Ecological Surprises of Tax Code of Ukraine

Photo from www.dashboardinsight.com

Our legislature does not allow the taxpayers to "relax" by affecting them again and again with the depth and scope of its "brilliant" ideas. This time it happened with the adoption of the Tax Code of Ukraine, in particular its chapter relating to duty for special use of water.

Whereas in the past pursuant to the Regulation on Procedure of Calculation of Duty for Special Use of Water* (para 4.8) business entities and individual entrepreneurs using water only for drinking and sanitation needs were exempt from duty for special use of water, there is no such exception for the present (para 324.4 of the Tax Code of Ukraine). To put it differently, an undertaking that does not carry out industrial activities associated with the use of water resources, and engaged in, say, the provision of financial, accounting or legal services still needs to pay duty for special use of water - just for the fact that there is cold/hot water available at its office and its employees use it.

The State Tax Service of Ukraine (the "STS of Ukraine") spelled out that duty for special use of water is not payable when the taxpayer buys drinking water in bulk water packs or when it leases its offices from the lesser (the Integral Base of Tax Knowledge published on the STS’s official  website, index 270.01). However, in the latter case, the burden to pay duty for special use of water still lies with the tenant if he rather than the lesser has directly entered into a contract for water supply.

Bank Forum tried to challenge in court the individual tax advice of the STS of Ukraine outlining the necessity to pay duty for special use of water in the situation under consideration (http://reyestr.court.gov.ua/Review/17074439). Expectantly, the result is negative. As noted above, the Tax Code of Ukraine does not provide exemption from the duty for special use of water for those using it only for drinking and sanitation needs. Hence, releasing the “non-manufacturers" from the duty for special use of water requires the respective amendments to be made to the Tax Code of Ukraine.

Another gift of fate for business has turned out to be ecological tax to the extent it concerns the taxation of waste disposal.

The stance of the tax authorities here is that ecological tax is payable by business entities even when they have entered into a contract for waste (trash)  removal with the enterprises licensed to collect and stock waste as secondary raw materials (the Integral Base of Tax Knowledge, index 300.01). The reasoning of the tax officers appears to be genius: before the transfer of waste (trash) to the aforesaid licensed enterprises the business entity has been keeping it for some time on its own territory. As a result, the exemption from the ecological tax (s.  242.1.3 of the Tax Code of Ukraine) covering the cases where waste is placed on the areas belonging to the enterprises licensed to collect and stock it as secondary raw materials does not apply.

Fortunately, there has been already a successful example of combating such "anti-waste" tax initiatives. Trading house  “Amstor "(large supermarket chain mainly located in Donetsk and Zaporizhia regions) proved the wrongness of the position of the  tax authorities before the Donetsk District Administrative Court (http://reyestr.court.gov.ua/Review/18677631). The court reversed the individual tax advice of the local tax office and found that the operation is not subject to the ecological tax if the taxpayer had entered into a contract for waste removal with enterprises holding the respective license.

Let us hope that in future the state will gift taxpayers with fewer such "ecological surprises”.

 

*- approved by the joint order of the Ministry of Finance of Ukraine, the State Tax Administration of Ukraine, the Ministry of Economy of Ukraine and the Ministry of Environmental Protection and Nuclear Safety of Ukraine dated 1 October 1999 No 231/539/118/219.

Draft law No 9221 "On Humanization of Liability for Economic Offences"

On 6 October 2011, the Ukrainian Parliament approved in the first reading the draft law No 9221 "On Humanization of Liability for Economic Offences" (the Draft law No 9221). The draft law radically changes the approach to economic crimes, including those related to tax evasion.

The state decided to punish white-collar criminals by high fines rather than by imprisonment. Does it make sense to sent unconscientious entrepreneurs and managers to prisons and spend government funds on them, when they can be turned into the separate revenue of the state budget?

Tax evasion (s. 212 of the Criminal Code of Ukraine) and evasion of unified social contribution (s. 212 of the Criminal Code of Ukraine) will no more be punished by imprisonment irrespective of the amount of the evasion.

The amounts of the fines are rather big. For instance, a large-scale tax evasion incurs a fine ranging from UAH255 thousand to 425 thousand, and a large-scale evasion of unified social contribution incurs a fine ranging from UAH170 thousand to 425 thousand. Yet, this is not a ceiling. Pursuant to the draft law in any case the amount of the fine should not be less than the amount of the damage caused by the crime. Consequently, the maximum amount of the fine is not confined at all and may reach fantastic sums in large tax cases.

