Changes to the Tax Code of Ukraine Regarding Implementation of the International Standard for Automatic Exchange of Information on Financial Accounts (CRS)

Recently, the Parliament adopted in its entirety the Law of Ukraine “On Amendments to the Tax Code of Ukraine and other Legislative Acts of Ukraine Regarding Implementation of the International Standard for Automatic Exchange of Information on Financial Accounts” (No. 2970-IX of March 20, 2023). The Law aims to implement the Common Reporting Standard and due diligence of financial account information (CRS). The corresponding act introduces numerous changes to the Tax Code of Ukraine (hereinafter referred to as the “TCU”), which will affect both financial agents (banks or non-bank financial institutions) and taxpayers in general. Below we are considering its main provisions.

Main Definitions

Multilateral CRS Agreement is an agreement between competent authorities on the automatic exchange of information on financial accounts.  Ukraine joined it on August 19, 2022. Pursuant to this Agreement, the competent authorities, in accordance with the reporting and due diligence rules of the Common CRS Reporting Standard, shall automatically exchange information on accountable accounts on an annual basis.

Common Reporting Standard (CRS) is a common standard for reporting and due diligence of financial account information, including commentaries thereto, approved by the Organization for Economic Co-operation and Development Council on July 15, 2014.

The standard establishes the criteria by which accounts are considered accountable, as well as those that do not fall into this category.

The standard classifies accounts into existing and new accounts, accounts of individuals and organizations, as well as low-value and high-value accounts (the criteria for assigning to such accounts are separately established, as well as the procedures carried out to verify a specific class of account).

Accounts Not Subject to Verification

The Law also specifies that an existing entity account with an aggregate balance or value of less than $250,000 as of June 30, 2023 is not subject to verification, identification, or reporting as an accountable account.    The account will be subject to verification if this amount is exceeded.

Verifying Subjects

The verification is carried out by a financial agent, which is any person (except an individual) who meets the definition of a reporting financial institution of Ukraine in accordance with the CRS Multilateral Agreement and the CRS Common Reporting Standard (generally, banks and non-bank financial institutions).

Financial agents are obliged to submit a report on accountable accounts to the supervisory authority every year by July 1.

Verified Objects

Financial account is an account opened by a financial agent or a contract concluded by a financial agent. For the purposes of the TCU, financial accounts include bank accounts, payment accounts, securities accounts, other types of accounts, contracts that meet the criteria defined by the FATCA Agreement and/or the CRS Multilateral Agreement.

Rights Granted to Controlling Bodies

Controlling bodies have the right to receive free of charge information and documents from financial agents in the amounts, in the order and on the grounds determined by the TCU, taking into account the laws determining the procedure for disclosing information with limited access.

Obligations of Account Holders

In cases defined by the Common Reporting Standard, financial agents must request, and account holders must provide to financial agents:

?a document of self-assessment of the status of tax residency in relation to oneself and/or in relation to controlling persons in accordance with the requirements of the CRS to establish the state (territory) of which the account holder and/or controlling person is a resident;

?other information and/or documents necessary for the financial agent to undertake due diligence of financial accounts;

?account holders must notify the financial agent of a change in their tax residency status within 30 calendar days.

If, during the application of due diligence measures, a financial agent has reason to believe that a person is simultaneously a resident of Ukraine and at least one other jurisdiction, for the purposes of the CRS Multilateral Agreement and the CRS Common Reporting Standard, such a person is considered a resident of the relevant other jurisdiction.

Consequences of Non-submission of Documents by the Account Holder

Failure by the account holder to provide the documents specified above, failure to notify the financial agent of a change in tax residency status, or failure to provide the requested information and/or documents within 30 calendar days from the date of receipt of the financial agent’s request, or providing information and/or documents that do not refute the financial agent’s suspicion of accountability of the account, are motives for the financial agent’s refusal to establish business relations, refusal to provide financial services, or refusal to further provide services, including termination of contractual relations with the account holder.

