Amendments to the Tax Code of Ukraine and certain other laws of Ukraine to ensure a balance of budget receipts
As the new political season began in the last days of August, September appeared to be rich in new legislative initiatives and for continuing work on draft laws from the previous parliamentary session. Among those that definitely deserve attention are the widely discussed Draft Law On Bureau of Economic Security of Ukraine, several prospective drafts that promise amendments to trade remedies laws (Draft Laws No. 4132 and No. 4134) and a couple of possible amendments in the tax field. The Ukrainian Journal of Business Law asked the lawyers to share their expert opinions on these and other important legal matters.
The Cabinet of Ministers registered Draft Law No. 4101 On Amendments to the Tax Code of Ukraine and Certain other Laws of Ukraine to Ensure a Balance of Budget Receipts. What amendments are stated in the document in the part on tax audit and on tax debt?
Draft Law No. 4101 provides for the cancellation of the moratorium to carry out tax audits and unprecedented extension of powers of the tax authorities in relation to access to banking secrecy and writing off of tax debts from the bank accounts of taxpayers.
Cancellation of moratorium to carry out tax audits
Specifically, Draft Law No. 4101 proposes cancelling the moratorium to perform tax audits introduced as of 18 March 2020 and which are still in force until the Government cancels COVID-19 quarantine measures. The authors of the Draft justify the cancellation of the moratorium on tax audits by the impossibility to audit 2.5k “risky” taxpayers having reported “questionable” input VAT credits for UAH 2.2 billion. Furthermore, the initiators of the Draft note that the tax authorities received more than 600 claims that different businesses breach the order of settlements, licensing terms and fail to formalize employment relations. They also note that just 401 (out of 3,761) tax audits scheduled for 2020 have been completed and resulted in tax assessments of UAH 1.4 billion, while for the same period in 2019 the tax authorities completed 3,236 tax audits and additionally assessed UAH 11.2 billion. As seen from the above, the cancellation of tax audits moratorium is aimed at the collection of additional taxes and fines despite the impact of quarantine on businesses.
If Draft Law No. 4101 comes into force, the tax authorities will be able to complete the tax audits started prior to 18 March 2020 and suspended due to quarantine. At the same time, tax audits scheduled for the period from 18 March 2020 to the effective date of Draft No. 4101 but not started due to quarantine, will be excluded from the tax audits schedule for 2020. Draft Law No. 4101 provides that the updated tax audits schedule shall be made publicly available within 10 business days following the effective date of Draft No. 4101. This rule contradicts other provisions of the Tax Code of Ukraine, restricting amendments to the tax audits schedule after Q2 of the current year.
Access of tax authorities to banking secrecy
Draft Law No. 4101 also provides for access of the tax authorities to information qualifying as banking secrecy (information on the balance of accounts, transfers, availability of a bank safe, etc.) without special court rulings. It is a positive thing that such powers are limited to instances when the tax authorities have previously received a court ruling on the recovery of tax debt from a specific taxpayer. The authors of Draft No. 4101 justify such extension of powers of tax authorities by difficulties in the recovery of tax debts confirmed by court rulings due to the absence of information on the availability of funds on the bank accounts of taxpayers at the disposal for the tax authorities.
Write-offs of tax debts without court rulings
The Tax Code of Ukraine currently allows the tax authorities to write-off the tax debts from the bank accounts of taxpayers without first obtaining a court ruling. Such “court-ruling free” write-offs are subject to certain safeguards. Specifically, such write-offs are allowed only in relation to tax debts corresponding to tax liabilities reported by the taxpayers in their tax returns. Furthermore, the tax authorities may perform such write-offs if a tax debt exceeds UAH 5 million and is due for more than 90 days. In addition, there should be no outstanding obligation on the part of the state in relation to the refund of mistakenly and/or excessively paid taxes to the tax debtor.
The authors of Draft Law No. 4101 propose empowering the tax authorities to write-off the reported tax debts from the taxpayers’ bank accounts without court rulings irrespectively of the amounts of such debts, the delay in settlement thereof, and availability of the indebtedness of the state in relation to refund of overpaid taxes to the taxpayers. This proposal is justified by the fact that the tax liabilities reported by the taxpayers qualify as “agreed” and cannot be challenged by the taxpayers. At the same time, the Tax Code of Ukraine allows taxpayers to adjust their tax returns to reduce the previously reported tax liabilities. If Draft No. 4101 is enacted, it is likely that the tax authorities will insist that mistakenly reported tax liabilities should nevertheless be paid. Otherwise, the tax authorities will endeavor to write-off the relevant amounts from the bank accounts of the taxpayers. Given the current economic situation in Ukraine and delays in refund of overpaid taxes by the state, it appears that removal of safeguards for “court ruling free” write-offs of the tax debts from the bank accounts of the taxpayers is likely to result in the unjustified collection of mistakenly reported tax liabilities and additional tax pressure on taxpayers.