VAT re­mains source of con­tro­versy, fraud in Ukraine

Kyiv Post Legal Quarterly - - Contents - By Ilya Timtchenko timtchenko@kyiv­post.com

Not only is there no con­sen­sus among the par­lia­ment and gov­ern­ment on Ukraine’s tax re­forms, there is also dis­agree­ment be­tween Ukraine’s lawyers on how to re­struc­ture the most prob­lem­atic tax for busi­nesses – the value-added tax.

The VAT tax is the main headache for busi­nesses when it comes to taxes.

The Cab­i­net of Min­is­ter’s pro­posal is to keep the VAT rate the same but elim­i­nate other pos­si­bil­i­ties to avoid pay­ing the tax, whereas the par­lia­ment sim­ply wants to bring down the tax by 5 per­cent. While some lawyers say that the Rada’s pro­posal is more busi­ness friendly, oth­ers say that the gov­ern­ment tax re­form will bring more profit for the coun­try in the long run.

Natalia Osad­chaya of Syutkin and Part­ners law firm, says that she is not happy with the gov­ern­ment’s pro­posal.

“I was so sur­prised when I saw it… I was ac­tu­ally shocked,” Osad­chaya said. She thinks that Ukraine’s cur­rent sys­tem, de­spite all of its loop­holes, is still much eas­ier for busi­nesses since it is more pre­dictable.

Osad­chaya says the VAT ex­ists for cor­rup­tion and prefers the sin­gle tax which con­sists of four groups. She finds it more clear and trans­par­ent. “The VAT ex­ists for cor­rup­tion be­cause the busi­nesses think how to avoid it and the gov­ern­ment thinks how to catch the busi­ness,” Osad­chaya said.

Her clients are mainly agri­cul­tural com­pa­nies who re­ceive VAT re­funds. The clients com­plain that the re­fund can take up to two years to re­ceive the re­fund and even if they do re­ceive it, the amount is much lower be­cause of the lo­cal cur­rency de­pre­ci­a­tion.

“One should ei­ther pay a bribe or pay in ad­vance prof­its, or go to the courts and maybe in 2-3 years they will get it back,” Osad­chaya said.

The fi­nance min­istry’s pro­posal is “killing” busi­nesses, Osad­chaya said.

Alexey Khomyakov, a part­ner at Asters law firm, says that the sales tax would be a good al­ter­na­tive to the VAT tax.

“In­stead of hav­ing a lot of taxes… the gov­ern­ment doesn’t re­ceive suf­fi­cient re­sources from the cor­po­rate in­come taxes while the busi­nesses spend a lot of time on bu­reau­cratic pro­ce­dures,” Khomyakov said. “I think the gov­ern­ment and the par­lia­ment should con­cen­trate on the pos­si­bil­i­ties to im­prove the busi­ness en­vi­ron­ment through the im­ple­men­ta­tion of the sales tax.”

He says that this will be much eas­ier for busi­nesses since they will pay only one tax im­me­di­ately at the point of sales. In ad­di­tion, the gov­ern­ment will not be spend­ing mil­lions of hryv­nias on ad­min­is­ter­ing the sys­tem.

But Sergiy Gryshko from Red­cliffe Part­ners law firm says that he thinks it is un­re­al­is­tic since the Euro­pean Union only has the VAT sys­tem.

But he finds the cur­rent VAT tax sys­tem in­cred­i­bly dif­fi­cult to ad­min­is­ter.

“Tax au­thor­i­ties tend to change their minds quite of­ten ev­ery now and then,” Gryshko said. “It makes the life for busi­nesses quite dif­fi­cult.”

It is very com­pli­cated to sub­mit VAT tax re­turns be­cause there are very un­clear rules.

For ex­am­ple, the elec­tronic tax sys­tem for pay­ing the VAT is still caus­ing busi­nesses headaches.

“They have to sub­mit for ev­ery client, they have to sub­mit a dec­la­ra­tion for ev­ery sin­gle pay­ment they make in elec­tronic form, they have to separately send the VAT money to the spe­cial ac­counts which again makes it in­cred­i­bly com­pli­cated,” Gryshko said.

Gryshko is for the elec­tronic VAT sys­tem since it will take care of the hu­man fac­tor. How­ever, so far it is not work­ing well where much im­prove­ment is needed. “The VAT dec­la­ra­tion is just a night­mare,” he said. “The prob­lem is that it looks like there is no co­or­di­nated ef­fort within the gov­ern­ment about what it should look like, at what rate, pace we should reach this full-fledged e-gov­ern­ment.”

While Gryshko finds the two pro­posed tax re­form pack­ages to be sim­i­lar, he says that par­lia­ment’s pro­posal will serve pri­vate in­ter­ests.

“I am afraid that there are quite a few vested in­ter­ests in­volved in the par­lia­ments draft so we have to watch very closely what’s in there,” Gryshko said.

Gryshko doesn’t see ei­ther pro­posal to take care of cor­rup­tion of the tax au­thor­i­ties. This also has to do with a week court sys­tem which does not hold the fis­cal ser­vices re­spon­si­ble.

Ro­man Blazhko, se­nior as­so­ciate at Lavrynovych and Part­ners law firm says that Jaresko’s pack­age didn’t pro­vide any ma­jor changes to the VAT tax ex­cept for can­cel­ing the re­duced 7 per­cent VAT rate for phar­ma­ceu­ti­cal com­pa­nies. The fi­nance min­istry also pro­posed to can­cel the VAT re­fund for agri­cul­tural com­pa­nies.

In ei­ther case, Aster’s Khomyakov says that both pro­posed tax re­form pack­ages are late since the two laws should have been drafted at least 6 months ago.

The par­lia­ment’s pro­posal was sub­mit­ted back in Oc­to­ber whereas the Fi­nance Mi­in­istry’s was sub­mit­ted on Dec. 11.

Asters’ lawer Alexey Khomyakov is skep­ti­cal of the value-added tax sys­tem al­to­gether. In­stead, he prefers the sales tax which he be­lieves will be eas­ier for busi­nesses to im­ple­ment. (Volodymyr Petrov)

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