Failure to discharge the fine within the prescribed time frame entitles the court to convert it into a prison sentence. The calculation formula is quite simple: one day of imprisonment is equal to eight non-taxable incomes (UAH17x8=UAH136). In the light of this, the conclusion about the cost of one day in prison can be easily made.

Fortunately, the draft law sets the maximum possible term of imprisonment in the application of such a "conversion", which is  12 years. Therefore, the prison sentences of several human lives length will be avoided (they may have been possible in several million hryvna cases if such a restriction had not been in place).

Another important feature of the draft law is that it limits the power of the law enforcement agencies to apprehend and arrest persons suspected or accused of tax evasion (evasion of unified social contribution). The law enforcement agencies will not be eligible to apprehend or arrest such persons, unless they fail to pay the bail or fulfill the obligations imposed on them in connection with the application of other preventive measures. These obligations may include: the timely appearance before an investigator or court, the ban to contact certain persons or visit certain places, the withdrawal of "foreign" passport by an investigator, etc.

It appears that the adoption of this bill will significantly improve the fate of taxpayers accused of tax evasion, and, conversely, will complicate the life of law enforcement agencies. The latter will be notably limited in the application of an apprehension and arrest as the most effective methods to influence "indocile" businessmen.

However, everything is not as good as it seems at first glance. In fact, the reform is half-done. Unfortunately, it did not touch upon such crimes as "forgery in office" (Article 366 of the Criminal Code of Ukraine) and "neglect of official duty" (Article 367 of the Criminal Code of Ukraine). A forgery in office and neglect of official duty leading to serious adverse consequences (UAH117,625 as at the date of the publication) regardless of whether these crimes are committed by an official of the private or public sectors carry a penalty of imprisonment for a term of one to five years.

The jeopardy for taxpayers is as follows.

Criminal proceedings under s. 366 of the Criminal Code of Ukraine ("Forgery in Office") are being instituted almost in all cases of the institution of the criminal proceedings for tax evasion. While producing a tax return, an accountant included false information in it, for example, understated taxable income (VAT output) or overstated deductable expenses (VAT input). This is well enough to accuse the accountant of forgery in office.

As for neglect of official duty (s. 367 of the Criminal Code of Ukraine), in practice this section is often employed to qualify the actions of persons who have not paid taxes to the budget without the intent to do so (by virtue of ignorance of the relevant tax laws or their improper application, etc.).

Hence, in reality things are not so bad for "fighters" against tax evasion. To command the full arsenal including the possibility to apprehend and arrest "indocile" businessmen, it is enough to initiate the criminal proceedings not only for tax evasion, but also for forgery in office, or instead of the institution of the criminal proceedings for tax evasion to institute criminal proceedings for neglect of official duty. This seems easy. Is not it?

This situation arose due to the fact that during the adoption of the so-called anti-corruption set of laws in April of this year (2011) introducing the division of criminal offences in office into those committed by officials of the private and public sectors, the legislature did not pay proper attention to forgery in office and neglect of official duty.

At that time, the Criminal Code of Ukraine was supplemented by the provisions laying down the responsibility for abuse of power and excess of authority committed by the officials of the private sector (ss. 364-1 and 365-1, respectively), but was not supplemented by the provisions establishing the criminal responsibility for forgery in office and neglect of official duty committed by this category of the officials.

Thus, there appears to be the paradoxical situation where the criminal responsibility for abuse of power and abuse of authority committed by the officials of the private sector is governed by the special provisions of the Criminal Code of Ukraine stipulating less severe penalties than those for the officials of the public sector, but when it comes to forgery in office and neglect of official duty the officials of the private sector are treated in the same way as the officials of the public sector.

Under these conditions, it seems expedient to ask the Parliament:

(1) to supplement the Criminal Code of Ukraine by the provisions that would set forth the criminal responsibility for neglect of official duty and forgery in office by the officials of the private sector;

(2) to extend the new fines regime provided by the Draft law No 9221 to neglect of official duty and forgery in office committed by the  officials of the private sector.

If these amendments are made, taxpayers will be put in much better position to resist the "ghost" of criminal responsibility for tax evasion.