Over
the time that has passed since the publication of my article
on the new system of VAT administration, I have lost my illusions as
to 100% efficiency of the new system.
Blocked
VAT-accounts are well able to resist VAT-fraud when it comes to
transactions between taxable persons. However, they are virtually
powerless against VAT-abuses when it comes to transaction between
taxable and non-taxable persons. A sham company can supply
goods/services to a non-taxable person and fail to declare its output
VAT. A limit on the registration of VAT invoices in the unified
electronic register will not help here. The sham company just will
not issue a VAT invoice at all thereby avoiding depositing funds into
its blocked VAT-account. The VAT "saved" in such a way the
sham company will be able to transfer to an unconscientious trader by
providing him with “all-loved” consulting services plus, of
course, black cash in suitcases.
Let
me illustrate this loophole of the new administration system by way
of example.
Company
A is willing to convert UAH 1 mln. into black cash and still enjoy
fake input VAT. Company A reaches out to Company B (a sham
company). The parties enter into a contract for consulting services
(Company A is the client, and Company B is the contractor) at the
amount of UAH 1 mln., inclusive of UAH 166.66 thousand of VAT.
Company A transfer UAH 1 mln. to Company B as an advance payment for
the consulting services.
Company
B does not hurry with the issuance of the VAT invoice to Company A
for the amount of UAH 166.66 thousand. The point here is that for
registering such a VAT invoice in the unified register, Company B
would have to fund its blocked VAT-account for UAH 166.66 thousand.
Instead, Company B seeks a possibility of issuing the VAT invoice to
Company A without depositing any funds into its blocked VAT-account.
To
this end, Company B buys for the same UAH 1 mln. computer equipment
from Company C (a taxable person) and gets for itself a VAT invoice
for the amount of UAH 166.66 thousand. The purchase is of true
nature. Company B really gets the computer equipment.
Now,
having the VAT invoice confirming its entitlement to UAH 166.66
thousand of input VAT, Company B issues a VAT invoice to Company A
for the same amount with no funding of its blocked VAT-account.
At
the final stage Company B sells the purchased computer equipment to
Company D (non-taxable person) for UAH 1.1 mln., including UAH 183.33
thousand of VAT. Again, it is a true nature transaction. The computer
equipment actually goes to Company D.
It
seems as if there were no options for Company B, but to fund its
blocked VAT-account for UAH 183.33 thousand necessary for the
issuance of the VAT invoice to Company D. However, Company D resorts
to “unexpected maneuver”. It does not issue the VAT invoice and
does not record its resultant output VAT in the VAT return.
Company
D is not a taxable person and by and large does not need the VAT
invoice. Therefore, it will not complain to the State Fiscal Service
of Ukraine about Company B failing to issue it with the VAT invoice.
Furthermore, the law itself does not provide any enforcement
mechanism that can be used to compel Company B to provide Company D
with the VAT invoice. A provision setting out 15 days time limit for
registering a VAT invoice in the unified register is not enshrined by
any effective legal sanctions.
After
receiving the funds from Company D Company B illegally converts them
into black cash and transfer the obtained black cash to Company A, of
course, less of the conversion fees charged.
By
the way, the question arises as to the amount of black cash
conversion fees. It appears that a 27-30% fee mentioned in my
preceding article
is rather an overstated amount. Arguing that the amount of the fee
would soar that high, I was premised on the assumption that the new
administration system would completely close the gap allowing sham
companies to evade VAT.
As
the aforesaid example shows I was wrong. The new system of
administration still permits sham companies to evade VAT, but this
will be much more difficult than it is today. Sham companies will
incur additional operating expenses. To secure a "deal"
they will have to at least carry out a real purchase of goods and
find a non-taxable customer ready to buy such goods from them at
prices close to market ones.
Given
the additional operating expenses, sham companies will charge more
for their services. How much will it be - it is difficult to say.
However, it is clear that it will be something above the current
7-10%, but below 27-30% suggested in my previous article.
Perhaps, it will be something around 12-15%.
What
could the government do to block/restrict the VAT-evasion
possibilities open to supplies involving non-taxable customers?
In
my opinion, the government may consider assigning certain controlling
responsibilities to banks or to non-taxable customers, in particular
those of them being sole traders or legal entities.
Banks
can be prohibited from processing payments made by non-taxable
persons to taxable persons, until the taxable person (supplier)
provides the bank with the confirmation of the registration of the
corresponding VAT invoice in the unified register.
As
for non-taxable persons, they could be obliged to complain to the tax
authorities about their taxable suppliers failing to provide them
with the confirmation of the registration of the VAT invoices in the
unified register. This obligation would be appropriate to safeguard
by means of a fine being equal to the amount of the VAT for which the
VAT invoice should have been issued. The presence of such a
significant fine would encourage the non-taxable persons to complain
to the tax authorities about the taxable persons failing to issue the
VAT invoices. The tax authorities would therefore be able to receive
promptly the information about the abuse and would be able to respond
to it accordingly.
