Certain provisions of the new tax code have come under assault from business circles in Ukraine and abroad.
Some of the causes for complaint include vague laws and a somewhat aggressive attitude toward those businesses that are willing to open their books to the tax authorities.
In addition, the severe penalties set out in the new tax code for non-compliance scare away those businesses that are willing to come out of the shadows and conduct business in a more transparent fashion.
While the tax code does provide for a grace period through June 30, 2011, during which the penalty for noncompliance will be only Hr 1, this grace period will soon be over.
Once this period is over, Ukrainian businesses will have to work under the threat of severe penalties, which appear to have increased under the tax code compared with those which applied under the older tax laws.
Under the previous tax law, penalties could be imposed on businesses which underpaid taxes due. With some exceptions, most such penalties varied from 10 percent to 50 percent – the older the overdue tax, the higher the penalties.
Ukrainian businesses will have to work under the threat of severe penalties, which appear to have increased under the tax code compared with those which applied under the older tax laws."
– Yuri Delikatny is head of tax at the Kyiv office of Noerr.
The new penalties apply regardless of how long a given tax is overdue, and under the tax code penalties range from 25 percent to a whopping 75 percent.
If the tax authorities identify a tax underpayment for the first time, in addition to the tax they will charge a penalty of 25 percent. If the tax authorities identify a similar tax issue two or more times within the next three years, they may apply penalties of 50 percent and then 75 percent, respectively.
Businesses will also be hit with another nasty surprise, as the tax authorities will be authorized to impose penalties on businesses even if no tax underpayments had been detected.
For example, the same 25 percent to 75 percent penalties can be imposed on the basis of incorrectly computed losses or value-added tax refunds, even if such incorrect calculations do not result in a loss of money to the Ukrainian state.
In response to such criticism, the government asserts that the new tax code has reduced the tax burden on businesses.
However, all of these rather punitive measures, combined with vague laws and possibly inconsistent application, will not result in a reduced overall tax burden and are not likely to increase the transparency of Ukrainian business practice.
Potentially, taxpayers can protect themselves from the imposition of a penalty if they apply for and obtain a ruling on a relevant tax issue from the tax authorities.
Under Ukrainian law, a taxpayer cannot be penalized if he strictly follows a position set out by the tax authorities in a ruling addressed directly to that taxpayer.
However, unlike under prior law, a taxpayer cannot conclusively rely upon general opinions expressed by the tax authorities, nor can the taxpayer rely upon tax rulings addressed to other parties.
To take advantage of any “safe harbor,” a tax ruling must be addressed to the specific taxpayer who relies upon that ruling. Although past experience shows that individual letters issued by the tax authorities to specific taxpayers at times were not very helpful and also led to further uncertainties, the tax code provides that a taxpayer, if he disagrees with a tax ruling, can now challenge it in court.
Although it remains to be seen how these new procedures will be applied in practice, it is definitely worth taking the time now to minimize risks that may arise.
Yuri Delikatny is head of tax at the Kyiv office of Noerr, a German law firm. He can be reached at [email protected].
