This week we have already published a report about the operation of the VAT-related risk monitoring system. This system is an integral part of the automated VAT refund procedure through which taxpayers have already been refunded 50.6 billion hryvna since April this year.
Both procedures help prevent billion-high schemes aimed to illicitly receive VAT refund and to arrange fake VAT credits. They also ensure regular and timely VAT refund to diligent taxpayers and are designed to create equal and transparent taxation rules. Automated VAT refund can’t exist separately from the system which suspends risky tax bills.
The risk monitoring system is operable now, it is permanently monitored by the Ministry of Finance and the SFS for possible flaws, which makes it possible to rectify them and promptly address possible technical issues. It can be said that the VAT-related risk monitoring system is stable and smooth in its operation.
At the same time, we see that the Parliament’s committee for tax and customs policy is trying to significantly change this system right now, when it is already fully operable and demonstrates its ability to effectively counteract VAT fraud and to regularly refund VAT to diligent companies in an automated mode. Any significant changes or the abolition of this system would be a great favor to those trying to find new ways for VAT manipulations.
Today, the draft law “On Amendments to sub-section 2 of section XX “Transitional Provisions” of the Tax Code of Ukraine regarding the Suspension of Tax Bills / Corrective Calculations in the United Register of Tax Bills” has been published on the website of the Parliament. This draft law was prepared by the mentioned Parliament’s committee, it proposes “to continue the test mode” of the system.
In fact, the authors of this draft law want to legalize the procedure allowing the manual suspension of tax bills at the discretion of the heads of regional SFS offices. First, it is not logical to propose the return to the test mode having the system operating normally already. Also, the proposed draft law does not actually prolong the test mode for the suspension of tax bills – it proposes an absolutely different system for the suspension of tax bills which is exposed to high corruption risks.
Having analyzed the risks of this draft law, we see the following possible consequences of its adoption:
• Entities which are currently not subject to suspension risks, could become exposed to them. The approval of risk criteria at the level of the SFS poses a potential risk for their misuse and the abuse of the principle separating control and policy-making functions within one authority to prevent conflicts of interests. According to the current procedure, the risk criteria shall be approved by the State Regulatory Service and the Ministry of Justice;
• The proposed draft law could establish a parallel mechanism exposed to high corruption risks with the regional tax authorities being entitled to suspend any tax bill at their own discretion. The heads of regional tax authorities would be authorized to suspend tax bills regardless of the risk criteria. Further on, the same persons would be entitled to decide on the resumption of the tax bill registration. This mechanism would generate significant corruption risks.
• The draft law also proposes to restore the withdrawal of the tax credit along the “chain of agents” making the buyer liable for all discrepancies. Tax bills which are subject to the risk criteria and which can’t be verified by the SFS regional commissions, will not be subject to the unconditional tax credit. The SFS would be entitled to withdraw the tax credit from the respective buyer or his/her contract parties and to deny VAT refund accordingly.
• Those who are now refunded VAT automatically, could lose this possibility.
The proposed algorithm for the operation of the system is available in the presentation.
It must be noted that according to the effectiveness monitoring data of the system it does not need to be abolished or “improved” in the proposed way.
The VAT-related risk monitoring system has the following results:
• The volume of the fake VAT has gone down almost 10fold compared to the beginning of the year.
• The VAT revenues are demonstrating a rising trend due to the de-shadowing of the economy.
The results of the system for the last 2 months:
• The number of suspended tax bills has gone down 4.5fold and is now only equal to 0.3% of the total number of tax bills;
• Operations within the SFS as well as cooperation with taxpayers run smoothly — as per September, there were no cases, when the SFS commissions failed to examine tax bills within the set timeline;
• The number of new companies exposed to the risk criteria is going down rapidly due to the acknowledgement of process cards submitted by companies from the real sector of the economy. These cards can be submitted by companies wishing to avoid the repeated suspension of tax bills;
• The SFS has already acknowledged more than 12,000 process cards submitted by taxpayers;
• The Ministry of Finance has already prepared and presented a list of changes meant to protect real-sector companies and especially agriculture companies against suspension as much as possible after the implementation of the initiative.
The Ministry of Finance is open to a professional discussion and invites to discuss the initiative of the Parliament’s committee as well as its possible risks prior to the adoption of the committee’s draft law.