Unreasonable inclusion in high-risk taxpayers’ list – a growing trouble for Ukrainian entrepreneurs

Business Ombudsman reports on complaints from entrepreneurs in Q2 2020 
In Q2 2020, the Business Ombudsman Council (BOC) considered 385 complaints of entrepreneurs on state bodies’ malpractice and closed 297 investigations. Businesses mostly complained about actions of tax (68%) and law enforcement bodies (12%), state regulators (5%), customs (3%) and local government authorities (2%). In total, these topics accounted for 90% of all appeals.  
A rapidly growing issue of enterprises inclusion in high-risk taxpayers’ list was the most frequent subject of complaints in Q2 2020. The BOC received 64 complaints on this topic, which is a third more than in Q1 2020 and four times more than in Q2 2019. 
 
“First of all, the list of high-risk taxpayers should be used to trace companies involved in illegal transactions with VAT. However, the current criteria of adding companies to this list are often unclear, while the tool is used not as intended, thus creating an unreasonable burden on business. We recommend a tax authority’s decision on inclusion of companies in high-risk taxpayers’ list being duly reasoned whereas their appeal procedure – clear and transparent”, stressed Marcin Święcicki, the Business Ombudsman. 
 
The number of appeals against tax audits findings (55 complaints) decreased by 39% compared to the Q1 2020 due to a moratorium on tax audits imposed during the quarantine period. The issue of non-enforcement of court decisions, which have already entered into force by state bodies (21 complaints), remained relevant for entrepreneurs. Companies continued lodging complaints related to lockdown restrictions. We managed to identify a number of systemic problems and, on the contrary, `solve some outdated problems. For example, with the Council’s facilitation the Ministry of Health registered antiseptics of two manufacturers who had been waiting for their re-registration since 2018.
 
Almost three quarters of complaints came from small and medium-sized businesses. The share of Ukrainian business in the structure of appeals was 86%, while business with foreign capital – 14%. Among the most active industries that turned to the Business Ombudsman were: wholesale and distribution (22%), manufacturing (14%), agriculture and mining (13%), real estate and construction (11%), and private entrepreneurs (10%).  More than half (51%) of all appeals came from Kyiv and oblast. Complaints were predominantly sent by entrepreneurs from Dnipropetrovsk (9%), Kharkiv (9%) and Odesa (7%) Oblasts.
The BOC has announced a new systemic study on administration of taxes paid by businesses. As of July 1, 2020 the share of complaints on tax issues reached 57,5% (4241 complaints). According to the Deputy Business Ombudsman Iaroslav Gregirchak who was responsible for preparation of the document: “These numbers speak volumes about the relevance of tax issues for Ukrainian business that only grows over the years”. In the report, the Council focused on the issue of administration of value added tax, unified social contribution, single tax, and corporate profit tax. Apart from that, the BOC covered the issue of tax audit procedure, appeals against conclusions of tax authorities and mechanism of generalized tax consultations.  Attention is also paid to the issue of disclosure of information by tax authorities and maintenance of integrated taxpayer cards. In total, the document contains 38 recommendations for the Cabinet of Ministers of Ukraine, the Ministry of Finance of Ukraine and the State Tax Service of Ukraine. The publication of the Systemic Report is going to be published in August 2020.
The Ukrainian Parliament (the Verkhovna Rada) is working on a new Draft Law No.3607, to enshrine the BOC status at a legislative level, as the institution is currently working based on the CMU Resolution of 2014. The BOC has prepared a number of materials for deputies on this issue: justification of the need to adopt the law and frequently asked questions about the Draft Law. The Verkhovna Rada Committee on Economic Development almost unanimously supported the Draft Law – the document is currently awaiting its first reading at the plenary session of the Verkhovna Rada. The Q2 2020 report is available here.