You're reading: Business Sense: Any new tax code should be fair, simple, consistently applied

Thankfully, Ukraine’s parliament has postponed the second reading of the tax code until September 2010 and called for a public discussion of the document.

Upon being passed in the first reading in June, the draft tax code was heavily criticized by the business community as well as the authorities.

Everyone agrees that Ukraine needs a tax code, but not the one that was voted for. So, what was wrong with the initial version, and what should the final tax code look like?

The philosophy of the draft originally submitted to parliament can be summarized as “the taxpayer is always wrong and guilty.” The document was an inconsistent compilation of existing tax laws with significant revisions of rules for tax audits, tax assessments and appeals against them that were constantly in favor of the tax authorities.

The initial draft proposed to give the tax office almost limitless powers to control business and collect taxes, more than the tax office is even able to handle. Examples include the right to collect from businesses any piece of information at any point in time; assess taxes on the basis of internal data without notifying the taxpayer of an audit; simplified procedures of tax pledges; and collection of tax debt directly from bank accounts.

In addition to this, new types of tax audits were introduced and the tax office was given almost unlimited authority to perform unscheduled tax audits.

Proposed temporary reductions of tax rates for major taxes – corporate profits tax and value-added tax (VAT) – and declaring a unification of financial accounting and tax accounting were relatively unimportant to business compared with the proposed overall worsening of the tax administration regime, which is already far from perfect in Ukraine.

The business community has therefore voiced a clear “no” to this tax code.

Thankfully, the government has shown itself ready to listen to concerns. The authorities have significantly revised the draft after the first reading and a number of comments from business have since been incorporated. President Viktor Yanukovych has publicly confirmed that he will not sign a new tax code if the business community does not agree to work under the new rules. So, the question is: What should these rules be?

In our view, the tax code, in addition to compiling hundreds of already existing laws, regulations and interpretations, must address the following four important areas: unification and simplification of tax rules; simplification of tax administration; introduction and consistent application of the principle of mutual responsibility of business and government in the tax area; and improvement of the investment climate of Ukraine and a stimulation of investment activity in our country.

Unification and simplification of tax rules can be achieved through the application of consistent terminology in the tax code and by real unification of financial and tax accounting. What is the point in declaring this unification if, for example, in the current draft this provision is followed by tens of pages of non-deductible expenses? Businesses should be allowed to deduct all business-related expenses for corporate profit tax purposes and to recover the associated VAT.

Realization of the above idea would be a first step in the simplification of tax administration. Additional steps in this area should include less frequent tax reporting (preferably annual) along with marked improvement in the quality of tax audits for mid-size and small businesses – the latter of which goes beyond the tax code as such.

The tax authorities must also understand the industries that they are auditing along with corresponding market trends and financial indicators at any given point in time. This would facilitate a focus on identifying and understanding any deviations from those trends and indicators for a particular taxpayer and allow them to discuss and justify their rationale with the taxpayer prior to assessing tax. These principles should be reflected in the final version of the tax code.

Mutual responsibility of businesses and government is a very important aspect in the tax area. Given that the Ukrainian tax system is still developing, tax penalties to bona fide companies should be fair.

The government, on the other hand, should be financially liable for incorrect tax assessments and for any breach of terms concerning the offset or refund of taxes (for example, refunds of VAT to exporters). The introduction of compulsory late payment interest in cases of untimely tax refunds and/or compensation of tax litigation costs to businesses that win tax cases in court may help to make tax audits more prudent.

All the above proposals, if accepted into the tax code, will clearly improve the investment climate of Ukraine, although more remains to be done. The government should further consider ways to stimulate investment activity in the country both by foreign and domestic investors. Introduction of tax holidays for priority investment projects, accelerated depreciation or some kind of amortization premium for capital investments in Ukraine would help to achieve this goal.

Last but not least is that once introduced, the tax code should be relatively stable. Its major concepts and principles – now agreed upon by both government and business – should not change.

At the same time, when legislators introduce further changes in the tax code (for example, in addressing the peculiarities of tax treatment of a new business transaction that could further the development of the Ukrainian economy), this should be done in consultation with the business community, and preferably prior to the adoption of the respective drafts by parliament in the first reading.

The business community should also be given time to adapt to any changes prior to their enactment.

Slava Vlasov is a partner in the tax and legal services department of PricewaterhouseCoopers Ukraine. He can be reached at [email protected].

Oleg Shmal is an assistant manager in the tax and legal services department of PricewaterhouseCoopers Ukraine. He can be reached at [email protected].