The first tax data sharing is expected in 2024: MPs open tax access to Ukrainians' accounts abroad

On 20 March, the Verkhovna Rada passed in the second reading the bill No. 8131, introducing European tax reporting standards and significantly increasing the transparency of taxpayers to the state – the so-called CRS Standard. This is one of the most important components of the European integration package of legislation that Ukraine has committed to approve as part of its progress towards the EU. The provisions of this draft law allow for the automatic exchanging data on accounts of Ukrainian taxpayers opened outside our country, as well as accounts of legal entities.

This opens up new opportunities for the State Tax Service to track tax evaders and beneficiaries of controlled foreign companies.

Mind has investigated what kind of tax information the STS will receive and how the exchange mechanism will work.

What is data exchange? A unified standard for the exchange of taxpayer data has existed for more than 10 years. It was developed by the Organisation for Economic Co-operation and Development (OECD) and has been joined by more than 110 countries.

The main goal of this initiative is to establish free circulation of data on accounts of legal entities and individuals (including trusts and foundations), interest payments and dividends, sales of assets, etc. between the countries participating in the exchange. Simply put, the tax authority of the A state can easily obtain the information it needs about its tax residents that the tax service of the B state  has. And vice versa. Because the exchange is mutual.

Data is transferred within the framework of two standards:

CRS, which provides for automatic exchange. Financial institutions (banks, investment and insurance companies, trusts) transfer information about the accounts of non-residents (individuals and legal entities) to the tax authorities. In turn, not only the local fiscal service, but also the tax authorities of the countries where this exchange standard has been adopted have access to this information. In other words, the State Tax Service of Ukraine will also be among the recipients of account data.

The CRS discloses the following information:

• details of the account holder (starting with the full name and ending with the address of residence);
• the country in which the account holder is a tax resident;
• information about the financial institution (or a few financial institutions) where the accounts are opened;
• balance of the account(s) and income received from financial assets (passive investments).

EOIR – exchange of information at the request of the tax authorities. This is specific data that is not available in CRS reports, but the STS can obtain what it needs by sending a separate request. The information under EOIR usually includes data on the business activities of Ukrainian residents. For example, whether a Ukrainian citizen is the ultimate owner of a controlled foreign company, whether he or she manages a trust registered in another country, etc.

What exactly does the Bill No. 8131 provide for? To be clear, the final version of the document voted for by the MPs has not been made public. Therefore, we are guided by the version published on the Parliament's website and the table of amendments to it.

When analysing the main provisions of the draft law, the following conclusions can be drawn.

1. All banking and non-banking entities in Ukraine will be granted the status of a financial agent, and from now on not only will they accumulate data on the accounts of their foreign clients, but also submit it to the tax authorities. However, let us clarify that the data to be exchanged under the CRS standard relates to a limited number of persons. Namely:

• the account holder is a non-resident individual or his/her partnership;
• the account holder is a non-resident legal entity or a permanent establishment of a non-resident;
• a financial account holder is any legal entity that is not a financial agent or ultimate beneficial owner (controller) of a non-resident.

2. Financial agents will carry out due diligence of accounts and, accordingly, will transmit the information received from clients to the tax authorities. It is noteworthy that even a person who applies for services (but not the fact that he or she will receive these services) will be subject to CRS. For example, a client came to a bank to open an account, but for some reason was refused. However, the bank already has some information (about the place of work, sources of income, etc.). And this information will become the property of the State Tax Service.

3. The tax authorities will conduct a desk (remote) audit of account information provided by financial agents. The verification will take up to 30 days from the moment the STS receives the next portion of information. Financial agents will be required to keep CRS-related documentation for at least five years.

4. Financial agents will be fined for non-compliance with the information exchange requirements. The fine for a financial agent will be 100 minimum salaries (UAH 670,000). However, even after paying the fine, a bank or insurance company will not be exempt from the obligation to submit tax information on accounts.

5. Sanctions will also be applied to account holders for submitting false information. The amount of the fine is the same as for financial agents – 100 minimum wages, or UAH 670,000. Again, after paying the fine, the taxpayer will still have to provide correct information about himself and his accounts.

6. Financial agents will have to provide data not only automatically, but also at the request of the State Tax Service. This means additional information requested by the tax authorities that does not go beyond the CRS standard. Moreover, the STS may also request such data directly from the taxpayer.

7. Legal entities that are foreign companies with a place of effective management in Ukraine and non-residents operating in Ukraine through permanent establishments (including partnerships) will keep primary documentation for five years (previously three years). This is necessary for the purposes of exchange of information upon request (EOIR).

8. CFCs and non-resident permanent establishments will be obliged to disclose the entire ownership structure to state registrars, as Ukrainian companies do. However, under martial law, the disclosure of such information is temporarily frozen. But after martial law is lifted, all businesses will have to disclose their beneficiaries within three months.

When will the provisions of draft law No. 8131 come into force? The launch of the information exchange mechanism (both CRS and EOIR) will be phased.

Based on the table of amendments prepared for the second reading of the draft law:

• the start of data collection by financial agents is scheduled for 1 July 2023;
• taxpayers who are members of an international group of companies will be obliged to notify the tax authorities that they are part of such a group by 1 October 2023;
• by 31 December 2023, the data on clients with accounts exceeding the equivalent of $250,000 will be verified, and by 31 December 2024, the data on clients with accounts less than the equivalent of $250,000 will be verified;
• 1 July 2024 marks the end of the first reporting period (year) for which the tax authorities will receive account data;
• the first exchange of tax data will also take place in 2024.

What are the risks for Ukrainian taxpayers? Despite the fact that Ukrainian financial agents will accumulate data on accounts of foreign clients, tax residents of Ukraine will also be subject to enhanced supervision.

After all, the exchange of information through the CRS and EOIR works in both directions. In other words, if a Ukrainian bank opens an account for a Polish citizen and reports it to the Ukrainian tax authorities, a Polish bank that opens a current account for a Ukrainian citizen also transmits data to the Polish tax authorities. And then the Ukrainian and Polish fiscal authorities share this data with each other.

In this way, the State Tax Service gets access to information about the accounts held by Ukrainian citizens outside the country, what business they own, what trusts they participate in, etc.

What will follow is obvious: the search for hidden income and assets, audits, additional tax liabilities and, most likely, sanctions for tax evasion.

And although it seems that all this is a distant prospect, in fact, countries that have long joined the exchange of tax data already have all the necessary information about Ukrainians. This means that as soon as the State Tax Service of Ukraine sends its first CRS report, it will immediately receive a huge amount of information about Ukrainian taxpayers in return.