Tax Automatic Exchange: Who Got on the Hook of the State Tax Service, and Why It Classified the Data Received

Ukraine classified the financial information received by our State Tax Service (STS) from its foreign colleagues as part of the exchange of financial information under the CRS. It is known that the STS departments have already started processing a mass of information: Ukrainians receive requests from the tax office based on this information. Legal experts are preparing for an increase in the number of CRS-related legal disputes with tax authorities.

What Data Has the Tax Office Already Received?

In early October, the STS announced the first successful automatic exchange of financial information between Ukraine and partner countries based on the Common Reporting Standard (CRS). So far, 120 countries have joined it.

“As of today, information on the refusal to exchange information with Ukraine according to the CRS standard has not been received from the supervisory authorities of foreign jurisdictions,” Artem Chekhlov, Head of the Department for the Prevention of Financial Transactions Related to the Legalization of Proceeds of Crime, noted in a comment for “Minfin”.

At the same time, he clarified that now only 54 countries have participated in the actual exchange of data: they have currently activated the necessary procedures.

“The next exchange of CRS information will continue until September 30, 2025,” Chekhlov clarified.

During the exchange of information, banks, insurance, investment companies and other financial institutions provide the following information:

◉ name of the account holder;

◉ address;

◉ tax residency;

◉ tax number;

◉ date/place of birth;

◉ financial institution data;

◉ account data;

◉ balance of funds in the account at the end of the reporting period;

◉ the total amount of dividends, interest or other income.

Our tax office received data on both individuals with foreign assets and business representatives. Lawyers are sure that this is a large volume of information.

They have no doubts: if the information received as part of the automatic exchange is not sufficient, then clarifying requests will be sent to individuals or enterprises. Fiscals have always had such an opportunity, especially as part of inspections of foreign companies controlled by Ukrainians.

“The information received as part of the automatic exchange on the accounts of foreign companies can be used by the tax authorities, including to monitor the compliance of our residents (both individuals and legal entities) with the CFC rules,” Volodymyr Sytnik, K.A.C Group Partner and lawyer, confirmed to “Minfin”.

He reminded that as part of the first automatic exchange, Ukraine provided information only for the second half of 2023 for the accountable accounts of non-residents — individuals and legal entities which started operation after June 1, 2023, as well as for the accounts of foreign individuals opened by June 30, 2023 with a balance or value of more than $1 million. At the same time, Volodymyr Sytnik suggested that Ukraine could receive data from partners for the entire year of 2023 or even retrospectively, if such a clause was included in bilateral agreements with a partner country.

“The CRS agreement itself does not establish a certain amount, upon reaching or exceeding which information is exchanged. Therefore, the projected volume of data is really significant and will only increase with the next automatic exchange,” Sytnik says.

Why Did the Tax Office Classify Received Information?

Olha Cherevko, Managing Partner of GLS Law Company, believes that the analysis of the information received now may take several months or even more, depending on the complexity and volume of the data.

“CRS allows to expose a wide range of schemes related to the use of offshore jurisdictions to hide assets. Increasing the level of information transparency can lead to the detection of undeclared investments and unregistered accounts,” she explained to “Minfin”.

The STS itself does not give forecasts regarding data processing. At the same time, Artem Chekhlov from the State Tax Service clarified to us that a special unit was not created in his department to analyze the received information.

“Structural units of the STS carry out processing and analysis of CRS information in accordance with their competence, in a general manner using a risk-oriented approach,” says Chekhlov.

Experts are sure that fiscals will start with large cases, and it may take half a year or more to process them alone.

“CRS is a tool for taxpayers to identify discrepancies in a taxpayer’s declared income and taxes paid. At the same time, CRS makes it possible to detect facts of non-declaration of income of controlled foreign companies.

The possible consequences for the taxpayer will depend on the depth of the analysis of the information received and collected by the controlling body, the tax history of the taxpayer, as well as the history of the formation of the sources of income,” says Ivan Maryniuk, Head of the Tax Law Practice at Ilyashev and Partners.

