vladimir Garkusha.

Well, the notorious bill 1210 (law 466-IX) was finally signed by the president, a year and a half drama is completed. Now this one, poorly tailored from multidirectional articles, “normative Frankenstein”, according to People’s Deputy Nina Yuzhanina, “will have disastrous consequences for the economy of Ukraine”.

How MLI works

Perhaps, we need to start with the Law of Ukraine No. 2692 – VIII “On Ratification of the Multilateral Convention on the Implementation of Measures Relating to Taxation Agreements in order to Counteract the erosion of the tax base and the removal of profits from taxation,” which entered into force on April 2, 2019. The main goal of the Law is to counteract the erosion of the tax base and the removal of profits from taxation.

The latter entails significant changes to existing double taxation treaties. The introduction of the MLI standard (Multireteral Convention to Implement tax treaty Related Measures to Prevent BEPS) is directly correlated with the controlled operations within the framework of the transfer pricing (transfer pricing), especially regarding the participation in the business processes of Ukrainian enterprises of foreign companies.

TCO control is also an “overseas thing” launched in Ukraine since 2013, and, according to the management of the Office of the TCO of the Department of Tax Audits, Transfer Pricing and International Taxation, the SFS already has a “solid portfolio” of several hundred million hryvnias for promising fines against accrued fines as a result of checks.

Additional charges occur as controversial methods used established by Art. 39 NKU, and on the grounds of controllability of operations.

With whom exchange information on financial transactions

Bills No. 2102 (Law 322-IX) and 2103 (Law 323-IX) adopted at the end of 2019 also entered into force.

It is necessary to ensure the protection of data and information received by the control authorities on residents’ reporting on income, in particular, obtained from sources outside Ukraine, to take into account the issue of criminalizing the illegal disclosure of such data and information.

To finalize and submit in a three-month period to Parliament bill No. 1232 on a one-time declaration of income.

The first two questions are technical. But the third one clearly lays down in the general logical chain of tax innovations of 2019–2020.

What to expect Ukraine

Put aside the economic meaning. In Argentina (one of the world leaders in the number of tax amnesties), they are preparing for another default. In Italy, tax amnesties have recently been legally banned. As a result of tax amnesty in Georgia in 2005, revenues amounted to a record $ 35,000.

It seems that we have a different meaning – a drawback: “Whoever didn’t hide is not my fault. That is, whoever has not declared all income and property before X hour, let them prepare for penalties and forfeiture.

The last logical point will be the establishment of total control over consumption and its comparison with sources of income according to the tax return.

The logical chain of laws No. 2692, No. 2102, No. 2103, No. 1210, No. 1232 speaks clearly of the following: the lack of chances to conceal information on financial flows and property (including abroad) of a taxpayer with a “controlled” status.

And the attempts themselves will be punished by huge fines and confiscations. In the end, everything will rest in the beneficiary – a citizen of Ukraine, who, due to the adoption of CRS and CFC, will have to go through the crucible of tax compliance and financial monitoring in the context of BEPS in general and CFC (CFC) / CRS in particular.

This will affect almost every citizen of Ukraine in the categories of “middle-aged entrepreneur” and above. The result will be full transparency of the assets and businesses of the beneficiaries – Ukrainian citizens in fiscal terms, as well as the formation of a potentially huge base for imposing quite substantial penalties for violating tax laws, this has already been felt by domestic entrepreneurs after the introduction of the MTC.

What are the logical steps to meet tax innovations?

First of all, it is necessary to thoroughly analyze the relationships that can be defined as “actual control” and, having accordingly prepared, independently identify yourself as “KIK controller”, without waiting for the HFS to do this with the help of CRS.

We are talking about the implementation in Ukrainian legislation of a mechanism for exchanging tax information with other countries, in particular FATCA – the exchange of tax information with the United States.

This was followed by the adoption by Ukraine of the two most important BEPS standards: Common Reporting Standard (CRS) “Standard for the automatic exchange of information on financial accounts for tax purposes” and Controlled foreign Companies (CFC / CFC) “Controlled Foreign Companies”.

The idea of introducing both standards is to return the citizens ’money“ to their historical homeland ”, as well as to identify any foreign assets and tax them with“ native ”taxes. Those who do not react in time or try to evade – impose “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.

About the innovations of the bill 1210

Now Law 1210. We will not dwell on it in detail. In the context of this material, we only note that the document pays much attention to non-residents.

Namely: taxation of income of non-residents with a source of origin in Ukraine, new readings of the status of their Ukrainian representative offices, as well as their Ukrainian investment assets.

Adapt the ownership and asset management structure (especially foreign ones) to the terms of the CFC and the TPO, realizing that the point of all this is access to personal taxation of the individual beneficiary controller.

Beneficiaries should closely deal with the legalization of foreign assets (companies, accounts, real estate) in the Ukrainian legislative field. The same applies to Ukrainian assets. It is necessary to change the design of foreign economic activity. 2020 is allotted for all this.

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