VAT remains source of controversy, fraud in Ukraine
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.