TAX ALERT 28.08.2023 | Digest of top tax news

Restrictions on the rights of a taxpayer subject to sanctions: the Law was adopted

On August 10, 2023, the Verkhovna Rada of Ukraine adopted the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on the Application of Special Economic and Other Restrictive Measures (Sanctions)” (Draft Law No. 6529). 

The text of the Law suggests that in case of application of special economic and other restrictive measures (sanctions) to a taxpayer following the Law of Ukraine “On Sanctions”, the rights of such a taxpayer under the Tax Code and other laws, control over compliance with which is vested in the tax authorities, may be restricted.

The tax authorities will implement measures to ensure the enforcement of decisions on the application of sanctions, in particular:

• in the event of the application of sanctions in the form of revocation or suspension of licenses and other permits, the obtaining (availability) of which is a requirement for carrying out a certain type of activity, the taxpayer’s licenses to carry out activities in the field of production and circulation of alcohol, alcoholic beverages, tobacco products, liquids used in electronic cigarettes and fuel will be canceled; 
• in the event of the application of sanctions in the form of suspension of economic and financial obligations, the following will be carried out:

• refusal/suspension of refund of erroneously and/or overpaid amounts of taxes and fees, single contribution to the obligatory state social insurance, penalties, fines;
• refusal to grant installments (deferrals) of monetary obligations (tax debt), as well as to decide on postponing the payment of installments (deferred amounts);
• suspension/refusal to grant VAT reimbursement from the budget. VAT payers will not be entitled to receive a VAT reimbursement during the period of application of the relevant sanctions. Moreover, negative value of VAT amounts will be credited to reduce the amount of VAT tax debt incurred in previous reporting (tax) periods (including the deferredone), and in the absence of tax debt, to the tax credit of the next reporting (tax) period.

From the date of the decision on imposition of sanctions, the repayment of the agreed amount of VAT budget reimbursement and the time limits for such reimbursement are suspended. At the same time, the State Treasury Service shall transfer such amount of budget reimbursement to the taxpayer’s bank account and/or budget accounts to pay monetary obligations or repayment of tax debt on other payments within 5 business days from the date of the decision to lift the sanctions. 

If a decision on imposition sanctions is made while the desk or documentary audit lasts, the tax authority sends the taxpayer a tax notice-decision on refusal to repay VAT budget reimbursement, which is not subject to appeal.

In addition, as a general rule, VAT amounts not refunded to the taxpayer within the statutory period are considered to be a debt of the budget to the taxpayer and are subject to penalty accrual. 

However, such penalty will not be charged in case of suspension/refusal to repay VAT budget reimbursement due to a decision on imposition of sanctions.

It is also envisaged that the amount of VAT, which includes tax amounts paid by the recipient of goods/services in the previous and reporting tax periods to suppliers of goods/services used or to be used in the operations of the first supply of housing (residential real estate), an indivisible residential property under construction / future residential real estate, will not be subject to budget reimbursement. The amounts of such negative VAT value are credited to the tax credit of the next reporting (tax) period until they are fully coverage by tax liabilities.

In addition, taxpayers subject to sanctions are not entitled to choose and apply the simplified taxation system during the period of their application, nor are they entitled to confirm the status of a Group 4 single taxpayer.

The Law will come into force from the date the State Register of Sanctions becomes operational, but no later than on January 29, 2024, except for certain provisions of the Law, which come into force on the day following the date of the Law’s publication.

It is worth reminding that the establishment of the above mentioned Register is provided for by the Law of Ukraine No. 3223-IX dated 13.07.2023. It will be maintained by the Office of the National Security and Defence Council of Ukraine, which shall ensure the establishment and operation of the Register no later than on January 29, 2024.

The Law on termination of the Double Tax Treaty between Ukraine and Iran was adopted

On August 23, 2023, the Verkhovna Rada of Ukraine adopted the Law of Ukraine “On Termination of the Agreement between the Government of Ukraine and the  Government of the Islamic Republic of Iran for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Property” (Draft Law No. 0215).

The adoption of the Law is caused by the need to address the threats to the national interests and security of Ukraine.

As is known, such international agreements are applied to avoid double taxation when collecting taxes covered by them. These agreements also allow the residents of the contracting states to apply for tax reliefs provided by them.