Increasing the Terms of Documentation Storage by Taxpayers

It was determined that taxpayers are obliged to ensure the storage of documents and information, namely primary documents, accounting registers, financial statements, other documents related to the calculation and payment of taxes and fees, the maintenance of which is provided for by legislation, as well as documents related to the fulfillment of the requirements of the law, the control of compliance of which is entrusted to the controlling bodies, within the terms defined by the law, but not less than:

?2,555 days – for documents and information necessary for tax control in accordance with Articles 39 and 39² of the TCU (transfer pricing, controlled foreign companies), i.e. 7 years;

?1,825 days – for primary documents, accounting registers, financial statements, other documents related to the calculation and payment of taxes and fees, the maintenance of which is provided for by legislation, which are made by residents, non-residents, non-profit enterprises, as well as legal entities that have chosen a simplified taxation system, with the exception of documents to which a longer storage period applies. Therefore, the term of keeping documents by taxpayers has been increased to 5 years.

?1,095 days – for other documents that do not apply to the requirements defined above;

?1,095 days – for documents related to the fulfillment of requirements of other legislation, the control of compliance of which is entrusted to the controlling bodies, including permit documents.

The terms of storage of documents and information are calculated:

?from the date of submission of tax reporting or other reporting provided for by the TCU, for the preparation of which the specified documents and/or information are used, and in case of non-submission – from the deadline for submission of such reporting provided by the TCU;

?for documents related to the fulfillment of the requirements of other legislation, the control over compliance of which is entrusted to the controlling bodies – from the date of the relevant business transaction (for the relevant permit documents – from the date of their expiration).

Additional Grounds for Submitting a Request to the Taxpayer by the Controlling Body

Controlling bodies have the right to apply to taxpayers and other subjects of information relations with a written request for the provision of information (an exhaustive list and grounds for providing which are established by law), necessary for the performance of the functions and tasks entrusted to control bodies, and its documentary confirmation, in particular if a request for information from a competent authority of a foreign state on the basis of an international agreement containing provisions on the exchange of information for tax purposes was received, and the requested information is not available to the controlling body.

Taxpayers and other subjects of information relations are obliged to provide the information specified in the request of the supervisory body and its documentary confirmation (except for counter-reconciliation) within 15 working days from the day following the day of receipt of the request (unless otherwise provided by the TCU).

If the request is made in violation of the requirements specified by the TCU, the taxpayer is released from the obligation to provide an answer to such a request.

If, based of an international treaty containing provisions on the exchange of information, the competent authority of a foreign state addresses the controlling body with a request (foreign request) containing a request not to notify the taxpayer of the fact of the foreign competent authority’s request, the controlling body notes in the request sent to the taxpayer or another person that the request has been sent on the basis of sub-clause 8 of sub-clause 73.3.1 of clause 73.3 of this article (a request for the provision of information from a competent authority of a foreign state has been received on the basis of an international treaty), without disclosing the content of the foreign request.

Supplemented and Specified Grounds for Conducting a Cameral Inspection

The subject of a cameral inspection may be:

1) timeliness of submission of tax declarations (calculations);

2) timeliness of registration of tax invoices and/or calculations of adjustments to tax invoices in the Unified Register of Tax Invoices, excise invoices and/or calculations of adjustments to excise invoices in the Unified register of Excise Invoices, correction of errors in tax invoices;

3) timeliness of payment of the agreed amount of tax (monetary) liability solely on the basis of data stored (processed) in the relevant information databases;

4) completeness of calculation and timeliness of payment of personal income tax and a single contribution to mandatory state social insurance in case of non-compliance of a resident of Diia City with the requirements specified in clauses 2, 3 of part one and clause 10 of part two of Article 5 of the Law of Ukraine “On Stimulating the Development of Digital Economy in Ukraine”;

5) timeliness of submitting an application for registration of financial agents in accordance with the requirements of Article 393 of the TCU;

