Crux (#10 October 2020)

Legal Digest

As the new political season began in the last days of August, September appeared to be rich in new legislative initiatives and for continuing work on draft laws from the previous parliamentary session. Among those that definitely deserve attention are the widely discussed Draft Law On Bureau of Economic Security of Ukraine, several prospective drafts that promise amendments to trade remedies laws (Draft Laws No. 4132 and No. 4134) and a couple of possible amendments in the tax field. We asked the lawyers to share their expert opinions on these and other important legal matters.

NBU Resolution No. 129 On Making Amendments to Some Legislative Acts of the National Bank of Ukraine includes an updated procedure on the opening and closing of the accounts of the banks clients, as well as the procedure to attract deposit funds from the accounts of clients. What else do these amendments include, and how they can influence the banking sector and its clients?

Anastasiia Zhebel, Associate, AVELLUM

In September, the National Bank of Ukraine continued to amend its internal regulations to bring them in line with other provisions of Ukrainian legislation. This time, the changes were made to the Instruction On the Procedure for Opening and Closing Accounts of Banks Clients and Correspondent Accounts of Ukrainian and Foreign Banks and the Regulation On the Procedure for Banks to Carry Out Deposit Operations. It is expected that such amendments will help banks to comply with legislation on financial monitoring and FATCA requirements implemented into Ukrainian law.

Among the changes, attention should be paid to extending the list of persons who are subject to the requirement to register with the Ukrainian tax authority. Now all non-residents who want to open an account with a Ukrainian bank, except for foreign correspondent banks, must provide evidence of such registration. Previously, investors and nominee holders were exempt from this requirement.

The amendments introduced by the central bank have confirmed the right of banks to close client accounts if there are grounds provided for this by the legislation on financial monitoring or the Tax Code relating to reporting accounts. At the same time, banks are prohibited from closing client current accounts if the funds in such accounts have been attached in accordance with legislation on financial monitoring.

In addition, the relevant legislative changes updated the requirements to the procedure for opening accounts to investors for agreements on product distribution, as well as for accounts used by candidates running for Parliament.

By amending the Regulation On the Procedure for Banks to Carry Out Deposit Operations, the Ukrainian central bank has provided the procedure for banks to attract deposit funds from individuals-entrepreneurs, foreign legal entities, representative offices of foreign legal entities in Ukraine. The regulator also allowed the issuance of deposit certificates denominated in precious metals, which was previously directly prohibited.

Draft Law No.4004, which brings amendments to the Criminal Procedural Code of Ukraine to increase the effectiveness of the fight against cybercrime and the use of electronic evidence was registered in Parliament. How effective will this Draft be in regulating the use of electronic evidence?

Denys Shevchenko, Attorney Assistant, AVER LEX Attorneys at law

At the beginning of September 2020, a group of MPs submitted to the Verkhovna Rada Draft Law No. 4004 which, at first glance, simply proposes to amend the Criminal Procedure Code of Ukraine to fight cybercrime and legalize the use of electronic evidence. But is everything so straightforward? Which of the proposals can disaccustom us to clean the history of the Internet browser and communicate uninhibitedly on a mobile phone?

80% of the text of the Draft is connected exclusively with the regulation of interaction with e-evidence in the framework of the criminal process, although this has not been a problem for a long time. In the long term, such changes should have a positive effect on the volume of waste paper in an investigation and courts.

An undoubted advantage is the introduction of the possibility of seizing virtual assets (Draft Law No. 3637 will introduce this definition) and their special confiscation, since the laundering of illegal earnings using virtual markets (cryptocurrency, etc.) is in great demand in the criminal world.

Under a bunch of monotonous edits, there is one interesting detail, which is not only related to working with e-evidence. These are unexpected changes in part of the circle of persons to whom the court will give the right to temporary access. It will be able to grant such a right not only to a specific employee, as is the case now, but to the entire prosecutors office or the investigation body. The likely outcome is more abuse than efficiency.

And the most disturbing thing is amendments to the Law On Telecommunications. The initiators of the Draft plan to oblige providers and operators of cellular communications and the Internet to, at their own expense, install equipment for surveillance of subscribers and provide all information, including the content of telephone conversations, to law-enforcement agencies. Even though this norm, although narrower, has long existed in legislation, in the event of the simultaneous adoption of these amendments with Draft Law No. 4003 (which must store information for 12 months), subscribers will foot the bill for all this.

Some of the proposed changes will expand the states ability to protect and control a legal society, but they will also definitely narrow the rights of members of this very society. Draft Law No. 4004 is, especially in combination with No. 4003, controversial and requires changes to take into account the rights of citizens, operators and providers.

On 4 September Draft Law No. 3295, which may create the State Agricultural Register, was adopted in the first reading. What is the need for its adoption based on, and what results are anticipated from it?

