Tax amnesty: What's it and why does Ukraine need it

Author : Yuriy Hryhorenko

Source : 112 Ukraine

Ukraine has already tried to create some conditions for the shadow income legalization. But without restoring strong business confidence, this attempt to "whitewash" the economy is doomed to failure
09:15, 19 March 2018

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112 Agency

The pre-election year obliges the government not only to improve the social standards but also to offer various bonuses for business. The president has created a tradition to sign laws on improving the business climate directly during the business meetings. Recently, the head of state was literally spouting with ideas of an introduction of a tax on the withdrawn capital, the tax police reform, a tax amnesty.

It is a kind of invitation for business to say "for" or "against" (amnesty can be held for private individuals, but in this case, it is about the business). Several bills on the tax amnesty are now registered in the Rada, and attempts to create a regulatory framework for them were taken in 2014, 2015, and 2017. One draft law was not let by the profile committee, and two were withdrawn by the authors. But now the Rada Committee on Tax and Customs Policy issues a working on a law on holding a one-time declaration.

Related: Searches of Nova Poshta: Company suspected of evading taxes

Tax amnesty is the legalization of savings by officially publishing the real amount of income, paying a certain sum of taxes (usually not more than 10%) in exchange for guaranteeing immunity from any kind of liability. This practice is quite common in the world's economies.

A lawyer of the "Poberezhnyuk and partners" legal group Roman Kobets notes that the purpose of the tax amnesty is, on the one hand, the withdrawal of capital from the "shadow" into legal circulation (with the possibility of further free disposal of funds), and on the other hand, investments in the economy through the legalization of incomes .

By and large, there are a lot of things to be amnestied in Ukraine - up to half of the country's economy is in the "gray." According to the estimates of the Ministry of Economic Development, for 9 months of 2017, the level of the shadow economy in Ukraine was 33% of GDP. According to the study of the International Association of Chartered Certified Accountants (ACCA), in 2016, Ukraine has ranked third (45.1%) in the list of countries with the largest shadow economy.

Related: IMF does not support replacing corporate profit tax with exit capital tax

According to Natalia Radchenko from Juscutum legal engineering firm, developed countries have another mechanism for returning money to the country - voluntary disclosure of the foreign income. At the same time, no one cancels the responsibility, and the taxes should be paid, but the responsibility is less since it takes into account the voluntary nature of disclosure of information and payment of taxes.

It is interesting that Ukraine already has some experience in tax amnesty. "Since January 17, 2015, a tax amnesty for business was introduced in the form of a tax compromise on enterprise profit tax and value-added tax. The tax compromise assumed that the state would forgive entrepreneurs their previously unpaid taxes (for periods before April 1, 2014) for a fee of 5% of the number of understated tax liabilities, while the remaining 95% were considered extinguished," Roman Kobets recalls.

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According to the State Fiscal Service of Ukraine, a month after the law on tax compromise entered into force of, 614 enterprises submitted applications to the bodies of the State Fiscal Service (SFS). They increased tax liabilities by 106 million USD, of which 5.2 million USD was payable to the budget. The tax compromise was interesting mainly to big business. "The tax amnesty ended in a complete failure in 2015," says Oleksandr Okhrimenko, the president of the Ukrainian Analytical Center.

There have been numerous attempts to introduce the universal declaration of income by the population and tax control of private spending by the indirect methods. And probably, fortunately, the matter has not yet reached its intentions.

In addition, the declaration of the officials showed that the inconsistency of incomes and expenses of the officials did not cause interest in the state agencies called to watch it.

"For a couple of years, the society was savoring information about incomes of the officials, disclosed in the electronic declarations. There were a couple of demonstrative attempts to find out the origin of some apartments, and that was all. It looks like we have already had an amnesty for the officials, they already submitted their "null declarations" then. So it is unclear, for whom this new auction of unprecedented tax generosity is designed," Natalia Radchenko mocks.

Related: Ukrgazvydobuvannya becomes Ukraine’s largest taxpayer in 2017

The tax amnesty provokes a lot of challenges. Some of them are purely psychological. "The tax amnesty will blow the minds of the “good payers”. It turns out that the others could steal like hell without paying taxes, and then "boom!"- the state tells you to pay 5% and go with the clear consciousness. How would those “good payers” feel themselves? A little bit fooled, I guess,” Natalia Radchenko states.

Most of the problems with amnesty are connected with its practical realization. The main one is that business has no confidence in the state. "Perhaps some will "fall for" this initiative, only if they are sure that in the future they will not be punished for it. Otherwise, it is impossible. But first of all, I would not talk about the acting businessmen, but about the former ones. Those who have been politicians for more than 10 years, but still "live on the profits from the past business." In my opinion, the "tax amnesty" is unlikely to lead the acting business out of the "shadow". This is how it works, it just uses all the "maneuvering possibilities." For example, tax havens might be considered unethical, but not always illegal," said Viktor Shulik, director of the market research department at the rating agency IBI-Rating.

Related: Ukraine takes 43rd place at Paying Taxes 2018

The use of "zero declarations" would allow legalizing a large part of the accumulated capital and increasing revenues to the budget, but would also give rise to a number of issues.

There is no guarantee that the terms of the "social contract" will not be revised in time. The stable socio-political systems give such guarantees, but in the Ukrainian context, it just might not work.

What will be the mechanism for verifying the data from the declarations? Would it be a reason for further abuses in the future?

Taking into account specifics of the Ukrainian economy, it is very difficult to confirm the sources of income and funds. Revenues from offshore companies are one thing, bribes are different, and the money of migrant workers brought from abroad is the third issue here.

Would the tax amnesty be of interest to the public, the business? It depends on many factors. First of all, it depends on the clarity of the proposed mechanism and the minimization of the possibility for fiscal bodies not to apply for tax reasons a tax amnesty after disclosing real incomes.

Roman Kobets notes that it is also important to guarantee the absence of liability not only for the direct tax violations but also for other violations committed to avoiding taxation. In any case, the tax amnesty should not stimulate an increase in the shadow economy when the taxpayer understands that the state will write off his debts.

Related: Ukraine's vicious circle of dodging taxes

In general, the economic effect of a possible tax amnesty causes doubts among the experts (especially in terms of the overall predictability of state policy). "The tax amnesty will not work; business just does not need it. It just needs the Tax Code not to be changed so often, and the presumption of innocence should work. Until this happens, no tax amnesty will work. "Businessmen would eagerly work "in white" if they know that the rules of the game are stable. But now it does not work so. In fact, the tax inspector can write a fine or even initiate the tax case against any Ukrainian businessman for some far-fetched reason, and the businessman needs to be protected. In 2002-2008, the business has been “whitened” without the amnesty. Then the grey economy decreased by some 30%. Now it is about 50%," Okhrimenko notes.

According to Victor Shulik, in order to declare income and pay taxes honestly, Ukraine needs to guarantee the inviolability of assets, as well as a fair trial; benefits from work "in white" and the risks of concealing income should also be significant; control by society also has to play an important role in this scheme.

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