Argument (#01-02 January-February 2020)

Tax Amnesty 2020, or Last Chance for Forgiveness of Tax Debts?

by Karina Pavlyuk

A tax amnesty has been discussed in Ukraine for several years now. But the probability of adoption of the relevant law increased significantly only after the rise of the new government.

Thus, on 2 September 2019, Draft Law No. 1232 was registered in the Verkhovna Rada of Ukraine. This Draft grants exempt from tax liability for individuals, provided that they declare their hidden assets by 31 March 2020. In return, the individual undertakes to pay a one-time tax on the declared amount at a reduced rate.

Hidden assets to be declared should be understood as absolutely any income that the individual may have received before 31 December 2018, or assets that were obtained by means of such income. For example, this may include currency valuables, movable property and real estate, corporate rights, intellectual property, financial instruments, and any other assets, property, property rights owned by the declarant, directly or indirectly, from which the declarant receives or is entitled to receive income.

The state is motivated to grant a tax amnesty since it provides an opportunity to replenish the state budget through hidden taxes and increase foreign exchange receipts due to funds repatriated to Ukraine. That is, globally, it has two missions: on the one hand, it aims to bring part of the economy out of the shadows and, on the other hand, it aims to start the process of building trust with a taxpayer, which should improve payment discipline and increase level of responsibility of citizens.

An individual may be interested in a tax amnesty due to the following.

First, it provides an opportunity for legalization of income, including foreign assets, without explaining the source of such income. That is, for example, if an individual declares currency valuables on foreign account, then there is no need to show what the sources of such funds are (i.e., economic transactions, counterparties, justification of economic expediency of transaction, etc.) It will be sufficient to declare the existence of such funds and be prepared to pay taxes in Ukraine at a reduced rate.

Second, participation in a special declaration may serve as good opportunity to form the source of funds history. Source of funds is by far the most topical issue in business circles. After all, the first question asked everywhere (whether in Ukrainian state agencies or foreign banks) is how were these funds earned, have the taxes been paid?

Third, the tax amnesty provides for applying a much lower PIT rate (2.5% / 5% / 10%) to declared income compared with the standard rate (18%). In addition, amnestied income will be exempt from any other taxes, i. e. war tax, unified social tax, etc. (as opposed to usual annual declared income, which, as a rule, entails quite a number of minor taxes in addition to PIT).

Fourth, the disclosure of hidden income to the state will be the basis for automatic closing of all tax, administrative, criminal proceedings that were aimed at finding amnestied assets.

According to the Draft Law, in order to qualify for the amnesty, individuals will submit a special declaration from 1 January to 31 March 2020 and pay taxes at the following rates within 10 days of submission:

5% as an overall rate for all assets, including currency valuables deposited on accounts in Ukrainian banks (for 365days or more)

2.5% for currency valuables in the event of investment in government bonds, or

10% for currency valuables deposited with banks and not invested in government bonds

As we can see, in order to qualify for the lowest PIT rates (2.5% and 5%), just presenting currency valuables to the state is not enough. They need to be deposited with a Ukrainian bank (for 1year or more) or invested in government bonds. Accordingly, those who plan to take advantage of this opportunity should start preparing for the special declaration in advance (look for banks to transfer money, look for the most profitable government bonds, etc.). It should be noted that the 2.5% and 5% rates are applicable only if the funds are already physically located in Ukraine (i.e., deposited with a Ukrainian bank or already used to purchase government bonds) at the time of submission of the declaration.

As we can see, participation in the tax amnesty campaign is not mandatory, and this is a private matter of each declarant. It is likely that it would make sense to take part at least to form a source of funds history.

A fair question might arise if someone is going to take part in the campaign: what are the guarantees for an individual who risks taking this step and disclosing hidden income? First, no criminal case (for tax evasion) will be brought into action against such an individual. Second, no administrative penalties will be imposed. Third, no questions will be asked as to the source of the declared income, its origin, the way it was earned. That is, there will be no verification of the source of funds. Fourth, the declared information will not be made public (special declaration is not public, as opposed to e-declaration).

However, if an individual decides not to participate in the tax amnesty and continues to hide income, then, if state agencies take the respective interest, the income will be considered confirmed and amnestied without submission of a special declaration and obligation to pay taxes only in the amount of UAH 300,000 (it should be noted that that text of the draft law specifies the amount of UAH 300,000, while the explanatory note to the draft sets out a much lower threshold of UAH 100,000; thus, the final amount to be granted to a taxpayer will be clarified in the final version of the draft law). Everything exceeding this threshold will be considered to be income hidden from taxation.

Karina Pavlyuk is a senior associate at Eterna Law

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