6) timeliness of financial agents’ submission of reports on accountable accounts, corrected reports on accountable accounts;

7) timeliness of responses by financial agents to requests (notifications) of the controlling body sent in the cases defined by Article 393 of the TCU;

8) timeliness of reporting on the structure of ownership and ultimate beneficial owners in accordance with the requirements of clause 44¹.2 of Article 44¹ of the TCU (applies to non-residents who conduct economic activity or receive income in Ukraine);

9) timeliness of the submission by the person who manages or administers the trust of a notice of conclusion of an agreement regarding the management or administration of the trust or of the termination of such an agreement, financial statements, copies of primary documents and other information regarding the trust at the request of the controlling body in the cases provided for in Article 44.2 of this Code;

10) timeliness of providing information at the request of the controlling body in accordance with clause 44¹.3 of article 44¹, sub-clauses 6-8 of sub-clause 73.3.1 of clause 73.3 of article 73 of the TCU. These sub-clauses to cases of submission by the controlling body of:

– a request in case of detection of unreliability of the data contained in the report on accountable accounts (applies to financial agents);

– a request in case of receiving a request to provide information from a competent authority of a foreign state on the basis of an international agreement (applies to all payers);

– a request in the event of receiving a notification from a competent authority of a foreign jurisdiction in accordance with an international agreement on detection by such an authority of errors, incomplete or unreliable data provided by a financial agent regarding the account account of a person who is a resident of the relevant foreign jurisdiction.

11) timeliness and completeness of the payment of the agreed amount of the monetary obligation in the form of an advance payment from the income tax of enterprises, determined in accordance with clause 141.13 of article 141 of the TCU, based on the data of the Register of Foreign Currency Exchange Points (applies to traders of currency values in cash form).

Liability for Violations in the Field of Providing Information on Accountable Accounts Has Been Introduced

Deliberate provision of self-assessment CRS documents by the account holder in relation to oneself and/or in relation to their controlling persons in the cases provided for in Article 39.3 of the TCU with inaccurate information, which led to failure to establish account accountability for the account holder and/or for their controlling persons, entails imposition of a fine equal to 100 times the minimum wage established by law on January 1 of the reporting (tax) year. Currently, it is UAH 670,000. Payment of such a fine does not release the account holder from the account holder’s obligation to provide self-assessment CRS documents regarding oneself and/or regarding their controlling persons in the cases provided for in Article 39.3 of the TCU, with reliable information.

Liability for Failure to Respond to the Request of the Controlling Body Has Been Introduced

Non-response to a request, non-submission or incomplete submission by a taxpayer, financial agent or other person of documents or other information at the request of the controlling body, sent in accordance with the grounds provided for in sub-clauses 6-8 of sub-clause 73.3.1 of clause 73.3 of Article 73 of the TCU (which were discussed above), entails the imposition of a fine equal to 5 times the minimum wage established by law on January 1 of the tax (reporting) year for each such fact. Currently, it is UAH 33,500.

Non-submission or incomplete submission by the taxpayer of documents or other information at the request of the controlling body in other cases provided for in Article 73 of the TCU entails the imposition of a fine in the amount of one minimum wage established by law on January 1 of the tax (reporting) year for each such fact (UAH 6,700). Payment of such financial sanctions (fines) does not exempt a person from the obligation to provide information.

In summary, the adopted Law will affect taxpayers in the following way:

?the obligation to submit information and documents at the request of the financial agent;

?the obligation to notify financial agents of a change in tax residency;

?increase in the terms of the storage of documentation by the taxpayer;

?the obligation to respond to the request of the controlling body in the event that this body receives a request from a foreign state. The timeliness of providing an answer to such a request of the controlling body may be subject to a cameral inspection. Liability is introduced for not providing a response or providing incomplete information. In addition, liability is introduced for failure to respond to the request of the controlling body in other cases, if it is made in accordance with the requirements of the TCU.