​How the tax environment in Ukraine should change in the context of the BEPS Action Plan – conclusions of the 1st Forum #BEPSinUA

11/6/18

On November 1, the First Forum for International Tax Cooperation #BEPSinUA took place that had been organized by the National Bank of Ukraine and the Ministry of Finance of Ukraine in partnership with the OECD, USAID and the World Bank.

Government and business representatives, Ukrainian and international experts discussed why Ukraine must implement the BEPS Action Plan (tax-base erosion and profit shifting) and what optimal approaches are available for this based on the experience of other countries.

Why does Ukraine need the BEPS Action Plan?

Acting Minister of Finance of Ukraine Oksana Markarova stressed the importance of the BEPS Action Plan implementation in her welcome speech: “Tax-base erosion and disparities in the application of tax regulations undermine competition and diligent business that feels unfairly treated. The steps required by the BEPS Action Plan are indeed rather hard, but I am confident that they will be supported by companies whose business is based on fair practices. Our task is to keep pace with changes in the environment so that the regulations which we adopt are helpful in establishing transparent and fair rules of the game.”

Head of the National Bank Yakiv Smoliy stressed that the implementation of the BEPS Action Plan in Ukraine will make it possible to establish effective tax regulation in Ukraine paving the way to the full-scale implementation of one of the National Bank’s strategic goals – transition of Ukraine to the free movement of capital.

“Now we are just one step away from this goal. In the beginning of the summer, the Law of Ukraine “On Currency and Currency Transactions” was adopted whose unofficial title is “The Law on the Visa-Free Movement of Capital”,” the Head of the National Ban said. He also pointed out: “However, it is important to understand that we can’t switch to the free movement of capital overnight. The paramount task of the National Bank is to ensure macro-economic and financial stability in Ukraine; we can only continue to liberalize currency transactions, if favourable conditions are in place. This also includes effective tax regulation.

The implementation of the BEPS Action Plan in Ukraine will establish required regulatory tools that will prevent the drain of capital from Ukraine to tax havens or to low-tax jurisdictions.

“If the Law “On Currency and Currency Transactions” is a “visa-free” regulation for the movemen of capital, the BEPS principles should be seen as the act on “visa freedom” for business, otherwise the price of the “visa” would be very high,” said Kateryna Rozhkova, First Deputy Head of the National Bank.

Ms. Monica Bhatia, Head of the Secretariat of the Global OECD Forum on Transparency and Exchange of Information for Tax Purposes, said that the implementation of the BEPS Action Plan will have a positive impact on the investment ranking of Ukraine. According to Ms. Bhatia, each country joining the global BEPS project sends a signal to other countries about its readiness to comply with international business transparency standards. It improves its reputation among partner countries.

“BEPS rules do not mean any additional taxes, they pose additional rules meant to tackle tax evasion. The objective of the BEPS Action Plan implementation in Ukraine is not to maximize tax revenues, but to establish fair and transparent tax rules,” said Sergiy Verlanov, Deputy Minister of Finance, during the discussion.

What parts of the BEPS Action Plan shall be implemented in Ukraine?

On November 24, the Ministry of Finance and the National Bank published the draft Law of Ukraine “On Amendments to the Tax Code of Ukraine for the Implementation of the BEPS Action Plan” which is aimed to implement eight most critical of 15 steps stipulated in the BEPS Action Plan.

This Ukrainian BEPS package is more comprehensive than the minimum standard that only covers four steps. According to the Ministry of Finance, it is optimal for tackling aggressive tax planning. Heike Buss, advisor at the OECD Centre for Tax Policy and Administration, said that actions 3 and 4 of the BEPS Action Plan are now crucial to Ukraine. They refer to designing effective controlled foreign company rules and limiting base erosion involving interest deductions and other financial payments.

“What are pre-conditions for the implementation of the BEPS Action Plan? For business, they include confidentiality and protection of information as well as a clear vision of the state tax policy. For partner countries, they include a proper data quality for exchange. For all of us it is about the rules of the game which must be made clear in advance,” said Kateryna Rozhkova, First Deputy Head of the National Bank.

What lesson should be learnt from the international experience?

The practical experience of other countries implementing the BEPS Action Plan demonstrates that Ukraine will need significant changes in its legislation. For instance, Germany had strong regulations designed to counteract tax violations. It was also among the first to join the BEPS initiative and is still on its way implementing some of the actions, said Michael Kiesewetter, senior tax advisor at the Federal Ministry of Finance of Germany.

One of the major problems for the implementation of the BEPS principles in Poland was the lack of relevant experts at the tax authorities, said Piotr Piontkowsky, representative of the Polish Ministry of Finance at the OECD. The implementation of the BEPS Action Plan resulted in a higher demand for tax advisors and triggered the drain of personnel from public service to the private sector. The situation on the labour market could be balanced later through the gradual increase of state funding and training programs for BEPS experts. At the same time, the number of tax audits in companies started to decrease, whereas state budget revenues went up.

Ukrainian business representatives also stressed the importance of the reform of the State Fiscal Service. Especially worrying for the business community is the availability of qualified BEPS experts at the State Fiscal Service as well as IT systems capable to ensure the confidentiality of data passed to tax authorities. Another important issue is a permanent dialogue between the Government and business concerning future tax innovations and their timely discussion. The experts agreed that the implementation of the BEPS Action Plan must be preceded by balanced amendments in the legislation.

Closing the Forum, Monica Bhatia welcomed the readiness of the Ukrainian Government to implement international standards and pointed out that Ukraine still needs to amend its regulations on the bank secret and disclosure of information about business beneficiaries to be able to implement the BEPS Action Plan. “It is crucial to catch up what other countries have already done. And I see that the wish is there to make it. On our side, we will be supporting Ukraine with advice and technical assistance,” said the Head of the Secretariat of the Global OECD Forum on Transparency and Exchange of Information for Tax Purposes.

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