Full-blown audits and fines: What changes await taxpayers from 1 August

From today, the Law No. 3219-IX of 30.06.2023, which was passed by the Verkhovna Rada at the second reading as Bill No. 8401, comes into effect. The document provides for a number of changes in taxation. In particular:

- The possibility to pay a single tax at a preferential rate of 2%, which has been in effect since March 2022, is abolished.

Payers who benefited from this relief will have the right to file a statement of refusal to apply the 2% Unified Tax from 1 August and specify the taxation system they wish to switch to. Without submitting a statement, the taxpayer will automatically be transferred to the system in which they were before opting for the 2% Unified Tax. Taxpayers who switched from the 2% Unified Tax to the general system in 2023 will be able to return to the simplified system this year.

- Tax inspections are reintroduced, but not in full.

The State Tax Service will be able to carry out unscheduled documentary inspections on certain grounds as provided by the provisions of the Tax Code. Routine inspections until the end of martial law will only be conducted for businesses in the field of production and/or sale of excise goods, in the gambling, and those providing financial, payment services. Also, from 1 August 2023 until the end of martial law, a moratorium was established on the documentary inspections regarding the payment of the Unified Social Tax (UST).

- Taxpayers are exempted from responsibility for violations in using cash registers committed from 1 January 2022 to 1 October 2023, and for violations in payment of the UST committed since the beginning of martial law until 1 August 2023.

The Parliament was supposed to pass this draft law no later than June for it to take effect from 1 July. However, it was only approved in the first reading on 29 May, and the draft was further revised. Therefore, the norms laid down in the bill come into force from 1 August.

Bill No. 8401 is one of the "structural benchmarks" that Ukraine has committed to fulfill within the memorandum with the International Monetary Fund.

In April, the head of the parliamentary Committee on Finance, Tax and Customs Policy, Danylo Hetmantsev, said in an interview with Mind that the 2% Unified Tax had outlived its usefulness and this relief should be abolished. He also reassured that only those taxpayers who have problems with tax compliance and do not respect the law would be inspected.

During the consideration of the bill, Mind recalled the history of its development and thoroughly studied the expectations of both sides – the treasury and business – from its adoption. We invite readers to recall how this process progressed and which provisions were in question..

Why will the Parliament ‘push through’ tax initiatives anyway? The Bill No. 8401 appeared in the Parliament at the end of January. However, discussions of MPs about the need to return to pre-war tax conditions started as early as the fall of 2022. There were two arguments in favour of this position: businesses have already adapted to the conditions of the wartime economy, and the state budget needs to be filled as there is a severe lack of funds.

Furthermore, in early April, a memorandum between Ukraine and the IMF was signed within the framework of a new financing programme worth $15.6 billion.

What tax innovations should businesses prepare for? The Bill No. 8401 can be roughly divided into three blocks (the following are the provisions and formulations from the document prepared for the first reading and posted on the website of the Verkhovna Rada).

First block – abolition of the preferential regime for unified taxpayers

For example, if an entrepreneur was operating under the simplified system of the 3rd taxation group and paying a unified tax at a 5% rate, after the abolition of the 2% tax, they will be back in the 3rd tax bracket. And if a company (legal entity) was using the general tax system with a corporate income tax rate of 18%, when the preferential rate ceases to apply, the company will again pay the full tax.

Second block – resumption of tax audits

It should be noted that partial tax audits were permitted as early as the summer of 2022. At that time, tax authorities were granted the right to conduct control and inspection measures, albeit in a limited number of cases. For example, if a taxpayer decided to liquidate or was declared bankrupt, claimed VAT refunds, or if the tax authority had grounds to suspect violations of the legislation.

Now, the STS will be able to visit taxpayers both as part of routine inspections and on an ad hoc basis, without any limitations. For instance, if an entrepreneur was late in submitting financial reports for the previous quarter, it provides an opportunity for an audit. Similarly, if a complaint is received regarding a legal entity paying employees 'under the table', it also serves as a basis for an inspection.

However, tax authorities can only conduct an audit if they have unimpeded and secure access to the business premises, inventory, and documents. If the enterprise has been damaged or destroyed due to shelling, it is logical to assume that the audit should be postponed. Nevertheless, decisions regarding the safety of an inspector's presence on the taxpayer's premises are made by the tax authority's management. However, the objectivity of such decisions remains uncertain.

By the way, according to the official schedule of tax audits, in the second half of 2023, the STS intends to audit nearly 2,500 companies and approximately 1,500 individual entrepreneurs.

Third block – reinstatement of penalty sanctions

If a taxpayer settles the debt identified during a documentary audit within 30 days after receiving the decision notice (this applies to debts related to taxes as well as unified social contributions), the tax authority will not impose a fine. In this case, the amount of the tax obligation is considered acknowledged, and it will not be possible to challenge it, even through legal proceedings. From this wording, one can conclude that when an entrepreneur/company fails to settle a tax debt or decides to challenge it in court and loses, the fine will still have to be paid.

However, fines related to cash registers will be fully reinstated immediately after the provisions of Draft Law No. 8401 come into effect. For example, selling goods/services without using a cash register will result in a fine up to 100% of the underpayment, and for repeated violations within a year, it will be 150% of the underpayment. The fine for unauthorised modifications to the structure of cash registers will be 5,100 UAH.

What are the suggestions and concerns about the draft law? Members of Parliament do not specify the reasons why Bill No. 8401 will not be brought for a second reading on time. Yaroslav Zhelezniak, a member of the tax committee and the Golos (Voice – Mind) party MP, only briefly commented that "the review is being delayed, and consequently, the implementation deadlines are being shifted."

Some proposals have been published by representatives of the Economic Expert Platform. They relate to the easing and postponement of certain norms. Specifically:

• extend the current moratorium on inspections and the application of penalty sanctions until the end of the state of war for business entities located in territories where military operations are taking place or have taken place; that are temporarily occupied; that are designated by regional military administrations as contaminated with explosive objects and/or have fortifications;
• focus the implementation of cash registers (payment transactions recorders) exclusively on individual entrepreneurs in the 2nd and 3rd groups of the unified tax, who have a high risk of exceeding annual revenue limits;
• ensure that businesses are exempt from fines for non-application of cash registers until the end of the state of war;
• provide that documentary tax audits are exclusively risk-oriented, focusing on the most significant violators of legislation.