In its official request to the State Tax Service, “Minfin” asked to provide information on the amount of data received (by the number of covered natural persons, sole traders, legal entities), on the most interesting cases and countries that provided the largest amount of information. However, we received a categorical refusal to provide it with reference to the laws “On Access to Public Information” and “On National Security”.

“Information received by the supervisory authorities from the competent authority of a foreign state, in accordance with international agreements containing provisions on the exchange of information for tax purposes, consent to the binding nature of which has been granted by the Verkhovna Rada of Ukraine, or drawn up on the basis of interdepartmental agreements, is the information with limited access,” Artem Chekhlov informed.

According to him, in the case of disclosure of information about CRS in the media, “Ukraine may be recognized as an unreliable partner.” And this can lead to a stop of data exchange and negatively affect our economic security. Chekhlov assured that the refusal to provide us with the details of the exchange is in the “national security interests” of our country. The editorial office of “Minfin” publishes the full version of the State Tax Service’s response below.

Tax Requests Were Sent to Two Regions

What is definitely not a secret is the first results of CRS information processing by our tax authorities. They are already spilling over into requests from the STS regarding ordinary Ukrainians and businessmen. Tax lawyers confirmed this to “Minfin”.

“Currently, the STS is actively sending requests to the owners of foreign controlled companies, including those from which they did not receive the expected CFC reports, despite the available tax information on the ownership of CFC shares. We have information from our clients, PEPs (politically exposed persons, politically significant persons), who were recommended (not by the STS) to review their declarations by the National Agency for the Prevention of Corruption, because their declared amounts did not match the amounts declared in the CFC reports,” Volodymyr Sytnik commented.

Ivan Maryniuk clarified that it is known about the distribution of tax requests in the Kyiv and Rivne regions based on the information received from the United Kingdom. His Majesty’s Revenue and Customs (HMRC) operates in this country.

“Information received from foreign tax authorities is partially processed, and taxpayers receive tax requests. Given the small amount of time that has passed since the exchange of information, and even the processing of clients’ requests, we have highlighted the following facts for ourselves. The first is that the requests were received by natural persons who are not entrepreneurs and had no income in Ukraine, the second is that the basis for such requests are the data of the British tax office, the third one is the geography of the requests – Kyiv and Rivne regions,” Marynyuk told us.

Olha Cherevko also confirmed the requests of our tax officer and specified their thematic focus: “Most often they concern undeclared assets abroad or discrepancies between declared income and assets. The most interesting cases concern entrepreneurs who tried to understate their income through offshore structures, as well as individuals who have undeclared real estate abroad.”

What Should Taxpayers Do?

Lawyers explain that the main purpose of the STS’s requests is to collect and verify information to identify tax law violators. If violations are discovered and proven, those who committed them will be charged additional taxes. In this way, control over the implementation of the mentioned CFC rules, which imply appropriate reporting and control, will be carried out.

“Here lies one of the most common and grossest mistakes. Beneficiaries-controllers of CFCs freely disposed of the funds of controlled companies in foreign bank accounts. From them, payments were made to their own individual (and family members) accounts, purchases were made for needs, regardless of the tax consequences.

The tax authorities and Mr. Hetmantsev (Chairman of the Finance Committee of the Verkhovna Rada — ed.), in particular, have repeatedly made statements regarding the facts of the discovery of more than 3,000 of potential CFC controllers after the end of the declaration deadline,” Volodymyr Sytnik clarified.

Ivan Maryniuk reminded that the detection of discrepancies between the incomes declared and revealed by tax officials can be the basis for issuing tax notices-decisions. Foreign income is taxed: personal income tax at 18% and military tax at 1.5% (5%, if the new tax law, recently adopted by the parliament, is signed).

Lawyers advise to regularly check mail at one’s tax address and in the taxpayer’s electronic account now. If a person is physically abroad, a corresponding electronic request can be sent to the STS. This is necessary in order to stay updated and track the relevant requests of tax officials.

If such a tax request arrives, it is not recommended to be in a hurry to respond to it. The first recommendation of lawyers is to check the correctness of its drafting in terms of form and substance, in accordance with clause 73 of Article 73 of the Tax Code, and decide if you have to protest against the actions of the fiscal.