The double tax treaty between Ukraine and Iran covers corporate income tax, personal income tax (for Ukraine) and income tax and property tax (for Iran).

After the entry of the Law into force, the agreement between Ukraine and Iran will be terminated. Consequently, residents of these countries will not have the preferential taxation conditions provided by the agreement, will not be able to eliminate double taxation by offsetting the relevant tax, and state bodies of the contracting states will not be able to exchange information on tax matters based on the stated agreement.

It is proposed to transfer the functions of administering the unified social contribution to the Pension Fund

On August 07, 2023, the Verkhovna Rada of Ukraine registered Draft Law No. 9570 “On Amendments to the Tax Code of Ukraine and the Law of Ukraine “On Collection and Accounting of the Unified Social Contribution” regarding the administration of the single contribution for obligatory state social insurance”.

The Draft Law proposes to transfer all functions related to the administration of the unified social contribution (the “USC”) from the tax authorities to the Pension Fund of Ukraine, which will, inter alia:

• collect and keep records of the USC revenues; 
• monitor compliance with the USC legislation, correctness of accrual, calculation, completeness, and timeliness of USC payment;
• establish the forms, terms, and procedure for accepting and processing reports from payers on the accrual, calculation and payment of the USC;
• form and maintain a register of insurers and a register of insured persons of the State Register of Obligatory State Social Insurance. 

It is also envisaged, in particular, that:

• the USC will be paid to the accounts of the territorial bodies of the Pension Fund;
• individual entrepreneurs, persons engaged in independent professional activities, and members of farming enterprises will be required to pay the USC monthly, rather than quarterly, as is currently the case;
• payers of the USC will be required to submit reports on the accrual of the USC through the Pension Fund’s electronic services web portal in electronic form, and insurers with no more than 5 insured persons will be required to submit reports in paper form at their option.

Additionally, it is proposed to establish that taxpayers with USC arrears will not be able to be single taxpayers, and single taxpayers will be obliged to switch to paying other taxes and fees in case of USC arrears under certain conditions. 

Thus, if the Draft Law is adopted, taxpayers  will  have to file USC reports separately from personal income tax (single tax) reports again, and the Pension Fund authorities will be empowered to conduct inspections of USC payers.

Draft law on establishing administrative liability for tax authorities for violation of the tax control procedure

On August 08, 2023, the Verkhovna Rada of Ukraine registered Draft Law No. 9590 “On Amendments to the Code of Ukraine on Administrative Offences to Introduce Liability for Violation of the Procedure for Exercising Tax Control”.

The Draft Law proposes to supplement the Code of Ukraine on Administrative Offences with a new Article 166²⁸ “Violation of the Procedure for Exercising Tax Control”, according to which officials (officers) of tax authorities will be held administratively liable in the form of a fine of UAH 8,500 to UAH 17,000 for:

• making an unlawful decision, performing unlawful acts or omissions that resulted in unjustified refusal to acquire, unjustified loss of the status of a taxpayer or payer of one of the taxes, the acquisition and/or cancellation (loss) of which occurs by decision of a tax authority; 
• failure to enter or untimely entry of data into the Register of applications for VAT budget reimbursement and/or violation of the deadlines for commencement of a desk or documentary unscheduled audit in connection with VAT reimbursement, if such unlawful acts resulted in violation of the deadlines for VAT budget reimbursement;  
• deciding to use property as a source of repayment of a taxpayer’s monetary obligation or tax debt, if, following the Tax Code, such property cannot be used as a source of repayment of a tax debt;
• obstructing the release of a person’s property from the temporary detention regime; 
• unlawful seizure of property or funds on accounts;
• unreasonable entry of data on the existence of a taxpayer’s tax debt or untimely entry or failure to enter data on the absence of a taxpayer’s tax debt; 
• violation of the statutory deadlines for conducting external tax audits.

In addition, a fine of the above amount will be imposed on the chairman of the regional or central level commission on suspension of registration of a tax invoice/adjustment calculation in the Unified Register of Tax Invoices (the “URTI“) for suspension of registration of a tax invoice/adjustment calculation in the URTI in violation of the procedure established by the Cabinet of Ministers of Ukraine, as well as for unlawful refusal to register a tax invoice/adjustment calculation in the URTI.

