In June, the Ukrainian parliament adopted the law “On Amendments to the Tax Code of Ukraine regarding the peculiarities of tax administration during martial law for taxpayers with a high level of voluntary compliance with tax legislation”, or the so-called “white business club” law. Currently, the document has been sent for the signature of the head of state.
The changes proposed by the law are planned to be used as a tool to reduce tax control over businesses that honorably fulfill their obligations to the state. However, not everything is so positive – the law contains some pitfalls.
What the “white business club” law offers
The new law provides for the creation of a list of taxpayers in Ukraine who demonstrate a high level of voluntary compliance with tax legislation. Being on this list will give businesses advantages in tax administration during martial law.
The list of “white businesses” will include legal entities and individual entrepreneurs, residents of Diya.Sity, who will meet certain requirements and criteria, taking into account the taxation system (in particular, the level of tax payment, the level of salary calculation, etc.).
Taxpayers with a high level of voluntary tax compliance included in the “club” will have the following advantages:
- moratorium on documentary checks, except for certain types;
• shortening of the terms of camera and document checks for budgetary compensation;
• reducing the terms of providing individual tax consultations;
• assigning a compliance manager to the taxpayer, with whom it will be possible to interact, in particular, through means of remote communication, including video conferences.
Before the second reading, the draft law was significantly revised together with business associations and experts, taking into account all comments and recommendations. However, the amendment on the government’s recommendation for 25% reservation was not adopted.
A new concept of “compliance” is introduced into the Tax Code, which means a system of measures and procedures implemented by controlling bodies (tax authorities) with the aim of increasing the level of voluntary fulfillment of tax and other obligations by taxpayers in accordance with the requirements of tax and other legislation, monitoring compliance carried out by these bodies, as well as to reduce the probability of tax risk (compliance risk).
Who can enter the “white business club”
The draft law contains a number of criteria that determine the list of taxpayers with a high level of voluntary compliance with tax legislation. In order to enter the “white business club”, legal entities and sole proprietorships must meet the following list of criteria:
- tax debt or arrears for other payments, the collection control of which is carried out by tax authorities, does not exceed 3,000 tax-free minimum incomes of citizens (51,000 UAH) and no more than 30 days have passed since the date of their occurrence;
• absence of arrears (deficiencies, fines, penalties) for payment of the EUS;
• absence of facts of violation of tax obligations regarding the submission of reports or documents;
• absence of tax notices-decisions regarding the violation of settlement deadlines for export-import transactions during the last 12 months;
• lack of a decision on the taxpayer’s compliance with the VAT risk criteria, adopted in accordance with the procedure and grounds determined by the Cabinet of Ministers of Ukraine;
• absence of the initiated procedure for termination of the legal entity or entrepreneurial activity of the FOP;
• absence of initiated proceedings in the case of bankruptcy (insolvency) of the taxpayer;
• lack of decisions regarding the application of special economic or other restrictive measures (sanctions) to the taxpayer and/or its founders (participants), ultimate beneficial owners in accordance with the Law of Ukraine “On Sanctions”;
• the taxpayer and/or its founders (participants), ultimate beneficial owners (with the exception of those who were granted the status of a participant in hostilities after April 14, 2014) do not have the citizenship of a state carrying out armed aggression against Ukraine;
• lack of persons living in Russia among the founders (participants), ultimate beneficial owners of the taxpayer;
• no changes regarding the main type of economic activity entered by the taxpayer in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations during the last 12 months.
Among the additional determining criteria for “white” business is the requirement that the indicator of the level of tax payment to the consolidated budget is equal to or exceeds the average indicator of the level of tax payment to the consolidated budget of the residents of Diya City.
For legal entities subject to the general taxation system:
- the indicator of the level of payment of corporate income tax must be equal to or exceed the average indicator in the relevant industry for the last four quarters;
• the indicator of the level of payment of value added tax must be equal to or exceed the average indicator in the relevant industry (with the exception of payers whose operations for the export of goods outside the customs territory of Ukraine constitute 25% or more of the total volume of supply) for the last 12 reporting periods;
• the indicator of the average monthly accrued or paid salary for the last four reporting periods must be at least the average salary in the relevant industry in the relevant region, multiplied by a factor of 1.1. At the same time, the average number of employees during this period should be at least five people.
What is wrong with the new law
The new law on the “white business club” contains several potential risks and disadvantages:
- Corruption and lobbying, that is, the possibility that large companies or certain influential groups will be able to manipulate legislative processes in their interests, creating unfair conditions for other entrepreneurs.
2. Limitation of competition. The law may create barriers to market entry for new players, resulting in less competition and innovation.
3. Social inequality. The law provides significant tax breaks for large companies, which can put small businesses at a competitive disadvantage. Supporting only big business can deepen economic inequality, as small and medium-sized enterprises may find themselves at a disadvantage.
4. Market monopolization. The law may contribute to the creation of monopolies or oligopolies, which will negatively affect prices, quality of products and services for consumers.
5. Non-transparency of support mechanisms. The lack of clear criteria and transparent procedures for determining who will receive support can lead to abuse and unequal distribution of resources.
6. Imbalance of interests. The law may focus excessively on the interests of big business, while not taking into account the needs of small and medium-sized enterprises.
7. Lack of incentives for sustainable development. If the law does not provide requirements for environmental responsibility or social responsibility of business, this can lead to negative environmental and social consequences.
8. Difficulty of administration. Implementation of new regulations may require significant administrative resources, which will increase government costs and create additional bureaucratic pressure on business.
As we can see, although, at first glance, the law provides a number of advantages for business, at the same time it creates grounds for discrimination of enterprises and new corruption risks. After all, not all companies will be able to enter the “club of the chosen ones”. There are no guarantees that among the “white businesses” there will not be “black crows” who are used to conducting “business as usual” with “dealers” and the use of well-known schemes to avoid paying taxes.
In addition, the approach proposed in the law suits tax officials because it justifies any illegal actions, for example, demanding overpayments of income tax, motivating it by “public interests”. This innovation can actually become an indulgence for “milking business”, that is, it will turn the division of business into “white” and “all others” into a tool for abuse. It will help taxpayers and those lobbying their interests (for example, the Ministry of Finance) to expand discretionary powers and powers, which in particular are provided for in the National Revenue Strategy.
So, no matter how hard a conscientious taxpayer tries to comply with the legal requirements, he can still be accused of underpayment with accompanying consequences, unless he “makes an agreement” with the tax office.
The introduction of the “white business club” will in no way contribute to increasing trust between business and tax officials. Instead, it can lead to greater segregation of entrepreneurs, new corruption schemes and, most importantly, will weaken the position of business in the fight for civilized tax relations.
Perhaps such a club could function successfully in a developed country with a conscientious tax service and an order of open access to the market based on free political and economic competition. However, the tax systems of such countries usually have well-thought-out risk criteria that do not require the existence of any clubs.
That is, if there are clear criteria for business integrity, then there is no need to create any clubs. The new law does not spell out the criteria clearly enough, which leaves room for manipulation.
