The Ministry of Finance appeals to the Parliament’s committee for tax and customs policy to restrain from the submission of draft laws which could jeopardize the system of automated VAT refund


The Ministry of Finance appeals to the Parliament’s committee for tax and customs policy to restrain from the submission of draft laws which could affect the full-scale operation of the automated system for the termination of suspicious tax bills, since it could jeopardize the automated VAT refund. This risk monitoring system now prevents manipulations and illegal VAT refund which used to result in losses for the state budget amounting billions of hryvnas.

The Ministry of Finance and the State Fiscal Service jointly monitor and improve the system on a permanent basis. If the members of Parliament want to participate in these improvements, the Ministry of Finance is ready for a dialogue, but we insist that they should ignore lobbyists who want to stop the operation of the system which successfully prevents VAT-related manipulations. This would be a major setback in our fight against corruption and VAT manipulations. Also, we can see significant corruption risks and possible restoration of the manipulations in case, if the decision-making powers regarding the registration of tax bills are transferred to the regional level.

Why the existing system can’t be abolished?

First, it is clear that the abolition of the automated system for the termination of the registration of tax bills which are suspected to be fake would result in direct losses for the state budget. Currently, there are tax bills blocked by the system which amount UAH 3b and for which the applicants did not apply to the State Fiscal Service with to confirm the correctness of their operation. 70% of this amount account for tax payers with a critically high risk level (outstanding tax payments, no registered personnel, involvement in manipulations according to SFS data etc.). In fact, the system has prevented state budget losses equal to UAH 3b. The algorithm on which the system is built up is doing its job and blocks the registration of fraudulent tax bills which account for the lion’s share of all suspended tax bills.

Second, returning to the manual termination of the registration of tax bills would disrupt the automated VAT refund. Presently, each tax bill which has passed the risk assessment guarantees the correctness of the respective business transaction. Should the system be stopped, the automated VAT refund without additional checks will become impossible in the mid-term run. This would mean a return to the situation, when liability for the illegal actions of third persons is imposed.

Third, the stop of the system would mean lower VAT revenues for the state budget. One of the results of the existing system is a significant growth of the VAT revenues. If the system is stopped, money-laundering centers will be back on stage pursuing manipulations with fake VAT claims. In the beginning of the years, their monthly turnover reached up to UAH 1b.

Fourth, the stop of the system means a return to the corrupt mechanism of the “manual” contract management (termination of contracts). Termination of contracts about electronic reporting would paralyze all business operations, even those not related to the VAT.

How does the system work?

It is not logical to attempt to change the system in the very moment when it has started to operate steadily and effectively.

The peak number of blocked tax bills which occurred during the roll-out phase of the system is history already. In fact, the current share of suspended tax bills is only equal to 0.3% of the total number. The system operation demonstrates a positive dynamic – for example, the number of new companies meeting the risk criteria is decreasing rapidly. Another feature of the system is that the operations of businesses whose risky tax bills have been suspended are not stopped – it is only the respective risky transaction which is put on hold.

It is important that companies representing the real sector of the economy whose operations are not fake are entitled to present additional data to the SFS (list of goods/services which are purchased or delivered), in order to prevent the repeated termination of their tax bills. If these data submitted to the SFS are correct, tax bills issued for such transactions are not suspended anymore. The SFS has already taken into account more than 12.000 charts with additional data provided by tax payers.
Each company can submit an application to the SFS with a standard list of documents to confirm that the respective transaction is real. The responsible SFS commission must examine the presented documents and allow or deny the registration of the tax bill within 5 days. Presently, the SFS commission operates properly, since September 1 there has been not a single claim about the violation of this deadline by the SFS.

The generation of fake VAT refund claims has significantly decreased. The Ministry of Finance timely amended the suspension criteria to prevent fake VAT amounts.

What is the conclusion?

The abolition of the system which automatically terminates the registration of tax bills which meet the risk criteria is an unreasonable and dangerous idea. The system prevents billion-high losses to the state budget every month. It is stable in operation, and the termination criteria are permanently improved.
The amount of fake VAT claims goes down every day, while VAT revenues to the state budget are increasing thanks to the crackdown on the fake VAT;
The number of terminated tax bills submitted by diligent tax payers is going down rapidly;
The SFS has organized effective operations within its units as well as with tax payers;
The system works, but, like any other risk assessment or complicated IT system, it requires permanent monitoring and improvement in the initial phase;
The Ministry of Finance has already prepared and submitted for examination a draft of amendments to the order of the Minister of Finance which must release companies of the real sector of the economy, especially agricultural companies, from the system to the highest possible extent.
The system for the automated termination of suspicious tax bills is crucial for the build-up of an automated procedure for VAT refund in Ukraine whish shall be free from corruption and return due funds to business. That is why to ensure the full-scale operation of this system.
The Ministry of Finance is open to professional debates and welcomes the discussion of the Parliament’s committee’s initiatives as well as their possible risks prior to deciding on the relevance of the adoption of the proposed draft law.

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