Actions committed by a person who has been subject to a penalty for one of the above offenses during the year, or who has caused large-scale damage to the taxpayer, will result in a fine of UAH 17,000 to UAH 85,000.

Large-scale damage will be defined as damage over one thousand tax-free minimum incomes, which in 2023 is UAH 1,342,000.

It is proposed to empower officials of the State Regulatory Service of Ukraine to draw up reports on the commission of these administrative offenses. Cases of such administrative offenses will be considered by the courts.

Thus, if the Draft Law is adopted, holding tax officials liable for violations of the tax control procedure may help to ensure that the rights and interests of taxpayers are respected.

It is proposed to establish a tax social benefit for defenders of Ukraine

On August 11, 2023, the Verkhovna Rada of Ukraine registered Draft Law No. 9609 “On Amendments to Article 169 of the Tax Code of Ukraine regarding the inclusion of participants in measures to ensure national security and defense, repulse and deter the armed aggression of the russian federation in the categories of persons entitled to a tax social benefit”.

The Draft Law proposes to establish that persons called up for military service during mobilization, participants of the ATO, JFO, and other measures to ensure national security and defense, repulsion and deterrence of the armed aggression of the russian federation (starting from 2014) will be entitled to a reduction of the total monthly taxable income of PIT from one employer in the form of salary by the amount of tax social benefit equal to 200 % of the amount of benefit determined by cl. 169.1.1 of clause 169.1 of Article 169 of the Tax Code (50 % of the subsistence minimum for an able-bodied person established by law as of 1 January of the reporting tax year).

Registration of a Draft Law on establishing a zero rate of environmental tax on carbon dioxide emissions from biofuel combustion 

On August 09, 2023, the Verkhovna Rada of Ukraine registered Draft Law No. 9596 “On Amendments to the Tax Code of Ukraine on Establishing a Zero UAH of Environmental Tax Rate for Carbon Dioxide Emissions for Installations that Produce Such Emissions as a Result of Biofuel Combustion”.

For environmental taxation purposes, it is proposed to define biofuels as fuels that consist exclusively of non-fossil, biologically renewable substances of organic origin that are capable of biological decomposition in the form of products, waste, and remnants of forestry and agriculture (crop and livestock production), fisheries and related industries, as well as the part of industrial or household waste that is capable of biological decomposition.

It is proposed that carbon dioxide emissions from facilities, which are included in the register of facilities that use biofuels as the only type of fuel, should be charged with an environmental tax at a rate of UAH 0.

According to the authors of the Draft Law, its adoption will ensure that companies continue to switch from fossil fuels (coal, gas, peat) to renewable energy sources, such as biofuels. It is expected to gain legal force on January 1, 2025.

Provision of refundable financial assistance by individual entrepreneurs – single taxpayers of groups 1 – 3: the Draft Law was registered

On August 15, 2023, the Verkhovna Rada of Ukraine registered Draft Law No. 9614 “On Amendments to Clause 291.5 of Article 291 of the Tax Code of Ukraine on the Provision of Refundable Financial Assistance by Individual Entrepreneurs under the Simplified Tax System”.

The Draft Law proposes to establish that individual entrepreneurs who provide refundable financial assistance may be single taxpayers of groups 1 – 3.

As a reminder, the Tax Code currently states that business entities (legal entities and individual entrepreneurs) engaged in financial intermediation cannot be single taxpayers of groups 1 – 3, except in certain cases. 

Taking this rule into account, the tax authorities expressed a position that individual entrepreneurs of groups 1 – 3 may not provide the stated financial assistance, as this type of activity is incompatible with the application of simplified tax system. 

Thus, if the Draft Law is adopted, the possibility to provide refundable financial assistance by the stated individuals will be clarified directly by law. 

Amendments to the procedure for suspension of registration of tax invoice/adjustment calculation: draft resolution published

On August 15, 2023, a draft resolution of the Cabinet of Ministers of Ukraine “On Amendments to the Procedures Approved by the Resolution of the Cabinet of Ministers of Ukraine No. 1165 dated 11.12.2019” was published on the website of the Ministry of Finance of Ukraine. 