Maksym Mykoluyk, Lawyer, EVERLEGAL

Administration of state support is one of the weakest points in the agriculture support system of our country. The process of getting state support is excessively bureaucratized, opaque and inaccessible, which makes it unattractive for all agricultural producers, especially for small agricultural businesses.

In addition to the fact that the system of obtaining and distributing public funds contains many corruption risks, it does not allow to conduct either analysis of the potential efficiency of providing public funds or the results of its allocation.

These circumstances made it necessary to create a unified state information system to include data on agricultural producers and ensure effective state support administration in the agricultural industry.

At the beginning of 2020, the pilot version of the State Agricultural Register (hereinafter the Register) was launched an electronic platform for agricultural producers, and, on 4 September 2020, the Verkhovna Rada approved Draft Law No. 3295 in its first reading, laying the basic principles of the future operation of this platform for the agricultural business in terms of legislation.

The new online system shall become an integrated database of farmers, their property, land, environmental, labor, finance and credit, and other images. The Register will serve for applying for participation in state agricultural support programs as well as for evaluating the results of such programs. These are the objectives to be declared as main ones by the Draft authors and representatives of the Ministry for Development of Economy, Trade and Agriculture of Ukraine, which coordinates the Registers implementation in cooperation with international organizations.

It is also expected that in the future the Registers features will include the ability to provide users with a wide range of public services, including the state registration of land plots.

According to the authors, from the moment it is passed its principal beneficiary will be small agricultural businesses. There is no doubt that successful creation of the Register will be substantially beneficial for the entire agricultural sector. At the same time, adopting Draft Law No. 3295 in its first reading is only one of the first steps to be taken towards implementation of an ambitious project, as it is too early to discuss the effectiveness and results of implementation.

The Cabinet of Ministers registered Draft Law No. 4101 On Amendments to the Tax Code of Ukraine and Certain other Laws of Ukraine to Ensure a Balance of Budget Receipts. What amendments are stated in the document in the part on tax audit and on tax debt?

Andriy Reun, Partner, LCF Law Group

Draft Law No. 4101 provides for the cancellation of the moratorium to carry out tax audits and unprecedented extension of powers of the tax authorities in relation to access to banking secrecy and writing off of tax debts from the bank accounts of taxpayers.

Cancellation of moratorium to carry out tax audits

Specifically, Draft Law No. 4101 proposes cancelling the moratorium to perform tax audits introduced as of 18 March 2020 and which are still in force until the Government cancels COVID-19 quarantine measures. The authors of the Draft justify the cancellation of the moratorium on tax audits by the impossibility to audit 2.5k risky taxpayers having reported questionable input VAT credits for UAH 2.2 billion. Furthermore, the initiators of the Draft note that the tax authorities received more than 600 claims that different businesses breach the order of settlements, licensing terms and fail to formalize employment relations. They also note that just 401 (out of 3,761) tax audits scheduled for 2020 have been completed and resulted in tax assessments of UAH 1.4 billion, while for the same period in 2019 the tax authorities completed 3,236 tax audits and additionally assessed UAH 11.2 billion. As seen from the above, the cancellation of tax audits moratorium is aimed at the collection of additional taxes and fines despite the impact of quarantine on businesses.

If Draft Law No. 4101 into law, the tax authorities will be able to complete the tax audits started prior to 18 March 2020 and suspended due to quarantine. At the same time, tax audits scheduled for the period from 18 March 2020 to the effective date of Draft No. 4101 but not started due to quarantine, will be excluded from the tax audits schedule for 2020. Draft Law No. 4101 provides that the updated tax audits schedule shall be made publicly available within 10 business days following the effective date of Draft No. 4101. This rule contradicts other provisions of the Tax Code of Ukraine, restricting amendments to the tax audits schedule after Q2 of the current year.

Access of tax authorities to banking secrecy

Draft Law No. 4101 also provides for access of the tax authorities to information qualifying as banking secrecy (information on the balance of accounts, transfers, availability of a bank safe, etc.) without special court rulings. It is a positive thing that such powers are limited to instances when the tax authorities have previously received a court ruling on the recovery of tax debt from a specific taxpayer. The authors of Draft No. 4101 justify such extension of powers of tax authorities by difficulties in the recovery of tax debts confirmed by court rulings due to the absence of information on the availability of funds on the bank accounts of taxpayers at the disposal for the tax authorities.

Write-offs of tax debts without court rulings

The Tax Code of Ukraine currently allows the tax authorities to write-off the tax debts from the bank accounts of taxpayers without first obtaining a court ruling. Such court-ruling free write-offs are subject to certain safeguards. Specifically, such write-offs are allowed only in relation to tax debts corresponding to tax liabilities reported by the taxpayers in their tax returns. Furthermore, the tax authorities may perform such write-offs if a tax debt exceeds UAH 5 million and is due for more than 90 days. In addition, there should be no outstanding obligation on the part of the state in relation to the refund of mistakenly and/or excessively paid taxes to the tax debtor.

