The new tax code will likely not, as promised by government, lessen pressure on taxpayers.
Rather, it could hit hard on tax minimization schemes medium- and large-sized businesses had been using happily for years. Lawyers and accountants are now working hard to find new ways for clients to minimize taxes payments, legally of course.
Volodymyr Kotenko, partner and head of tax practice at Ernst & Young, an international consulting company, said: “All companies use tax optimization schemes. Everybody tries to interpret laws to their favor. Not doing so would be silly.”
Some Ukrainian companies surrender 55 percent of their profits to state coffers in various taxes. According to the World Bank’s Doing Business report, paying taxes in Ukraine ranks amongst the toughest levels seen globally.
Together with informal payments, and bribes that are paid in Ukraine’s notoriously corrupt economy, plus problems with getting value-added tax refunds on time and in full, many businesses struggle to stay profitable. Loosening tax pressure is a matter of life and death for many.
“I would say tax optimization is a noble occupation, helping all mankind to survive,” laughs Yaroslav Lomakin, founder of Moscow-based consulting firm Honest & Bright, which specializes in tax minimization. It’s only a matter of time before loopholes are found in the new tax system, he said. “Every virus eventually gets its own antivirus,” Lomakin added.
How are companies adapting two months under the new tax code? A few new schemes are already in the works.
Overstating expenditures has long been used to minimize profit tax payments, sources said.
Last year, many companies offset purchases of goods or services made from private entrepreneurs who paid a small flat tax. This option will no longer be available as of April 1, when the relevant provisions of the tax code will come into effect.
However, there is still a way, tax consultants say, to exploit the simplified tax system intended for small entrepreneurs. Businesses that successfully converted employees to individual entrepreneurs can still save on a hefty 43 percent payroll payment relative to the salaries paid to employees.
Last year, some big retailers used a sophisticated trick to keep the value added tax they got from sales. They bought various difficult-to-measure and sometimes fictitious services – like legal advice, auditing services and engineering work – the price of which included VAT.
Then a retailer would ask the tax administration for tax credit to offset VAT they “paid” for these services against what they have to pay to the budget out of their sale revenues.
But now such consulting services are granted exemption from VAT. “All of a sudden, a gorgeous scheme is destroyed,” says Kotenko.
Kotenko notes, however, that advertising will still be subject to VAT payments and companies will be likely to use the schemes that involve ad services – both real and fictitious – more intensively.
Paying foreign residents has long been favorite scheme to get money out of Ukraine and supposedly as an expense. Owners of a Ukrainian company would set up an enterprise in an offshore tax haven, such as the British Cayman Islands, with a front company in a respectable country like the Netherlands, to avoid direct dealings with offshore destinations subject to extra tax charge.
The scheme allowed business owners to show minimal profits in Ukraine, where profit taxes are in double-digit percentage levels.
Meanwhile, millions of dollars was often paid to offshore companies as royalties for various services, including use of a trademark, said Sergiy Melnyk, an associate at Salans international law firm.
The new tax code makes an attempt to limit such practices. Ukrainian companies will no longer be able to pay foreign suppliers of services more than 4 percent of what they earned as sales revenues in the previous year.
Experts say this change has shaken up many businesses. They are now in panic mode seeking new loopholes to compensate.
Kyiv Post staff writer Kateryna Panova can be reach at [email protected]