“If the request is made in violation of the requirements of the law, the taxpayer is released from the obligation to respond to such a request. In general, to prepare a response to the request, we advise to immediately contact specialists, since the provided information and documents can be used in the future to conduct an audit of the payer and potentially to assess tax liabilities,” Volodymyr Sytnik explained.

Errors and Miscalculations

Lawyers assure that after the first CRS announcements, they urged clients with foreign assets to be as transparent as possible and to declare income received outside of Ukraine. The latter must comply with capital purity rules not only at home, but also in other countries, where financial monitoring by financial institutions can be even stricter than at home.

“Capital with any tax violations will be considered by these banks as violating AML requirements and may be the cause of additional investigations. CRS is also subject to the rules of controlled foreign companies (CFCs), so our clients have made full disclosure,” Kostiantyn Soliar, Partner of Tax Law Practice in Asters, explained to “Minfin”.

Nevertheless, he admitted that not everyone listened to the advice of jurists. Many shrugged off the new reality, assuming that they would not be affected by the new rules.

“In general, among entrepreneurs and individuals, only a part was preparing for CRS. The problem is that many of them have tried to ignore the issue, hoping that their assets will not be checked. From a legal point of view, proper preparation requires a full declaration of assets, but most people tried to limit their efforts to a minimum, which, as practice shows, leads to problems,” says Olha Cherevko.

“Some of the declarants had doubts about submitting reports or postponed solving this issue until later. Some decided not to report in Ukraine at all, given their stay abroad, obtaining a residence permit and a local tax number,” Volodymyr Sytnik added.

Kostiantyn Soliar explained that a typical mistake is made when a person, knowing that they had not paid some tax, plans to hide these funds behind a new purchase (real estate), not realizing that it will only make the situation worse. Lawyers recommend to avoid such an option.

“We immediately informed such potential clients that, if the proper tax was not paid on these sums of money and the funds were used in such a scenario, they may be separately prosecuted in European countries for a separate crime – money laundering. We persistently asked them not to do such a thing,” Solyar emphasized.

Based on the fact that automatic exchanges of information under the CRS will become regular, legal experts now advise not to brush off problems, but to check your assets, account movements and submit reports to the STS. But even after that, one should check again whether any requests are being received from tax officials. They should not be ignored or avoided.

It is very important to respond on time, within the terms specified in the current legislation:

◉ 15 working days from the moment of receipt;

◉ 30 days for certain cases, such as transfer pricing reporting;

◉ 2 months to submit additional explanations regarding CFCs.

In this regard, one cannot forget the importance of keeping documents confirming the source of funds. This especially applies to financial transactions for significant amounts.

Disputes and Lawsuits

Tax lawyers interviewed by “Minfin” believe that the STS will try to make maximum use of the data received as part of the CRS. The inquiry and checks may not start very quickly, but gradually the fiscals will unfold their efforts.

“We see the growing interest of the tax service in the foreign income of citizens. The STS is actively mastering the toolkit for additional taxes on income from foreign sources, which appears to be quite distant and unclear for our citizens.

Many have already heard about checks of receipt of income by Ukrainian residents from activity on foreign platforms and corresponding surcharges under already existing agreements on administrative assistance in tax matters with the competent authorities of other countries. And now the tax office received one more important tool, thanks to which the information is being received without much action. Of course, we need to prepare for an intensified scenario,” Volodymyr Sytnik believes.

Experts do not yet undertake to predict the number of tax notices-decisions and the amount of collections that may follow the first exchange of information within the CRS framework. However, they predict an increase in tax disputes with the STS in the coming months.

“Ignoring the requests of the tax office in the long run may result for the taxpayer in a court case regarding tax debt collection. At the same time, the amount of tax debt can include not only tax arrears, but also the amount of penalties and fines,” Ivan Maryniuk noted.

In such cases, taxpayers are unlikely to do without the support of lawyers, but even with their involvement, the STS can win court disputes, thanks to the information collected.

“Controversies related to tax surcharges may create more problems for businesses, and for individuals they may raise doubts about the legality of charging taxes on their international income and the legitimacy of the origin of funds. If individuals cannot confirm the legality of their assets and income, most disputes can be resolved in favor of the tax authorities,” Olha Cherevko summarized.

Source