The authors of Draft Law No. 4101 propose empowering the tax authorities to write-off the reported tax debts from the taxpayers bank accounts without court rulings irrespectively of the amounts of such debts, the delay in settlement thereof, and availability of the indebtedness of the state in relation to refund of overpaid taxes to the taxpayers. This proposal is justified by the fact that the tax liabilities reported by the taxpayers qualify as agreed and cannot be challenged by the taxpayers. At the same time, the Tax Code of Ukraine allows taxpayers to adjust their tax returns to reduce the previously reported tax liabilities. If Draft No. 4101 is enacted, it is likely that the tax authorities will insist that mistakenly reported tax liabilities should nevertheless be paid. Otherwise, the tax authorities will endeavor to write-off the relevant amounts from the bank accounts of the taxpayers. Given the current economic situation in Ukraine and delays in refund of overpaid taxes by the state, it appears that removal of safeguards for court ruling free write-offs of the tax debts from the bank accounts of the taxpayers is likely to result in the unjustified collection of mistakenly reported tax liabilities and additional tax pressure on taxpayers.

On 15 September Draft Law No. 3851 related to the establishment of tax preferences for the creative industry was adopted by Parliament in its first reading. What preferences are mentioned in the Draft, and what is your opinion on their establishment?

Yana Bazia, Attorney-at-law, Senior Tax Consultant, KPMG Law Ukraine

On 15 September 2020 the Ukrainian Parliament adopted in the first reading the Presidents Draft Law On amendments to the Tax Code of Ukraine on the State Support of Culture, Tourism and Creative Industries. As is stated in the Explanatory Note, the purpose of the following Draft Law No. 3851 is to support the cultural spheres, creative industries and tourism sector in order to prevent their stagnation, ensure preservation and create new working places.

The Draft proposes to exempt from corporate income tax and personal income tax income in the form of targeted cultural grants provided for the implementation of a project or program in the fields of culture, tourism and the creative industries sector. Such provisions will obviously help to legalize micro and small businesses in the creative economy, encourage Ukrainian authors to create a quality cultural product with export prospects, and will allow referral for institutional support or financial assistance in the development of their own projects and for individuals to obtain personal grants.

Cutting VAT is also contemplated from 20% to 7% for performance shows (theatre, opera, ballet, circus, music, sound and others), performances of professional art groups, actors and artists, cinematic premieres, cultural and artistic events, showing original of musical works, individual and group excursions to museums, zoos and reserves, visiting their territories and objects by visitors. This amendment will also apply to the distribution, screening, public showing of films adapted into Ukrainian-language versions for the visually impaired and hard of hearing.

The Draft envisages the establishment of a reduced VAT rate of 7% till 1 January 2023 for temporary accommodation services provided by hotels, hostels and other similar facilities affected by the fall in tourist flows due to quarantine.

The adoption of Draft Law No. 3851 and the cut in VAT for the tourism industry would help to stimulate investment and may contribute to additional budget revenues. The potential increase of tourist flows would also probably lead to the creation of new jobs.

On 21 September Draft Law No. 4134 On Protective Measures was registered in Parliament. What exactly is included in the Draft, and how it can influence the export market in Ukraine?

Alexey Pustovit, Partner, Asters

The revision of laws on trade remedies has been discussed for years, so the drafts registered in Parliament are a long-awaited initiative. The growing number of trade investigations further crystallized numerous imperfections in the current regulations. The drafts address many of them, still there are many provisions requiring improvements and discussion with the business community. Draft Law No. 4134 is one of the initiatives that concerns safeguard investigations. On the legal side, the benefits of the documents include:

A more detailed regulation of interim and sunset reviews of safeguard measures;

Introduction of the suspension mechanism as an alternative to the review procedure. The measures in force may be temporarily suspended (i) if national interests so require, or (ii) in the event of substantial change in market conditions that precludes renewal of serious injury; or (iii) with a view of bringing their measures into compliance with WTO Agreements following recommendations by the WTO Dispute Settlement Body.

Clearer regulation of certain procedural issues addressing, inter alia, time constraints of the complaint consideration preceding the initiation of an investigation; more precise disciplines to tackle abuse of the confidential regime leading to non-disclosure of publicly available information which, in turn, affects due process principles; the right of the Ministry to use verifiable data obtained from a disqualified party; the consultations procedure between the Ministry and interested parties and others.

Application of the bilateral safeguard measures stemming from Ukraines FTA agreements; the most illustrative example includes provisions of the EU-Ukraine AA on safeguard measures on passenger cars.

