The tax authorities perceive business as enemies, but the authorities are happy with this

In conditions of a huge budget deficit, when the state needs to communicate with business about the inevitability of tax increases, the authorities turn a blind eye to the unreformed tax service. But there is room for reform, because manual control and a presumption of guilt are now practiced.

A thousand years ago, on the site of modern Lviv Square stood the Western Gate, through which the Kyiv princes and their squads went on campaigns to the surrounding lands to collect tribute. Now it is almost the center of the capital, above which rises the 24-story building of the central office of the State Tax Service (STS).

The history of tax relations between the state and citizens is as old as the area where the headquarters of the State Tax Service is located. This relationship has never been easy. Just look at the murder of Prince Igor, who once again wanted to exact tribute from the Drevlyans. The modern relationship between taxpayers and those who collect them remains hostile, although without bloodshed.

In 2023, entrepreneurs most often complained to the Business Ombudsman Council about tax problems. Particularly painful for them are the blocking of VAT invoices and the return of audits. The latter, in the eyes of business, have become almost a punitive instrument and a way of collecting “corruption tribute.”

At the end of 2023, the government tried to correct this situation. The National Revenue Strategy he approved states that one of the first steps of future reform is “restoring trust in the tax authorities.” The same document provides for increasing a number of taxes and providing the State Tax Service with access to banking information.

True, almost six months after the strategy was approved, the authorities have not taken a single step towards resetting tax relations. Moreover, the State Tax Service formally lacks a person who would receive a mandate to implement changes: the service has been operating for three years without a full-fledged head. Why can relations between tax authorities and business deteriorate significantly and can this be prevented?

Tax audits

The vast majority of business complaints about the activities of the State Tax Service concern the blocking of VAT tax invoices and audits. The latter, according to entrepreneurs, have become a fiscal and punitive instrument of the state, which, in particular, was recently reported by the Business Ombudsman Council (BOB).

The inspections were intended as a tool for identifying violations of the law. If an entrepreneur commits a violation, the taxman draws up a report and assesses additional tax and/or a fine. If there are no violations, a certificate is issued.

However, the second option almost never occurs. The share of inspections that result in violations being found in businesses is growing noticeably. In 2020, 53.2% of unscheduled documentary inspections ended in drawing up reports, in 2023 – 75.1%. For actual and planned inspections this figure reached 90%.

These figures indicate not so much that Ukrainian entrepreneurs have begun to violate the law more often, but rather that tax officials are trying to find violations at any cost, the Business Ombudsman Council notes.

“In the absence of violations, business representatives reported that they were faced with requests from inspectors to independently provide at least some minor violations in order to carry out additional charges, since it is impossible to complete the inspection without additional charges or fines,” says the SBO study.

This situation shows what entrepreneurs call the “presumption of guilt” of payers - the biased attitude of fiscal officials towards businesses as potential violators of the law.

“The tax authorities have perceived business as enemies since Soviet times. At that time, it was generally accepted that entrepreneurs were exploiters, and not those who created added value in the economy. The majority of tax workers and law enforcement officers are brought up on this ideology,” says Vladimir Dubrovsky, senior economist at CASE-Ukraine.

Although the tax office checks businesses so scrupulously, the state budget hardly feels this. According to estimates by the Business Ombudsman Council, revenues from these audits in 2018-2023 did not exceed 1% of the country’s total budgeted income. Businesses make 99% of payments to the budget voluntarily.

Businesses successfully challenge more than half of the audit reports in the courts, which confirms the fallacy of some of the tax authorities’ claims. This allows entrepreneurs to save on paying additional taxes and fines, but in the end, they lose.

Judicial red tape takes a lot of time, effort and money. Companies include these costs in the price of their goods and services for end consumers. Tax officials spare no resources in confronting business, which overloads the judicial system with similar cases and even irritates some judges.

“An analysis of judicial practice indicates that the tax authorities consider it necessary to bring the consideration of all cases to the Supreme Court, having their own procedure for reviewing their decisions - administrative appeal. The number of refusals to open cassation proceedings indicates a waste of money and time of tax authorities and judges,” says the Supreme Court’s response to the SBO’s request.

"Red" or "Green"

Entrepreneurs with whom ED spoke complain about the formal approach in the work of tax authorities, who even see malicious intent in technical mistakes of a business.

“For example, the company has a fuel warehouse at 41a Shevchenko Street. She makes a mistake in reporting and writes not “41a”, but “41”. The tax office says the business hid the warehouse. For this, companies are assessed a fine of 1-2 million hryvnia,” business ombudsman Roman Vashchuk said in the EP podcast.

According to him, in the understanding of the State Tax Service, there are only two states: “red”, when a deliberate violation was committed, and “green”, when the taxpayer acts in accordance with the law. However, there is no “yellow” – the entrepreneur’s right to a technical error and the opportunity to correct it without incurring additional charges or fines.

“In Western countries, tax authorities, when they see an error in reporting or declarations, first inform the payer about them by call, SMS, informal letter, and then, if the error is not corrected, by an official appeal. Only if these messages are ignored are inspections and financial sanctions initiated,” says Miroslav Laba, an expert at the analytical center of the Union of Ukrainian Entrepreneurs.

