Ukraine’s tax administration has gone out of its way this year to warn foreigners residing in the nation that they are required to file tax declarations and pay their fair share.
But compliance has proven incredibly difficult.
Unclear legislation and disarray at tax administration offices across Ukraine has made filing tax returns for foreigners difficult ahead of the May 3 filing deadline.
Those who manage to navigate past the administrative hurdles could find that their tax returns are filled out incorrectly – especially if they followed instructions from the tax authorities themselves.
The problems lie in several areas, experts say.
Local tax districts are refusing to receive tax returns from foreigners claiming they are not in their databases, warns Oksana Lapii, who manages expatrate tax issues at auditing giant Ernst & Young’s Kyiv office.
Unclear legislation and disarray at tax administration offices across Ukraine has made filing tax returns for foreigners difficult ahead of the May 3 filing deadline.
The problem, as was made clear in recent days, is that expats usually register at the central Kyiv tax administration to obtain identification numbers but then have to file declarations at district tax offices. The latter, however, do not have them in their databases and thus refuse to accept the declarations.
This is likely due to the fact that the tax administration adopted a new electronic filing system this year, Lapii explained, and the data is not shared between various offices.
Nor has efficiency been improved, as declarations still have to be physically brought to the offices where employees re-file them electronically – a procedure that takes around half an hour per declaration.
Unless something is done by the filing deadline of May 3 the state budget, which is already far from overflowing, could find itself even shorter on cash.
Experts estimated the potential loss of tax revenue could go into the hundreds of thousands of dollars for just the Kyiv-based expats.
Andriy Sokolov, a spokesperson for the State Tax Administration, said that there should be no problems with the returns.
If a foreigner is not registered at a district office, then filling in a simple questionnaire should solve the problem. It’s the same procedure as for when a woman marries and takes her husband’s name, he added.
The experience of numerous foreigners in Ukraine portrays a far different picture.
In one case brought to the attention of the Kyiv Post, a foreigner spent two days running from office to office within a Kyiv district tax administration hearing mostly the same message from local officials: You should pay, technically can’t, but are still liable and can be fined for not complying.
Scant experience with foreigners is part of the problem. Many local tax officials simply don’t know the procedures of how to help foreigners comply.
The problem can indeed be resolved by filing an application to the local tax authorities together with documents proving one resides there – a temporary residence permit or passport with the OVIR immigration office stamp.
But the documents require personal signatures and expats, who often hold top managerial positions and travel frequently, cannot be flown in at the week’s notice which the tax administration provided.
“If we were talking about one person, this would not be such a huge problem,” Lapii said. But with hundreds of expats to cover and just days to go the system will be overwhelmed.
The case of short-term workers without residence but who still pay some taxes in Ukraine is even more difficult, Lapii emphasized.
According to her, tax authorities are trying to be more flexible and said they will accept hotel certificates or lease agreements in lieu of residency documents, but this information was only verbal and is not legally-binding.
Yet the filing trouble is not the only problem in one of the country’s most chaotic tax seasons.
“The tax legislation changed, the template changed, and became long, complicated and irrelevant for the way of calculating taxes,” Lapii explained.
Until the first of April the tax authorities did not issue any clarifications on how to calculate the tax liability based on the small progressive tax rate.
Meanwhile, the tax declaration template itself is misleading. It suggests that monthly foreign-earned income should be taxed at 15 percent until the level of Hr 9,410 (just over $1,000), and at 17 percent thereafter, Lapii said.
This is also what foreigners will hear if they ask local tax offices.
But this is wrong according to the central tax administration experts, Lapii said. Instead, foreigners should calculate the total income they earned in a given month – foreign and domestic – and then apply the 15 percent rate to only to the first Hr 9,410.
If the accounts are calculated separately, as the template suggests, there will be an underpayment of Hr 188.2, the difference between applying the 15-17 percent progressive system for both rather than just one account (assuming both foreign and domestic income exceeds Hr 9410).
Ever-changing tax legislation and general disarray in governmental services mean that available information is often stale or does not take into account the fluid complexity of Ukrainian law.
Don’t expect to get accurate consultation and advice from regional tax officials or the telephone hotlines.
When asked about the situation of foreigners paying taxes on foreign-owned income, a hotline set up by the State Tax Administration to inform taxpayers about applicable regulations had a curious answer.
“Income earned outside of Ukraine is not subject to taxation in Ukraine,” the State Tax Administration hotline informed, firm and clear.
But experts say this clearly contradicts Ukrainian tax legislation which states that any foreigner residing over 183 days per year in Ukraine is considered a tax resident and as such has to pay taxes on their global income.
For such tax residents, any income earned abroad that was not taxed in another jurisdiction and does not fall under double taxation treaties should be taxed in Ukraine, confirmed Scott Brown, a senior partner at the Frishberg & Partners law firm.
The problem is that, for all its best intentions, the hotline carries no legal weight whatsoever.
Nor does advice from tax authorities, emails from the administration or statements on government websites. The only way to receive legally-binding instructions is to apply for a formal inquiry petition, which can take weeks to be reviewed.
On a somewhat more positive note, the typical penalty for late or even absent declarations is from Hr 51 to 136, according to the hotline.
Second time offenders, however, will see the fine multiplied by ten, warned Brown. Third time offenders will face a criminal case. “Three strikes you’re out,” he summed it up.
For those who want to play it safe, tax authorities mercifully confirmed that overpaying one’s taxes is also possible.
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