It is proposed to replace the dysfunctional surveillance regime enshrined in current law with the ex-post monitoring system, which is also in line with recent EU initiatives.

Many important elements have been left unaddressed or require in-depth modification. For instance, the business and professional community will appreciate if the ICIT will finally start publishing texts of the decisions and if the Draft resolves confidentiality constraints pertaining to the ICITs meeting, decision-making process, access to the case files. Finally, while the Draft Law allows the interested parties to use a deposits system for the purposes of provisional duties collection, this mechanism does not work in the absence of respective amendments to the Customs Code of Ukraine.

At the end of September, a group of MPs registered Draft Laws No. 4132, 4133, 4134, 4141 on trade defense in Ukraine. What provisions do they intend to regulate, and what are the drawbacks of the current legislative base?

Olena Omelchenko,

Partner, Ilyashev & Partners

The new Draft Laws No. 4132, 4133, 4134, 4141 on trade defense in Ukraine are aimed at improving the investigation procedure and clarifying legislative terminology, taking into account WTO dispute settlement practice.

There is no doubt that these Draft Laws will improve the transparency of the process, establish the phases of the investigation procedure and eliminate the legal uncertainty that exists in current Ukrainian legislation.

Along with that, the excessive detail of the procedure will significantly complicate the work of the Ministry for the Development of Economy, Trade and Agriculture of Ukraine, which will inevitably lead to procedural violations, which in turn will become additional grounds for appealing to a court against the decisions based on the results of investigations. That part of the evidentiary process, which lies on the domestic producer will be significantly complicated, while importers and exporters will obtain more opportunities to protect their own interests.

The Draft Laws provide for the possibility of initiating ex officio investigations. However, it is unlikely that this norm will be applied practically, due to the fact that the Ministry for the Development of Economy, Trade and Agriculture of Ukraine and the Interdepartmental Commission on International Trade are on their own unable to gather the information, which is needed to initiate proceedings without cooperating with businesses.

The issues of the status and operation of the Interdepartmental Commission on International Trade, which decides on the application of anti-dumping, countervailing and safeguard measures, have not been resolved.

Unfortunately, the Draft Laws left out recent reform of the EUs trade defense instruments in terms of reducing the time of investigations and new approaches to methods of calculating duties, providing an opportunity to significantly increase their size. Furthermore, the Draft Laws do not provide additional options to gather information that would help to more effectively protect domestic producers from dumped, subsidized or growing imports.

These bills do not, generally speaking, envisage real reform of trade defense in Ukraine, and do not introduce new approaches to combating unfair competition from foreign producers and importers. That is why they need to be discussed with representatives from the business sector and refined, taking into account the latest world practices.

Draft Law No. 3087- On Bureau of Economic Security of Ukraine was adopted in its first reading. What does this draft envisage, and how will the creation of the new body influence the business situation in Ukraine?

Yevhen Filonenko, Counsel, EQUITY

The Verkhovna Rada of Ukraine adopted in the first reading the Draft Law On Bureau of Economic Security of Ukraine (registration No.3087- of 2 July 2020). The given Draft aims to liquidate the tax police, downsize the structure and numbers of bodies combating economic crimes, eliminate the overlap of their functions and create the Bureau of Economic Security of Ukraine with a view to preventing, detecting, stopping, investigating and solving criminal offences referred by the law to their jurisdiction.

In general terms, the Draft specifies the legal basis of the organization and operation of the Bureau and its officers.

In accordance with the Draft the Bureau is a state law-enforcement body the investigative jurisdiction of which is expected to comprise criminal offences in the sphere of economic activities (particularly, making a bank insolvent, making bankrupt, tax evasion, misuse of public funds, etc.).

Under the Draft Law the President of Ukraine creates the Bureau, appoints/dismisses the Bureau Chief, determines the organizational structure of the Bureau. At the same time, such provisions conflict with the Constitution of Ukraine, which does not set out the powers of the President to create or make any other decisions in regard to the Bureau.

Besides, the said Draft introduces changes to more than 40 other pieces of legislation, including the Criminal Code of Ukraine, Criminal Procedure Code of Ukraine, Code of Labor Laws of Ukraine, etc.

In particular, it is proposed that new Article 222-1, which specifies a new criminal offence, namely value added tax fraud described as embezzlement of misappropriation of public funds by receiving budget compensation in applying for return of budget compensation on the grounds of deliberate misrepresentation, including use of a deliberately forged document (value added tax fraud), is added to the Criminal Code of Ukraine.

Thus, although the Bureaus formation is not leading to deterioration of the business climate of Ukraine in general, a significant number of defects and discrepancies in the given draft law will have a negative impact both on legal relations in the sphere of protection of rights of persons overall and the system of authorities in particular.

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