From presumption of “ill will” to “tax” trust

The Business Ombudsman Roman Waschuk presented his own initiative investigation results of the tax audits phenomenon.

The event was attended by leading business associations representatives, including the American Chamber of Commerce, the European Business Association, the Ukrainian League of Industrialists and Entrepreneurs, the Chamber of Commerce and Industry, the Union of Ukrainian Entrepreneurs and the Federation of Employers of Ukraine.

The Business Ombudsman Council’s team, based on statistics of entrepreneurs’ appeals on challenging tax audits results over the past seven years, as well as statistics and reports of STS bodies, investigated both the impact of tax audits on the business environment and results for the state in terms of budget revenues. Thus, the Council found out that 99+% of tax revenues were provided precisely at the expense of voluntary tax payments, while the share of revenues from additional payments charged as a result of inspections did not even reach 1% over the past six years. Nevertheless, the “tax audit” word combination is scary for entrepreneurs.

According to BOC observations, business and professional community perceive tax audits as the state’s fiscal and punitive tool further undermining trust between taxpayers and the state. According to the Council’s research, the level of trust in the central apparatus of the State Tax Service is 19%, while in regional tax authorities – 13%.

The generation of tens of thousands of extremely formalistic and often insufficiently substantiated tax audits findings every year, a large part of which fail after years in courts, creates an administrative, law enforcement, legal and judicial turmoil not considerably increasing tax revenues in Ukraine. This approach creates unreasonable burdens for Ukrainian businesses related to their defense within administrative and judicial procedures, taking time away from managers and working capital from companies that could be better used to achieve wartime and post-war recovery goals instead. Worse yet, it keeps undermining trust between taxpayers and tax authorities, which the National Strategy seeks to restore,” noted the Business Ombudsman Roman Waschuk.

Kateryna Glazkova, the Executive Director of the Union of Ukrainian Entrepreneurs said: “We at SUP also feel concerns of business in relations with the State Tax Service of Ukraine. Therefore, we support previous Business Ombudsman Council’s recommendations regarding implementation of the “Consult First” principle, providing for consultation and assistance to businesses first, and only afterwards – inspection and punishment, introduction of transparent and public KPIs for the Tax Service, and the necessity to increase business confidence in STS bodies.”

Doing business in Ukraine is expensive. However, 99% of companies pay taxes on time and honestly, despite the war. However, at the same time, they suffer more and more due to fiscal pressure rise. Business, particularly members of the Ukrainian Chamber of Commerce and Industry community, find it unfair that, due to small percentage of violators, the “presumption of ill will” is applied to all entrepreneurs. Among the reasons for such a disconnection is the lack of permanent management of the STS, both at the central and regional levels. We continue our joint work to change the tax approach to business and to build “tax” trust between the state and business,” Gennady Chyzhykov, the President of the Ukrainian Chamber of Commerce and Industry, stressed during his speech.

Yuliia Drogovoz, Vice-President on Tax Policy of the Ukrainian League of Industrialists and Entrepreneurs, added: “The biggest issue remains non-transparency of STS bodies’ acceptance of tax notifications-decisions based on audits findings, no control and inspection work effectiveness indicators, which allows the STS authorities to manipulate relevant statistical data, misleading all users of this information with inflated indicators of additional tax charges and fines. It is necessary to change the philosophy of relations between taxpayers and STS bodies, turning the tax service into an advisory, not a punitive body. For this purpose, it is necessary to fundamentally change the principles of their work and the principles of building their relations with taxpayers, taking such relations to a different conceptual basis principles of freedom, humanism, human rights, etc.”

“Predictable, fair, equal and transparent tax policy remains a constant business priority over the years. In addition, the business community identified uninterrupted operation of companies during martial law. as one of important work directions for 2024.  For this purpose, we monitor and address problematic business issues, including tax audits, to relevant stakeholders. We are grateful to the Business Ombudsman Council’s team for performed research, as well as highlighting tax audits practical aspects being important for transparent business,” emphasized Oksana Shvets, Chief Policy Officer (Tax and Customs Issues) of the American Chamber of Commerce in Ukraine.

Official statistics of the STS of Ukraine show that in 2023, the majority of court decisions was made in favor of taxpayers. Legal costs of the STS of Ukraine in 2023 amounted to UAH 143,738,500. These statistics shows creation of unlawful pressure on honest taxpayers, which ultimately harms the development of Ukraine’s economy. Business considers it expedient to introduce administrative and disciplinary liability of tax officials for creating undue pressure on companies. Probably then tax officials, both rank-and-file and those in leadership positions, will consider the consequences of their actions,” said Nataliia Artemchuk, Manager of the Tax and Customs Committee of the European Business Association.

The Federation of Employers of Ukraine also upheld the position regarding tax audits. According to Dmytro Oliinyk, Chair of the Board of the Federation of Employers of Ukraine: “The published results of the Business Ombudsman’s investigation into tax audits fully coincide with the assessment of business problems related to control and inspection work of tax authorities on the part of Federation of Employers of Ukraine. In particular, we are definitely concerned about the wave of groundless additional charges by tax officials resulting in extreme overload of courts it all takes time and resources of business entities distracting them for these charge-related disputes. The situation in which tax officials only create problems for both taxpayers and the state (at least because of the need to finance the activities of courts and tax authorities themselves, aimed at considering meaningless and senseless disputes), is abnormal and needs to be corrected.”

Taking into account discussions and consultations results with industry experts, business and stakeholders, in the report the Council outlined a number of ideas that can positively impact tax audits effectiveness and contribute to building partnership relations between business and the state. The key to this is setting a strategic indicator of the level of voluntary agreement of accrued monetary obligations thanks to a set of measures taken by the state.

Download a report with our own initiative investigation results (UA) here.

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