укр eng рус est

Publications

Recent news
References
Chambers Europe

“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

A 30% tax levied on illegal profits of Ukrainian citizens will lead to Land Rovers sold for USD 5 000

27.01.2015

Dmytro Shemelin, Lawyer at Ilyashev & Partners Law Firm
Source: Forbes Ukraine

Amongst several points of the tax reform developed by the Ministry of Finance in cooperation with the State Fiscal Service is a 30% tax levied onto the amount of expenses of citizens in excess of their officially declared income. Forbes received lawyer’s opinion about how this approach is effective in the fight against the black economy

Comparison of incomes and expenditures to detect tax evasion is really a common practice in fighting the black economy. However, while Ukraine retains a system of “under the table” settlements it will not be possible to solve the problem of hidden wages using the method stipulated by the Law.

What the Government can really achieve is to cerate additional inconveniences for its own citizens who will have to differentiate “white” and “black” money more distinctively.

What is happening now? Is it possible to take “shadow” income and just silently spend it as legally earned. After the adoption of the Law it will be required, so to speak, to keep “dirty” money in one pocket to make “shadow” settlements and keep “clean” money in the other pocket to make unrestricted settlements. As a rule, the “white” part is substantially less than the “black” one.

The legal business will be the first to suffer from such division as soon as it can not use “black” settlements in its activities. Its budgets are limited to only “white” people’s money, which is certainly a smaller amount. Since one will be required to spend “black” wages with caution, instead of going to the “X-market” and buy legitimate iPhone 6 for 15 000 hryvnias, a buyer will buy the same using the services of online store (on the quiet perhaps organized by “X–market” itself) and paying the same 15 000 hryvnias to the courier in cash.

Accordingly, the practice of “real” and “formal” price will return when one will have to take, for example, “5” and carry “50” over. We will be witnessing Lend Rovers priced at 5 000 US dollars, two-bedroom apartments in Kyiv city center priced at 100 000 hryvnias and the like.

In my opinion the draft Law would sizably benefit should the State shift the limit of the “supervised” operations from 12 000 hryvnias to at least 10 000 US dollars. I think this decision will ultimately be upheld, even if not within the text of the Law itself, but in practice. Until the moment when we have this system tuned up there is no sense in getting bogged down in the hundreds of thousands of purchases of mobile phones and TV sets, and in concentrating on apartments, automobiles, land plots, etc. It is clear that any bribe is a crime, but it is the big fish is worth catching now, i.e. bribe takers who take millions rather than thousands.

The second less obvious problem is a monstrous amount of work that tax authorities need to do to meet the legislative requirements. It is practically difficult to imagine how tax authorities are going to cope with the flow of “zero tax return” declarations. It will take millions of man-hours spent in queues to count – at the very least – owners of real estate, cars and/or corporate rights. Knowing the “capacity” of the tax administrations we can assume that more than half of the applicants will achieve nothing. As a result they will have their property estimated “by default” in the amount of UAH 200 000.00 on the basis of their coming to the tax authorities, but failing to be received by tax officers.

Problems are expected to surface also at the stage of punishment of violators. There are ten million employees in Ukraine 30% to 70% of whom, according to various estimates, receive, at least partly, envelope wages. Suppose this quantity constitutes 50% of all the employees. It means five million potential violators.

Statistically speaking the said annually generates tens and hundreds of thousands of cases related to additional charge of tax. Accordingly, when there are so many violators at hand, the only question is who will finally be picked up and punished. And this creates a fertile ground for corruption. If you have tens of thousands of pending tax cases it is very tempting for the tax inspector to ask a small favor to attach No. 6 432 to your case on additional charge of tax instead of No. 3 in the overall queue. With such volumes of work it will be impossible to be in control such maneuvers.

Risks hidden in the draft Law are more than plenty. It is not ruled out that the financial impact of this document onto the budget will be so low that it will not compensate for the problems it will cause. It will be possible to find the balance of pros and cons only when the provisions of the Law will be implemented in practice.

 
© 2018 Ilyashev & Partners / Mobile version