In Ukraine, the place of “yellow” is taken by “gray” color: the payer’s ability to “agree” with the controller so that he “does not see” an inaccuracy or a deliberate violation, adds Vashchuk. Apparently, this is why the State Tax Service is often seen as a corrupt service in the minds of business, and tax audits are associated with pressure and extortion of bribes.

Tax office under control

“Tax officials say that discretion (an official deciding an issue at his own discretion) is a direct path to corruption, so they punish businesses with fines even for technical errors,” says Vashchuk.

True, this rule does not always work. Representatives of the tax service allow themselves to interpret the legislation at their own discretion, if the “price” of such an interpretation exceeds the risks of going to jail.

Businesses experienced an example of this discretion at the end of 2022, when the Ministry of Finance unexpectedly made changes to the operation of the automated VAT administration system (known as SMKOR). After these changes, entrepreneurs began to report massive blocking of tax invoices.

A feature of VAT administration provides that payers of this tax have the right to reduce their obligations to the state by the amount of VAT paid, which was included in the price of goods and services purchased by them. By blocking tax invoices, the State Tax Service actually blocks the working capital of the enterprise.

SMKOR was conceived to minimize the interference of officials in the administration of VAT and to counter the attempts of unscrupulous entrepreneurs to abuse transactions and evade paying tax or claim budgetary reimbursement.

However, after making changes, the system began to work in manual mode. In conditions when business tax invoices were massively blocked, intermediaries appeared who offered to “solve the problem” for a certain fee. Their work even came to the attention of law enforcement officers. In February 2023, the SBI exposed the head of the Kyiv tax office, Oksana Datii, for illegal activities.

However, such abuses usually do not result in criminal charges. As a former employee of the State Tax Service explained to the EP, law enforcement officers often use the collected materials as a tool of blackmail to obtain a kickback.

In addition to the head of the capital’s tax office, the head of the tax committee of the Verkhovna Rada, Daniil Getmantsev, also offered services to businesses for unblocking tax invoices. He openly encouraged entrepreneurs to contact him with cases of unjustified blocking or other complaints against the tax authorities.

ED's interlocutors in business circles and parliament note that it is Getmantsev who oversees the work of the State Tax Service, at least in terms of blocking tax invoices. Control over the work of the service also ensures that since May 2021, the tax office has been working without a full-fledged head. Almost all of the management that is key to filling the budget of the service is now in the status of i. O.

“The status of “acting” allows you to control the work of an entire body. The right people can be appointed to the position of temporary managers in a non-transparent manner, and just as non-transparently and for formal reasons, such people can be fired,” explains Vyacheslav Cherkashin, an entrepreneur and senior tax analyst at the Institute of Socio-Economic Transformation.

Getmantsev himself denies that he controls the work of the tax office. He calls his influence on the State Tax Service “parliamentary control.” “A person comes to me with a problem. Call it whatever you want, but I have to solve this problem, I am a deputy. I should not tolerate the fact that a person cannot find something at the tax office and receives formal replies,” he explained at the beginning of 2023.

Parliament really should control the work of the State Tax Service, but whether external control of a government body controlled by the controller himself makes sense is a rhetorical question.

What's next

At the end of 2023, the government approved the National Revenue Strategy, an action plan that should reduce the state's dependence on external financing.

Among the measures are an increase in taxes for individual entrepreneurs, the return of a progressive scale of taxation of personal income, and providing tax authorities with access to banking information of businesses and citizens. However, the first step should be to restore taxpayers’ trust in the State Tax Service. This measure is truly necessary, because without such trust, the country’s survival in a war may be in question.

The EP wrote that in 2024 the government needs to find about half a trillion hryvnia to finance military expenses. Mainly for the purchase of weapons and payments to military personnel, in particular a new payment in the amount of 70 thousand UAH per month.

Since Ukraine is prohibited from spending international aid on war, taxes will likely have to be raised to finance these needs. In conditions when only 13-19% of businesses trust tax authorities (RBO survey), it would be naive to hope that increasing tax rates can actually increase budget revenues and not lead to a shadow economy.

According to the publication's interlocutors in parliament, the government will begin to actively seek additional sources of budget financing in June, after the revision of the IMF program. Until then, it is unlikely that trust in the tax service will be restored. Although the first step on this path can still be taken.

A year ago, a bill was registered in the Verkhovna Rada that provides for the reboot of the State Tax Service: the election of a full-fledged head through a transparent competition with the participation of representatives of international organizations, as well as re-certification of its employees. Interestingly, Getmantsev is a co-author of the document.

The reboot of the work of the State Tax Service and the election of its leadership is also supported by business.

“It is important to finally appoint a real head of the State Tax Service, who will be interested in the development of the body, and not keep it. o., which does not bear personal reputational responsibility. The association initiated meetings with the leadership of the State Tax Service many times, but did not have a single meeting,” the European Business Association reported.

Without a leader with a mandate to effect change, change will never happen. If nothing changes, the relationship between taxpayers and their collectors risks remaining as hostile as it was a thousand years ago. And then the increase in the tax burden did not end well.