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Exchange of Tax Information: When the Secret Will Come to Light?


Galyna Melnyk, lawyer at Ilyashev & Partners Law Firm
Source: Ekonomichna Pravda

In April 2016 the Head of the State Financial Service made a statement on Ukraine’s readiness to joint a multi-party agreement on exchange of tax information.

He expressed hopes that it will allow Ukraine, as early as from the beginning of 2017, to receive data from other countries about foreign companies founded by Ukrainian residents, accounts opened by such companies, as well as reveal violations of Ukrainian tax laws.

Although, it will take much more than half a year for Ukraine to have a fully valid aforementioned automatic exchange of tax information.

At best such mechanism will start working to its full in several years. Please, find the preconditions for such a pessimistic conclusion.

The idea of automatic exchange of tax information is represented by the following actions: financial institutions annually accumulate certain information about accounts of foreign legal and individual persons (information about holders of accounts, turnover on accounts, sums of certain categories of profits such as interest, dividends, profits from sale of investment assets etc.) and transfer it to the tax authorities.

After this such information is sent to the country of tax residency of the account holder.

For the abovedescribed mechanism to operate on practice certain legal instruments are required. Legal basis for the automatic exchange of tax information is represented by:

1. Multi-party agreement on the competent body, drafted by the Organization for Economic Co-operation and Development (the OECD).

This document regulates in detail the procedure of exchange of information between fiscal authorities of participating countries. According the official data of the OECD as of June 28, 2016 this agreement has been signed by 83 countries. Ukraine has yet to sign this agreement.

2. Alternative instrument – two-party agreements between particular countries which establish specific features of automatic exchange of information for particular countries-signatories and are concluded on the basis of the Convention on administrative assistance in tax matters.

At present Ukraine has not entered into any of such agreements regardless of the fact that it signed the mentioned convention along with 97 other countries.

Valid two-party agreements on avoidance of double taxation, which were concluded by Ukraine, contain provisions of exchange of tax information, but there provisions are over generalized and do not allow making exchange of information under the automatic procedure.

In reality it is possible to receive information on the basis of the agreement on avoidance of double taxation only upon request of tax authorities describing a particular situation in relation to which tax information is requested.

3. Norms of the national legislation, on the one part, must provide financial institutions of a certain country with powers to collect the clients’ information required for automatic exchange, regulate the procedure of its collection and transfer to the competent body (in case of Ukraine – the State Fiscal Service of Ukraine) and, on the other part, must regulate the procedure of processing and use of information received from other countries under automatic exchange procedure.

Essentially the national legislation must ensure practical operation of automatic exchange of information in each particular country. It will be impossible to perform the automatic exchange without certain particular internal mechanisms of information collection.

As soon as at present Ukraine has not made the initial steps towards connection to the system of automatic exchange through the mechanisms described in the above paragraphs 1 and 2, the national legislation does not yet contain provisions directed at activation of the automatic exchange of information.

With consideration for the fact that activation of the aforementioned legal instruments may practically last for years (especially organization of signing and ratification of international agreements) it may be observed that at present Ukraine is not ready to be fully engaged into the system of automatic exchange of tax information.

Thus, as soon as automatic exchange in the future will allow controlling bodies of Ukraine to seek and find assets of Ukrainian residents at the level of legislation the competent authorities have already commenced works on introduction of rules of “controlled foreign companies” widely used in the world practice.

Pursuant to the Draft law No. 4636 (“Draft law on introduction of amendments to the Tax Code of Ukraine as for prevention of diversion of the taxable base and transfer of profits to offshore jurisdictions”) it is proposed to include profits of the foreign company subordinate to individual/legal person – resident of Ukraine to the taxable income/profit of such person.

It will be possible to determine the amount of such profit also through assistance of the mechanism of exchange of the tax information.

In addition to the aforesaid activation of automatic exchange of information will make it possible to reveal foreign exchange operations carried out in violation of Ukrainian legislation.

For example such operations may be represented by acquisition by residents of Ukraine of the investment objects abroad, depositing foreign currency assets at the accounts abroad without the NBU license, as well as revealing profits obtained by Ukrainian residents abroad which were not declared and taxed by such persons.

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