The tax amnesty is in the home stretch. What did the one-off declaration of personal income bring to the state budget?
And why it was necessary after all
Ukraine’s State Tax Service (STS) announced the preliminary results of the ongoing tax amnesty in Ukraine on February 13th, 2021. According to STS data, during that period Ukrainian taxpayers declared income and assets worth 6.2 billion hryvnias, of which 380 million hryvnia of the one-time levy (tax) was paid. In particular, during the state of emergency, the amount of assets amnestied amounted to 3.92 billion hryvnia and the amount of levy paid was 246.6 million hryvnia.
Mind looked into how effective one-off declaration was in Ukraine and what taxpayers can expect after it is over.
What does the mechanism for tax amnesty look like? One-off (special) declaration or tax amnesty is conducted in accordance with Law No. 1539-IX adopted by the Verkhovna Rada in June 2021.
The amnesty process provides that any individual (citizen of Ukraine) may submit a special declaration indicating income and assets on which taxes were not paid. Then the declarant pays a one-off levy, which de facto legalises those declared incomes and assets. At the same time, no penalties are imposed on taxpayers for non-payment of taxes – fines, penalties or other sanctions.
What should be indicated in the one-off declaration? The following shall be declared:
- currency values (national and foreign currency, bank metals, deposits);
- immovable property (land, apartments, houses);
- movable property (cars, motorcycles, planes, boats);
- artworks, antiques and jewellery;
- shares in companies’ capital and other corporate rights;
- securities and other financial instruments.
It should be noted that assets not only within Ukraine territory but also abroad must be declared at the statement (e.g., funds on accounts in foreign banks).
Since declaring is not mandatory but voluntary everyone pays taxes decides whether to participate or not in an amnesty process themselves. If you ignore filing a declaration, the State Tax Service will assume that:
- The taxpayer has assets worth up to 400 000 UAH (in equivalent);
- The individual owns one apartment/apartments with total area up to 120 sq. m., one house/houses with total area up to 240 sq. m., non-residential premises with area up to 60 sq. m., land plots within limits free transfer norm from 0.01 to 2 ha;
- The taxpayer is an owner of one transport means such as a car worth up to 400, 000 UAH, motorcycle, helicopter, plane or yacht.
What tax should be paid after filing the declaration? The rates of the one-time levy are as follows:
- 2.5% for those declarants who, during the tax amnesty, purchased government domestic bonds with a no less than 365 days term and without the right of early repayment;
- 5% for individuals who declared currency values on accounts in Ukrainian banks and other assets in Ukraine;
- 9% for taxpayers who declared currency values on accounts in foreign banks and other assets outside Ukraine.
The levy can be paid immediately or in instalments, in three equal parts. In the latter case, the rate increases to 3%, 6% and 11.5% respectively. The payment of the tax is made within 30 days after the submission of the declaration. If a taxpayer has chosen the instalment option, the first payment must also be made no later than 30 days, the second payment – by November 1, 2023, the third – by November 1, 2024.
How does taxation check declarations? According to the legislation, the STS has the right within 60 days after submitting a declaration to carry out its desk audit. It is conducted remotely, without personal contact between taxpayers and tax inspectors.
If fiscal authorities find errors in the declaration, which included underpayment of the one-time levy, an individual will have 10 days to pay the amount owed and 20 days to submit an explanatory declaration.
In that case when a taxpayer does not remove errors, he will not be held responsible for it. However, the STS will consider the declaration unfiled and the taxpayer will automatically fall into those individuals who ignored amnesty.
How successful was the tax amnesty in Ukraine? When legislators were discussing the introduction of a “zero declaration” law, it was expected that the amnesty would enable the declaration of incomes and assets worth around $20 billion, with additional budget revenues estimated at around $1 billion. In Ukrainian Hryvnia, this translates to approximately 720 billion and 37 billion respectively (using the current official rate set by the NBU).
The declaration campaign is coming to an end soon – on March 1. According to data provided by Mind, the Tax Committee of Ukraine has declared assets worth 7 billion hryvnias, with net budget inflows estimated at around 400 million hryvnias. This allows us to assess the effectiveness of the measure.
In total, just 1% of what was expected has been declared and the state budget will receive only 1.3% of what was planned. In terms of economic scale, this amounts to a mere 0.002% share in Ukraine's GDP for 2022.
To compare these results with other countries:
- In Indonesia in 2016, assets worth around 40% of GDP were declared;
- Argentina's 2016–17 amnesty saw assets worth approximately 20% of GDP;
- Italy's 2001–02 amnesty helped bring out 73 billion euros – 6% of its GDP;
- Belgium's 2004 capital amnesty resulted in 17 billion euros being declared – 5% of its GDP.
According to Danylo Hetmantsev, Chairman of Parliamentary Finance, Taxation and Customs Policy Committee and one of the ideologues behind introducing this tax amnesty, war conditions made it difficult for them to reach their goals.
According to statistics and government plans, it can be concluded that the tax amnesty in Ukraine did not bring the desired results in terms of financial gain. At the same time, it is important to consider that one-off declaration is the starting point for general reporting of incomes and expanding the taxation base. From this point of view, the amnesty has obviously played in favour of its authors.
"The restrictions imposed (by the NBU – Mind) have made it much more difficult to unshadow the currency in which we know people keep their savings. That is why we decided to extend the amnesty until March 1. The amnesty was also somewhat competed with by the preferential taxation regime of a single tax at a rate of 2%. Many Ukrainians made use of this system as an amnesty equivalent," explained Danylo Hetmantsev.
What should taxpayers expect next after such an amnesty? Already during the preparation for the one-off declaration, its initiators did not hide that after the introduction of the amnesty there will be increased control over citizens' income.
As Danylo Hetmanets reported to Mind back in September 2019: "The main task of this programme [tax amnesty] is to give taxpayers an opportunity to start from scratch before implementing BEPS steps and launching automatic exchange of tax information."
By 2023, the goal for citizens' income has not changed. According to Hetmancev, Ukraine's eurointegration path foresees that any possibilities for tax avoidance must be blocked.
Therefore, the next steps regarding individual taxpayers will be:
- Strengthening of financial monitoring on behalf of banks. More and more questions will arise in financial facilities regarding the origin of funds when opening accounts of individuals and with large operations/transfers.
- Expansion of the powers of taxation in terms of access to data on the financial condition of taxpayers who will be finalised within the framework of automatic exchange of taxation information (draft law No. 8131 adopted in first reading).
- Launching a mechanism for controlling incomes of individuals by expenses (so-called indirect methods), allowing taxpayers to determine the real state of citizens by analysing their lifestyle. In this case, it is impossible to hide behind a minimum salary and taxes from hidden income found by tax authorities must be paid.
However, all these measures are not a prospect for tomorrow. MPs assure that as long as there is martial law in the country, no one will look deep into citizens’ pockets.
"The government has not approached us either with an offer to extend the period of amnesty or with an initiative to introduce indirect methods of taxation control," Danylo Hetmantsev commented to Mind.
But one should not doubt that in perspective all income earners without exception will become objects of close attention from tax inspectors. And these are not just those same indirect methods, but also a fight against "envelope" salaries, and removing loopholes in a simplified taxation system allowing to minimise tax base.
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