Tax amnesty bills not enough to make busi­ness come clean

A nearly bank­rupt and heav­ily in­debted gov­ern­ment wants to bring money out of Ukraine’s mas­sive shadow econ­omy to fi­nance ser­vices and benefits.

Kyiv Post Legal Quarterly - - Contents - By Olga Ru­denko ru­[email protected]

Strug­gling for cash, Ukraine’s gov­ern­ment has once again turned its at­ten­tion to cur­tail­ing the na­tion’s shadow econ­omy in hopes of col­lect­ing more tax rev­enue.

In 2011, the State Tax Ser­vice es­ti­mated that up to 17 per­cent of rev­enue gen­er­ated by small-to-medium busi­nesses re­mains hid­den to the gov­ern­ment. In Oc­to­ber, chief tax­man Ihor Bilous said that 50 per­cent of salaries are paid off the books.

Ukraine has been talk­ing about bring­ing the econ­omy out of the shad­ows for years with lit­tle suc­cess. The re­ces­sion-mired na­tion is ex­pected to of­fi­cially gen­er­ate as lit­tle as $150 bil­lion in gross do­mes­tic prod­uct this year.

Ex-prime Min­is­ter Mykola Azarov, who fled with the regime of ex-pres­i­dent Vik­tor Yanukovych, promised to bring the econ­omy out of the shad­ows but never did.

But now the ef­forts un­der way ap­pear to be se­ri­ous.

A draft law filed to the par­lia­ment on Nov. 27 of­fers a tax amnesty, or, as it is be­ing called, “a tax com­pro­mise.”

The idea is that if a tax agency finds short­ages of tax pay­ments in the books, the com­pany will be able to ad­mit fault and pay only 15 per­cent of the amount owed to the state. No fines will be im­posed. The com­pro­mise will be avail­able for a year from the day the law comes into ef­fect, if no other changes are made dur­ing the adop­tion process.

In an al­ter­nate ver­sion of the tax amnesty bill, a dif­fer­ent group of law­mak­ers gives the busi­nesses 90 days to claim ad­di­tional tax li­a­bil­i­ties on any pe­riod be­fore April 1 and get away with pay­ing only five per­cent of the amount.

Both ini­tia­tives are a step in the right di­rec­tion, but are not strong enough to dent the shadow econ­omy, lawyers say.

Volga Sheiko of Asters law firm says no law will be ef­fec­tive un­less it es­tab­lishes an obli­ga­tion for busi­nesses to come clean.

“There is no re­spon­si­bil­ity for re­fus­ing to claim up­dated tax re­ports, which makes it al­most im­pos­si­ble to move the boul­der that the shadow busi­ness is,” Sheiko told the Legal Quar­terly.

Both amnesty laws are based on the premise that com­pa­nies will vol­un­teer in­for­ma­tion on tax eva­sion or im­proper pay­ment.

What re­ally can push the com­pa­nies to come clean is es­tab­lish­ing a sys­tem that makes pay­ing taxes eas­ier than evad­ing them. “it should be eas­ier and cheaper to con­duct busi­ness openly and trans­par­ently than with use of var­i­ous la­tent ap­proaches,” says Olek­sander Borod­kin, a part­ner at Vasil Kisil and Part­ners.

A rel­a­tively easy way to make tax­a­tion sim­pler and cheaper would be through chang­ing how two of the most trou­ble­some taxes work. Value added tax and in­come tax are the ones that cause the most trou­ble.

Nataliya Osad­cha of Syutkin & Part­ners says that “the cur­rent leg­is­la­tion can’t pro­tect hon­est tax­pay­ers and can’t hold re­spon­si­ble the com­pa­nies that ben­e­fit from il­le­gal VAT (value-added tax) re­turns. This sit­u­a­tion dam­ages hon­est tax­pay­ers who have to prove in court that their deals are real.”

”We need to change the tax­a­tion sys­tem to the root and use the ex­pe­ri­ence of the West­ern coun­tries,” Osad­cha says.

The new gov­ern­ment does seem to un­der­stand that a com­plete over­haul of th­ese taxes is needed. lead­ing the econ­omy out of the shad­ows has been de­clared a top pri­or­ity. In Septem­ber, a tax re­form law was reg­is­tered in the par­lia­ment.

It seeks to re­duce the num­ber of taxes in Ukraine from 22 to nine. It will also re­duce the pay­roll tax that eats up some 30 per­cent of a worker’s salary. But re­vi­sions are ex­pected from the new Cabi­net.

Some ar­gue that a lot more is needed to make real changes.

“The of­fered re­forms are not rad­i­cal enough,” said Anna Derevyanko, head of the Euro­pean Busi­ness As­so­ci­a­tion, speak­ing at a round ta­ble in Kyiv re­cently.

Osad­cha from Syutkin & Part­ners says busi­ness has high ex­pec­ta­tions. The sign­ing of a trade deal with the Euro­pean Union ear­lier this year sig­naled that im­prove­ment of the busi­ness en­vi­ron­ment is com­ing.

“Now is the per­fect way to move out of the shad­ows,” she says.

Com­pa­nies will come clean if gov­ern­ment makes pay­ing taxes eas­ier and less costly than evad­ing them. “It should be eas­ier and cheaper to con­duct busi­ness openly and trans­par­ently...” says Olek­sander Borod­kin, part­ner at Vasil Kisil and Part­ners.

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