No secret millionaires: Tax authorities are going to identify Ukrainians who receive the minimum wage "on paper", keeping millions in foreign banks

At its meeting on November 16, the Verkhovna Rada adopted as a basis the draft law No. 8131. Its provisions laid the foundation for the launch of the automatic exchange of tax data between Ukraine and other countries.

According to Yaroslav Zheleznyak, the First Deputy Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, the draft law provides for the implementation of international standards in the field of transparency and exchange of information for tax purposes in Ukraine.

"We are becoming part of the OECD system of standards (Organization for Economic Co-operation and Development – Mind). It will make tax evasion even more difficult, as well as using offshore companies for this purpose," Zhelezniak explained.

Mind has looked into how such changes will affect taxpayers and what data tax authorities can access.

What is the exchange of tax information? International exchange of tax data implies that the fiscal authorities of a particular country receive information from the tax authorities of other countries on the flows on their residents' bank accounts. Such residents include both individuals and companies (legal entities), including their beneficiaries.

The automatic exchange takes place within the framework of a unified reporting standard developed by the OECD. It is called CRS. In fact, it looks like this. A certain citizen of Ukraine has bank accounts in Switzerland. Currently, the Ukrainian State Tax Service (STS) can find out about these accounts only upon a special request, for example, as part of an investigation or court case. And it is not a matter of fact that the Swiss side will provide such information. But after Ukraine joins the CRS, the State Tax Service will regularly receive data on the accounts and their status of the mentioned Ukrainian citizen from the Swiss Federal Tax Administration as a standard automatic procedure.

The second standard is called EOIR. It is the exchange of information (which goes beyond the conditions of automatic exchange) at the request of the tax authority regarding specific taxpayers.

"In addition to accounts, it can be information about the ownership structure and ultimate beneficial owners of the company that has permanent representative offices or headquarters in Ukraine; about the beneficiaries of foreign partnerships that operate or receive income subject to taxation in Ukraine; about trusts managed by Ukrainian residents," says Igor Yasko, managing partner of Winner Law Firm.

How does Ukraine implement data exchange? The Ukrainian authorities have been declaring their intention to join the CRS for quite some time. In 2017, a roadmap was approved, under which Ukraine planned to implement the CRS standard in 2020, but the deadlines were constantly postponed. In the autumn of 2021, the Ministry of Finance announced that the exchange of information would be launched in 2023. But the war once again adjusted the plans.

For what purpose will the tax authorities collect information? The essence of the exchange of tax data is that the CRS agreement member countries can receive information on bank accounts and financial assets of their tax residents in other countries.

"Access to information should ensure tax transparency and become an effective tool to control the timely and complete declaration of income of residents of CRS member countries received outside their borders," explains Olga Cherevko, managing partner at GLS Law Firm.

"The State Tax Service will have access to information on foreign financial assets of Ukrainian residents and will be able to control the completeness of the declaration of taxable income. It will allow detecting undeclared income and attempts of tax evasion by individuals," agrees Igor Yasko.

What will change for Ukrainian taxpayers after the launch of the CRS? All residents of Ukraine who have already opened accounts in Ukrainian banks or when opening new accounts will undergo an additional questionnaire.

"This is necessary to determine the status of their tax residency and their tax numbers for further automatic exchange of information on such accounts with partner countries," explains Olga Cherevko.

It is also possible that foreign banks will check their Ukrainian clients more closely, especially the sources of their income.

What will the transfer of tax data look like? This procedure has already been worked out in the countries that are members of the information exchange system.

According to the accepted exchange standards, the tax services of the CRS member countries transfer data:

• on current accounts of individuals;
• on corporate accounts – companies, funds, trusts.

The information that is transmitted within the automatic exchange has the following content:

• account holder's name, address, date and place of birth;
• country/countries of tax residency;
• taxpayer identification number (or equivalent number)
• account details and account currency;
• current balance, income from financial assets (passive investments);
• information about the financial institution where the account was opened.

At the same time, not all data are subject to automatic exchange.

First, pension accounts, term life insurance accounts and deposit accounts are not subject. The tax authorities consider them to be low-risk accounts.

Second, the requirements to report data to the tax authorities under the CRS do not apply to crowdfunding platforms, payment systems and electronic money systems, crypto exchanges, insurance brokers and currency exchange offices.

How do tax authorities use obtained data? As we have already mentioned above, the main task of fiscal authorities is to detect hidden income and to ensure the payment of taxes from it. It is logical that the introduction of automatic data exchange will be a good help for tax authorities in this regard.

"If an individual has not indicated such income in the annual declaration, the tax authorities will have every reason to conduct an audit and charge additional tax liabilities," says Olga Cherevko.

The situation is similar to bank accounts of controlled foreign companies (CFCs) used by residents of Ukraine for investments. If more than 50% of such companies’ income is passive income (dividends, interest, royalties), information on CFC accounts will also be transferred to the tax authorities of Ukraine. And they, in turn, will be able to compare the real income of controlled companies with the declared one, and, if necessary, demand from the Ukrainian beneficiaries of CFCs to pay the missing tax amount.

What are the risks for taxpayers? In addition to extra tax liabilities, the STS may impose penalties on the foreign account holder. The amount of such sanctions depends on whether the tax authorities prove the fact of tax evasion or not.

In the worst case, according to the Criminal Code of Ukraine provisions, evasion of taxes, duties and other obligatory payments on an especially large scale entails a fine of UAH 3.7 to 8.7 million. Also, the taxpayer may be fined 5 to 10,000 tax-free minimum incomes (UAH 85-170,000), and at the same time deprived of the right to hold certain positions or engage in certain activities for up to three years.