​The Government does not support the draft law on amendments to the operation of the VAT-related risk monitoring system which was initiated by the Parliament’s committee for tax and customs policy

11/14/17

On November 13, the Cabinet of Ministers issued a negative conclusion on the draft law on amendments to the system for the suspension of tax bills registration which had been prepared by the Parliament’s committee for tax and customs policy.

The draft law proposes amendments to the Tax Code and the continued test mode of the system for the suspension of tax bills registration in the Unified Register of Tax Bills. At the same time, it is stated in the conclusion that “the key goal of the system for the suspension of tax bills registration is to liquidate gaps which enables non-diligent VAT-payers to apply tax evasion schemes”. Hence, the termination of the system would result in manipulations and generation of fake VAT.

Currently, the main criteria based on which the registration of tax bills can be suspended is the result of the check for the illicit reduction of tax obligations. Presently, only 0.3% of submitted tax bills are suspended from registration. Also, the Ministry of Finance and the SFS permanently monitor the valid criteria and duly update them, if required.

The main research and expert department of the Parliament of Ukraine also provided several critical remarks to the draft law of the Parliament’s committee in its conclusion presented on October 2, 2017.

Also, business associations expressed their concern regarding the possible adoption of the above draft law and its negative impact on diligent taxpayers: US Chamber of Commerce, European Business Association, Ukrainian Grain Association, Coalition for De-shadowing, Association of Ukrainian Entrepreneurs. The International Monetary Fund (IMF) expressed its doubts about the adoption of the draft law too.

Previously, the Ministry of Finance emphasized the risks which the draft law of the Parliament’s committee has for the VAT-related risk monitoring system:

First, a parallel mechanism would be established with high corruption risks, since regional tax authorities would be in position to stop any tax bill “at their own discretion”. The heads of regional tax authorities would be entitled to stop tax bills irrespective if the risk criteria. The same persons would also be authorized to decide about the resumption of the registration procedure. Thus, a mechanism would be established which is exposed to high corruption risks.

Second, taxpayers who are not subject to the risk criteria will probably be exposed to them overnight. The SFS entitled to determine the criteria risks poses a possible hazard in terms of misusing them and violating the principle of keeping the functions of control and policy-making separated between different bodies to avoid conflicts of interests. According to the current procedure, the list of the risk criteria is agreed with the State Regulatory Service and the Ministry of Justice.

Third, it is obvious that the termination of the system for the automated suspension of the registration of potentially fake tax bills would result in direct revenue losses for the state budget. The stop of the system would also lead to lower VAT revenues. So far, the system for risk monitoring has contributed to the significant increase of the VAT revenues. If it’s terminated, illegal money-laundering centres will resume their operations pursuing manipulations with fake VAT claims.

Fourth, the return to the “manual” suspension of tax bills would disrupt the automated VAT refund. Now, each tax bill which has passed the risk monitoring guarantees that the respective transaction is real. If the automated system is terminated, it will be impossible in the mid-term run to refund VAT automatically without additional tax checks. In this case, taxpayers could again be made liable for the illegal actions of third parties.

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