Taxes and audits are back to normal. The Verkhovna Rada will consider a draft law on the return of "pre-war" taxation

At its meeting on February 20, the Parliamentary Committee on Finance, Taxation and Customs Policy decided to recommend that the Verkhovna Rada adopt Draft Law No. 8401. This was reported to Mind by Danylo Hetmantsev, chairman of the relevant committee.

This bill was elaborated as part of the agreements that Ukraine undertook in a new memo with the IMF signed in December 2022. The main tax obligations to be fulfilled by the Ukrainian side are related to the abolition of the preferential system of taxation with a single tax at 2% rate, the resumption of full-fledged business inspections and the return of penalties for tax violations.

According to Mr. Hetmantsev, the Verkhovna Rada plans to discuss draft law No. 8401 in March-April.

Mind analysed the key provisions of the document and how they will affect taxpayers.

One measure that is going to be abolished is the 2% rate single tax system for small & medium businesses. This was introduced as a part of Bill No. 7137 (now Law No. 2120-IX) passed by the Verkhovna Rada on March 14th 2022 allowing commercial entities to switch to a special tax regime paying 2% of turnover during wartime. This is essentially an equivalent of the guaranteed single rate taxation for group 3 simplified systems but with more attractive rates.

In order to qualify for this, the taxpayer had to be Ukrainian resident (if the entity – owners had to be residents too) and have annual income under 10 billion UAH while the number of employees hired was not limited. Switching also freed them from having to pay VAT upon products/services sales within Ukraine's territory.

Ukrainian MPs eventually began to discuss how the system was causing more harm than good. According to the estimates of the Parliamentary Tax Committee, due to the widespread use of special tax regime not only by entrepreneurs but also by large companies, in 2022 the state budget lost around 10 billion UAH.

All taxpayers who are currently using this system will automatically switch back to the terms of taxation they have used previously. If an entrepreneur was, for example, a group 3 single tax payer, he will pay 5% of his turnover. If a legal entity used a preferential mechanism within a general system, after cancelling the special regime it will return to paying income tax at 18%.

Cancellation of tax holidays for commercial entities of single tax groups 1-2. The aforementioned Law No. 2120-IX provides entrepreneurs who chose groups 1 and 2 of the simplified taxation system a right not to pay single tax (ST) while martial law is in effect. The Bill No. 8401 eliminates this provision so that all without exception entrepreneurs will be bound to pay ST after its approval even if they do not conduct operations.

Resumption of documentary audits. An important change would be returning business tax inspections. The current legislation limits the rights of tax inspectors for now. According to Law No. 2260-IX taxpayers can carry out desk, ex post and documentary unscheduled audits but under certain conditions such as taxpayer filing for VAT tax reimbursement or in case there is information available in tax authority about taxpayer violating currency legislation.

Truth be told, inspection measures are possible provided that the inspector has safe access to the enterprise's premises, its production facilities, offices and so on. If the tax inspector cannot reach the object where the inspection should take place and stay there without risking their life, the head of the State Tax Service is entitled (but not obliged!) to postpone the verification process.

What is also important – documentary checks begun (but not completed) before February 24th 2022 will be unlocked. They will be resumed on their originally planned deadline. Say, if an inspection was supposed to last 14 days, inspectors checked out a taxpayer for four days but suspended it due to martial law. Therefore by July 1st 2023 they will be able to complete this review and "work off" 10 remaining days.

By the way, according to a timeline posted on STS’s website they plan to verify 2500 legal entities, financial institutions and non-resident representation in Ukraine as well as around 1500 taxpayers – physical persons (it’s all about documentary audits) during 2023.

Returning of fines sanctions is yet another unpleasant piece of news for business. First, these are fines connected with use of payment transactions recorders (PTR). For now taxpayers obligated to apply PTRs in their activity are punished only if they engage into excise trading.

For example, when selling goods without using the PTR system, the first such violation will be fined 100% of the value of the goods, for each subsequent – 150% of the value of the goods. For unauthorised interference in the structure or software of a cash register, a fine is provided in the amount of 300 non-taxable minimum incomes of citizens (5,100 UAH), and for non-submission to the State Tax Service of reporting related to the use of PTR, account books and fiscal receipts, a fine will be 30 non-taxable minimum incomes (510 UAH).

Second, turning to penalties for violations related to late or incomplete payment of a single social security tax (SST). According to current provisions of the Law “On Collection and Accounting SST on Obligatory State Social Insurance” such fines are not applied. But starting from July 1 2023 for non-payment, partial or overdue payment of SST a penalty will be imposed in the amount 10% from sum. Although taxpayers still have a legal opportunity to avoid these sanctions (see below).

Some reliefs and simplifications. Norms provided in Draft Law No. 8401 foresee certain liberalisation for taxpayers.

The same applies also to those cases when auditors record the fact of non-payment/underpayment tax obligation. If the taxpayer pays needed taxes sum to the state budget no later than within 30 days then he won’t face penalties or interest charges.