Date of publication: 23 July 2024
Ivan Maryniuk, Head of Tax Law Practice
Source: The Page
The recent passage of the “White Business Club” law has sparked widespread discussion, and the text is now awaiting the President of Ukraine’s signature. As businesses assess their eligibility for this initiative, many are weighing the potential benefits against the possible risks associated with the tax authorities’ new “carrot and stick” approach. But what exactly does this law entail?
The law introduces a set of 12 criteria (spanning financial, economic, legal and reputational factors) by which taxpayers will be assessed to determine their eligibility to attain the coveted status of “high-level voluntary tax compliance” taxpayer. Membership in this exclusive club comes with several incentives, but also raises significant questions.
And at this stage questions arise. For example, what happens if a business fails to meet these criteria? Does this automatically label them as non-compliant or a potential violator requiring state intervention? Should other businesses avoid them? And importantly, what are the consequences for those who do not qualify?
Formation of the “Club”
The formation and review of membership in the “Club” will be carried out by the DPS of Ukraine quarterly, and the list of “lucky ones” will be published on the official website of the tax office. Newly created payers will qualify only after a one-year “trial” period. The selection criteria are strict, and it will be difficult to fulfill them in the economic downturn. In addition, it is easy to lose “Club” status, however.
For instance, a sole proprietor in Group III earning less than UAH 5 million annually won’t qualify and won’t have a “high level of compliance with tax legislation”. A minor infraction, such as a tax return delayed by your accountant or a tax debt exceeding UAH 51,000 – possibly due to procedural delays (delay in the opening court proceedings in a case on appealing the tax notices-decisions), indebtedness to the unified social tax or change in the principal type of activities – could also disqualify a business from membership.
What are the benefits?
A business that gets into the “Club” and stays in it can receive the following privileges:
- A moratorium on certain types of inspections: While this sounds beneficial, exceptions in the law still allow tax officials to conduct most common inspections, so the change may be minimal;
- Shortened audit periods for VAT reimbursement: While audits may be quicker, there’s no guarantee of a favorable outcome, membership in the “Club” ≠ an undisputed right to VAT reimbursement, and the risk of biased audits remains;
- Reduced timelines for obtaining individual tax consultations (ITCs): The timeline may be shorter (from 25 to 15 calendar days), but the quality of these consultations often suffers, and quicker responses may not lead to better advice;
- Assignment of an individual compliance manager: This idea, while promising, requires additional tax staff and budgetary resources. Moreover, tax inspectors specialize in specific areas, which could result in incomplete or incorrect advice. The law also lacks clarity on the legal status of compliance managers’ consultations and their accountability. There is a question whether you can contact them at all. Anyone who has ever called the tax office is familiar with the complexity of telephone communication with official authorities.
Potential downsides
Despite these apparent benefits, “Club” membership may be more theoretical than practical. The law and subsequent regulations (related to the status of a payer with a “high level of voluntary compliance with tax legislation”) could introduce new corruption risks for businesses seeking entry. Additionally, the administrative burden on the tax office and state budget could increase due to the need for more resources.
The law’s implicit suggestion that those outside the “Club” are less compliant is troubling. So, if you are not a “white” business with a high level of tax compliance, then you automatically turn into a “black” or “grey” business? And you probably violate tax laws as well?
These initiatives could negatively impact businesses that fail to qualify for the “Club”. Potential future consequences include restrictions on participating in tenders or public procurement, increased risks of tax invoice blocking, and difficulties establishing contracts with foreign partners. How will you convince a European or American company that it is safe to do business with you if you are not a member of this “Club”?
There are now more questions than answers, which is why these innovations are alarming. The most pressing question remains: what happens if your company or sole proprietorship cannot meet the established criteria? Unfortunately, it seems we’ll only find out once businesses start navigating these uncharted waters.
