Tax Amendments under New Year Tree of 2018

Co-authored by Anton Havryk

The end of 2017 has not been an exception in terms of brining amendments to the tax legislation to be in effect from the beginning of 2018.

In the continuation of the “good” long-standing tradition  just few days before the New Year’s Eve, the President of Ukraine signed the Law of Ukraine "On Amendments to the Tax Code of Ukraine and Certain Statutory Instruments of Ukraine on Ensuring the Balanced State Revenues in 2018".  The Law was officially published on 30 December 2018.

The Law provides for a large number of changes to the tax legislation. Below is a very brief summary of the most important of these changes.

VAT - the suspension of registration of VAT invoices. Quite a major reform is being accomplished in the area of the suspension of the registration of VAT invoices. In short, the essence of the reform can be boiled down to as follows.

The system of the suspension of the registration of VAT invoices stopped its functioning following the entry into force of the Law. The system will resume its operation after the approval by the Cabinet of Ministers of Ukraine of a new procedure governing the suspension of the registration of VAT invoices. The Cabinet of Ministers of Ukraine is supposed to adopt the new procedure by 1 March 2018. However, there are some doubts whether the Cabinet of Ministers of Ukraine will be able to do it on time.

Rather favorable transitional provisions are envisaged for VAT invoices the registration of which has been already suspended, but the decision to decline their registration has not been issued yet by the tax authorities.De pending on the date (before or after December 1, 2017) at which the taxable person provided explanations/documents for the restoration of the registration, the registration can be either completely automatic or must be carry out after the expiry of five business days set aside for the consideration of such explanations/ documents.

VAT - the abolishment of VAT refund on the exportation of oilseeds.  The exportation of soybeans will be exempt from VAT from 1 September 2018 to 31 December 2021. The exportation of yellow rocket seeds and rapeseeds will be exempt from VAT from 1 January 2020 to 31 December 2021.

The above VAT exemptions will result in the abolishment of VAT refund on  exportation of the aforesaid oilseeds.

It is worthy of note that initionaly the draft law provided for VAT exemption (canceling VAT refund) on the exportation of sunflower seeds, rapeseeds and soybeans from 1 March 2018. As far as we understand,  under the increasing pressure of the strong Ukrainian agrarian lobby these provisions have been seriously alleviated at the stage of the adoption of the final wording of the law.

VAT - exemption in case of non-commercial importations of goods into the customs territory of Ukraine (hand luggage, passenger luggage, international mail and express shipments). Special rules have been established to combat abuses related to the use of the aforesaid  VAT exemption on commercial purposes (fairly common practice as of  today).

Restrictions are tied up to the frequency of the departure of persons transporting goods from abroad and the frequency of receiving international shipments. For example, the VAT exemption available for international shipments priced at no more than EUR 150  only works for first three shipments per month. The value of all the three first shipments are cumulated for the purposes of the exemption. The exemption is to be  granted only to the extent that the summed up value of the first three shipments during the calendar month does not exceed of EUR 150.

VAT - exemption for the supply of "electrocars". A VAT exemption is provided for the importation and domestic supplies of automobiles propelled by electric motors. The exception is of a temporary nature to be in force for the entire 2018. We can expect electric cars to fall in price by 20%!

Transfer pricing. Considerable changes to the transfer pricing rules have been made. Of those changes, it is worthwhile to mention the adjustment of the criteria for controlled transactions as well as the introduction of new requirements for the contents of transfer pricing documentation.

Excise tax, environmental tax, rent charge.  The rates of these taxes have been increased.

* Photo from https://efibcongress.org/

Blocking VAT Invoices: Ukrainian Approach

One of the most controversial innovations brought by the mini tax reform of 2017 is the mechanism of blocking the registration of VAT invoices. This will work from 1 April 2017 in a test mode and from 1 July 2017 in a full mode.

What for?

The system of blocked VAT-accounts introduced in 2015 was quite a serious blow to the lucrative business of those providing fraudulent encashments services in Ukraine.

However, the representatives of the “industry” turned out to be smart enough to find a “weak spot” in the system of blocked VAT-accounts and began to exploit it actively.

Despite its advancement, the system of blocked VAT-accounts is absolutely powerless against abuses involving supplies to non-taxable persons.

For example, a non-bona fide taxable person  buys on the domestic market or imports a batch of smartphones. Then it resells them to non-taxable third parties and obtain cash or even bank transfer payments in the amount sufficient for recovering the VAT incurred on the purchase of the smartphones. As a matter of fact, the non-bona fide taxable person does not declare output VAT arising from the supply of the smartphones and does not register a VAT invoice.

Consequently, the non-bona fide taxable person retains the input VAT deduction that can be "sold" to those interested in saving on remitting due VAT to the tax authorities. The buyer receives a "set of documents" attesting his entitlement to the input VAT deduction.

Nonetheless, there is a small issue for the parties to the trickery. In most cases, the buyer of the input VAT deduction is not interested in the goods actually sold by the non-bona fide taxable person (in our example - smartphones). So, the "set of documents" for the buyer is produced for the sale of something else: for example, much-favoured "consulting and information services".

In view of the fact that the implementation of the scheme entails the "transformation" of one product to another (in our example, smartphones are transformed into services), the scheme has received the popular name "twist". The very such "twists" are exactly what the blocking mechanism is called to counteract.

How will this work?

The blocking mechanism is as follows:

1) In case of the detection of a "twist", the tax authorities send a document  to the taxable person on the suspension of the registration of the tax invoice.

2) The taxable person has the right to submit to the tax authorities his written explanation (with the attachment of the supportive documents) in order to confirm the lawfulness of the registration of the tax invoice.

3) The explanation of the taxable person is considered by a special commission of the State Fiscal Service of Ukraine within 5 business days from the date of the receipt. Based on the results of the consideration, the commission takes a decision on the registration/refusal to register the tax invoice.

4) The taxable person has the right to appeal from the decision of the commission under the administrative and /or judicial procedure.

Conclusions and reservations

The mechanism for blocking the registration of tax invoices is absolutely necessary to counter VAT fraud. At the same time, the blocking mechanism entails significant risks for bona fide taxable persons. The latter risk to fall into disgrace of taxmen endowed with new broad powers.

By and large, much depends on how well statutory instruments determining grounds for suspending / canceling the registration of tax invoices are worked out. The adoption of such instrument is entrusted to the Cabinet of Ministers of Ukraine and the Ministry of Finance of Ukraine.

It is crucially important that grounds for suspending / canceling the registration of tax invoices are formulated with utmost precision and with due regard for the sound balance of interests of the tax authorities and bona fide taxable persons. Given the complexity of the issue and the high dependence of the decisions on the specific circumstances of the case, the task is not simple even for the authentic tax luminaries.

Let us hope for the best!

* Photo from youtube.com