Among other things, the draft resolution provides for:

• amendments to the unconditional registration feature of the tax invoice/adjustment calculation (“TI/AC”) regarding the indicator of the total amount of VAT paid by the taxpayer in the last 12 calendar months by increasing it from UAH 1 million to UAH 10 million;
• clarification that the decision to disregard the taxpayer’s data table, the decision on compliance/non-compliance of the taxpayer with the riskiness criteria, may be appealed in administrative or litigation proceedings;
• amendments and additions to the indicators used to determine the positive tax history of a VAT payer. 

The explanatory note to the draft resolution states that it was developed to improve the mechanism of suspension of TI/AC registration to provide favorable conditions for conscientious VAT payers to register TI/AC.

The Ministry of Finance of Ukraine is currently accepting comments and suggestions for the draft resolution within 30 working days.

Procedure for the importation of goods by business entities to be used in their own production activities: the draft resolution was published

On August 07, 2023, on the website of the Ministry of Economy of Ukraine was published a draft resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for the Importation by Business Entities that Meet the Criteria Set Out in Clause 68 of Subsection 10 of Section XX “Transitional Provisions” of the Tax Code of Ukraine, Goods, the Importation of which into the Customs Territory of Ukraine is Exempt from VAT, to be Used in Their Own Production Activities”.

It is worth reminding that temporarily, until January 01, 2037, operations on the importation into the customs territory of Ukraine of equipment and components imported by business entities that meet the legally established criteria, exclusively to be used in their own production activities and classified into certain commodities subcategories according to the Ukrainian Classification of Goods for Foreign Economic Activity, are released from VAT.

At the same time, the procedure for importing such goods into the customs territory is determined by the Cabinet of Ministers of Ukraine.

Thus, the draft resolution proposes to determine the following procedure, which, in particular: 

• will set out the list of documents to be submitted by a business entity to the Ministry of Strategic Industries of Ukraine for the customs declaration of goods and control over their intended use. 

After reviewing the submitted documents, the Ministry of Strategic Industries will send a letter to the company confirming that the goods and the entity that will import them meet the statutory criteria. This letter, together with the customs declaration and other documents, will be submitted to the customs authority during the customs clearance of goods;

• will define the obligations of a business entity to submit to the tax and customs authorities a certificate of placing the goods in property, and a report on the intended use of imported goods. The forms of these certificates and reports will be set out in the appendices to the procedure;
• will provide for the tax and customs consequences of the misuse of imported goods.

The State Tax Service of Ukraine has updated the schedule of documentary tax audits

On August 07, 2023, the updated Schedule of Documentary Planned Audits of Taxpayers for 2023 was published on the website of the State Tax Service of Ukraine.

According to the current version, the number of taxpayers in Section I “Documentary Scheduled Audits of Taxpayers – Legal Entities” and Section II “Documentary Scheduled Audits of Financial Institutions, Permanent Establishments and Representative Offices of Non-Residents” has decreased from 1854 to 990.

The updated Section III “Documentary Scheduled Inspections of Individuals” contains a list of 256 individuals instead of 1468 in the previous version.

The current Section IV “Documentary Scheduled Inspections of Taxpayers – Legal Entities on the Correctness of Calculation, Completeness and Promptness of Payment of Personal Income Tax, Military Tax and Single Contribution to the Compulsory State Social Insurance” currently provides for a list of 29 legal entities, instead of the previous list of 318.

As a reminder, temporarily, from August 01, 2023 until the termination of martial law, the modifications of a schedule may be made monthly, taking into account circumstances of force majeure, and the presence/absence of safe conditions for conducting inspections.

The schedule may include only taxpayers engaged in the production and/or sale of excisable goods, the organization and conduct of gambling in Ukraine (gambling business), and the provision of financial and payment services. 

The modified schedule shall be published no later than on the last day of the month in which the changes to it were approved.

The allowed documentary scheduled audits may begin not earlier than 30 calendar days following the date of publication of the modified schedule, provided that a copy of the order on carrying out the audit and a written notice indicating the date of its commencement are sent (delivered) to the taxpayers (their representatives) no later than 10 calendar days prior the beginning date of the audit.