ADMINISTERING TAXES PAID by BUSINESS August 2020
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SYSTEMIC REPORT ADMINISTERING TAXES PAID BY BUSINESS August 2020 TABLE OF CONTENTS LIST OF ABBREVIATIONS ............................................6 1 FOREWORD ............................................................. 11 2 ADMINISTRATION OF VAT ....................................... 16 2.1 History and overview of the current state of VAT administration ...............................16 2.1.1 How VAT works .........................................................................................................17 2.1.2 How schemes of VAT fraud work ............................................................................17 2.2 The Unified Register of Tax Invoices (URTI).....................................................................18 2.2.1 TIs/ACs registration delay due to technical problems on the side of tax authority ..............................................................................................................................19 2.2.2 Delay of registration of TIs/ACs not provided to recipients ................................24 2.2.3 Penalties for late registration of "reducing" ACs ..................................................28 2.2.4 No registration of TIs/ACs, which were never issued ...........................................30 2.3 System of Electronic Administration (SEA) of VAT ..........................................................33 2.3.1 Calculating registration limit in the SEA VAT .........................................................34 2.3.2 Registration limit’s seizure (arrest) and release ....................................................40 2.4 The System of Automated Monitoring of Tax Invoices’ Compliance with Risk Criteria (“SMKOR”) ........................................................................43 2.4.1 Overview of SMKOR-related issues ........................................................................43 2.4.2 Lists of “risky” taxpayers ..........................................................................................49 2.4.3 Enforcement of court decisions ordering registration of suspended TIs/ACs ..56 2.5 VAT-related tax audits........................................................................................................61 2.6 VAT refund ..........................................................................................................................66 2.6.1 Temporary Register ..................................................................................................68 2.6.2 VAT Refund Register .................................................................................................70 3 UNIFIED SOCIAL CONTRIBUTION ............................. 73 3.1 Charging persons about whom data is absent in the USR with the USC ....................74 3.2 USC privileges: reporting correction issues ....................................................................79 3.3 USC privileges: relief from payment on the ATO territory ............................................83 www.boi.org.ua 3 3.4 Determining, agreeing and adjusting arrears amounts ................................................85 3.4.1 The legal nature of the payment notice on USC debt (arrears) ..........................86 3.4.2 Determining arrears amount based on tax audits findings ................................87 3.4.3 Determination of arrears based on data records .................................................90 4 SIMPLIFIED TAXATION SYSTEM ................................ 93 4.1 Top single tax rate application .........................................................................................94 4.2 ”Once a calendar year” rule ..............................................................................................96 4.3 Single tax and SIC codes ....................................................................................................99 4.4 Liability for breaching requirements of simplified taxation system ..........................103 5 CORPORATE PROFIT TAX ....................................... 108 5.1 Companies’ expenses “not related to economic activity”/”having no business purpose” .........................................................................109 5.2 CPT advances while paying dividends ...........................................................................111 5.3 Accounting currency exchange differences under currency obligations ..................113 5.4 Debt-to-equity swap ........................................................................................................116 6 TAX AUDITS (SELECTED PROCEDURAL ASPECTS) ....................... 120 6.1 Risk-oriented approach: general overview ...................................................................120 6.2 Scheduled audits: scheduling, forming and adjusting of plans-schedules ...............122 6.3 Selected problems while appointing unscheduled and factual audits ......................125 6.4 Interaction between taxpayers and tax authorities’ officials during tax audit .........126 6.4.1 Document disclosure .............................................................................................126 6.4.2 Administrative arrest of property .........................................................................127 (a) Allowing tax audit to start ..........................................................................................128 (b) Taking physical inventory during tax audit ..............................................................130 6.5 Evaluating outcomes of control and audit activities (measures): disclosing data and performance of respective KPIs ...................................................131 www.boi.org.ua 4 7 CHALLENGING RESULTS OF TAX AUDITS................ 134 7.1 Considering taxpayers’ objections to tax audits reports .............................................135 7.2 Problems related to efficiency of administrative appeal procedure .........................137 7.2.1 Engaging third parties to administrative appeal procedure .............................138 7.2.2 Effective use of modern technologies in administrative appeal .......................139 7.2.3 Adherence to guarantees granted by the TCU ...................................................140 7.2.4 Taking into account case-law and prospects of judicial consideration. ...........141 7.2.5 Publication of decisions issued by the STS ..........................................................143 7.2.6 Setting correct KPIs for administrative appeal procedure ................................144 8 GENERALIZED TAX CONSULTATIONS ..................... 147 9 DISCLOSURE OF INFORMATION BY TAX AUTHORITIES ............................................ 154 9.1 Publication of data on control and audit measures ....................................................157 9.2 Disclosure of data about administrative appeal procedure .......................................158 9.3 Publication of data on outcomes of judicial consideration ........................................158 9.4 Publication of information on results of SEA VAT and SMKOR ..................................160 10 TAXPAYERS’ INTEGRATED CARDS ........................... 163 11 REFERENCE MATERIALS ......................................... 171 11.1 Annex 1. How VAT evasion “schemes” work .................................................................171 11.1.1 What are "conversion centers" ...........................................................................171 11.1.2 How have schemes changed in an era of SEA VAT ...........................................174 11.2 Annex 2. What is registration limit in the SEA VAT .......................................................176 11.3 Annex 3. How SMKOR works ..........................................................................................177 11.3.1 How automated monitoring of VAT invoices works .........................................177 11.3.2 Consequences of TIs/ACs suspension (blocking) ..............................................179 www.boi.org.ua 5 LIST OF ABBREVIATIONS Abbreviations Definition ACC/SC Administrative Cassation Court within the Supreme Court ATO Anti-terrorist operation Central level Commission within SFS/STS, which at different times was called: commission • Central level commission, which takes decisions on registration of TI/AC in the URTI or on registration refusal; • Central level commission on issues of suspension of TI/AC registration in the URTI CMU Cabinet of Ministers of Ukraine Council Business Ombudsman Council CPT Corporate profit tax Draft Law No. 3475 Draft Law of Ukraine “On the Administrative Procedure” No. 3475 dated May 14, 2020 ECtHR European Court of Human Rights EU European Union Expert Council Expert Council on preparation of generalized tax consultations of the Ministry of Finance of Ukraine GAAP Generally accepted accounting principles GTC Generalized tax consultations IE Individual entrepreneur IFRS International financial reporting standards Instruction No.449 Instruction on the Procedure for Calculation and Payment of the USC, approved by the Order of the Ministry of Finance of Ukraine No.449 dated April 20, 2015 Interim Measures Law Law of Ukraine “On Interim Measures for the Period of Anti-Terrorist operation” No.1669-VII dated September 2, 2014 ITC Individual tax consultation KPI Key performance indicators www.boi.org.ua 6 Abbreviations Definition Law No. 466-IX Law of Ukraine “On Introducing Amendments to the Tax Code of Ukraine on Improvement of Tax Administration, Elimination of Technical