Tax audits of businesses are beginning in Ukraine, which may lead to situations where bribes are required

The IMF draws attention to the need to conduct new inspections of Ukrainian enterprises.

Fiscal authorities will resume tax audits of businesses. The lifting of the moratorium on such checks, which was introduced in connection with the Russian invasion, is a condition for receiving the next IMF tranche, which, in the context of a possible reduction in Western financial assistance, is extremely important for our country. On the other hand, many provisions of the law on tax audits that have come into force are quite vague, and therefore create fertile ground for corruption. “Apostrophe” figured out what domestic entrepreneurs should prepare for.

On the second try

Business tax audits are back. On December 5, the corresponding bill No. 10016d was signed by the President of Ukraine Vladimir Zelensky, and on December 7, after publication in the official press, it came into force as a law.

The lifting of the moratorium on tax audits was one of Ukraine’s obligations in accordance with the memorandum concluded with the International Monetary Fund (IMF). Parliament was supposed to introduce this rule on July 1 of this year; articles relating to tax audits were removed from the bill, which was just preparing for the second reading. Such a deviation from its own obligations was not appreciated by the IMF, which this year finally switched to the concept of “money in exchange for reforms” on the issue of financing Ukraine. And the parliament, together with the government, had to urgently develop and pass a new bill.

It was assumed that it would come into force on December 1, until the next revision of the memorandum. And technically there was such a possibility, since the law went to the president for signature on November 27. However, there was a delay with this, which is why the date of entry into force was moved up by a week, which is another violation of agreements with the IMF. We can only hope that, despite two missed deadlines, the fund will still consider the fulfillment of this “beacon” and make a decision regarding the next tranche of the current financing program.

The share of the nearly $900 million tranche will be decided on December 11.

Risk is not a noble thing

Thus, Ukrainian enterprises are awaiting tax audits. However, it is assumed that they will not be total. Parliament and the government managed to agree with the fund that they would apply to enterprises where there are certain risk factors.

Therefore, in addition to enterprises that are involved in the production of excisable products, the organization of gambling and the provision of financial services (for which inspections were resumed back in July), visits from tax inspectors should be expected by taxpayers who in 2021 had:

- twice as much accounts receivable as accounts payable;

— the level of payment of corporate income tax and value added tax is less than 50% in the industry;

- annual income is more than 10 million hryvnia, and expenses are more than 75% of the amount of annual income.

At the same time, the law exempts private entrepreneurs of the first and second groups, as well as enterprises located in temporarily occupied territories or territories where hostilities are taking place, from inspections.

Domestic business took the news about the return of inspections quite calmly.

“The business environment is very sensitive to inadequate decisions of the authorities,” said Oleg Getman, coordinator of expert groups of the Economic Expert Platform, in a commentary for Apostrophe. “And when a bill is considered that involves significant corruption risks or obstruction of business, all business associations respond vigorously to it. For example, they are now actively opposing bill No. 5420 on the criminalization of smuggling. However, in the case of this law there was no such reaction. This suggests that, in general, business is satisfied with this law.”

According to the expert, representatives of the business environment took part in the development of the bill, and their recommendations on the formulation of risk criteria were taken into account.

Don't trust, but verify

The main goal of the bill is to increase tax revenues to the budget, however, according to experts, one should not hope for miracles in this area.

“Of course, checks will give a certain increase in payments, but it will not be too large - most likely, within the limits of statistical error,” says Oleg Getman.

However, tax officials are in favor of returning checks. And they have their own reasons for this.

“The tax office actively supports the new law, since for it every audit is an opportunity to receive a bribe,” CASE Ukraine expert Vladimir Dubrovsky told Apostrophe. “According to surveys that were previously conducted among Ukrainian entrepreneurs, about 20% of them were forced to pay bribes during inspections.”

If we talk about an increase in budget revenues, then, according to the expert, it will not be large, since the majority of Ukrainian entrepreneurs are not such ardent draft dodgers as is believed.

“Some government and parliament leaders are of the opinion that if business is not strictly controlled, then it will not pay taxes at all,” says Vladimir Dubrovsky. “That is why at one time, under the leadership of Mykola Azarov, the tax administration was created precisely as an instrument of pressure on business. And one of its main tasks was the collection of fines and charges. The tax authorities even had planned indicators for them.”

Meanwhile, such an attitude on the part of the state is a significant exaggeration. According to the expert, the vast majority of taxes in Ukraine are paid voluntarily.

“This is confirmed by the experience of 2022,” says Dubrovsky. – Despite the Russian invasion, a significant decline in the economy and a complete moratorium on audits, tax revenues fell by only 5%. That is, the absolute majority of enterprises paid them without pressure from the tax authorities.”

However, the state is not too inclined to trust entrepreneurs.

“Our tax system has a presumption of guilt of business,” Ilya Neskhodovsky, head of the analytical department of the ANTS network, tells Apostrophe. — Every entrepreneur is considered an evader who has not yet been exposed by the tax authorities. It is on this belief, for example, that the system of blocking tax invoices is based. Experience shows that in most cases it is groundless. 80% of invoices are unlocked after further review. In other cases, enterprises go to court, and in 95% of cases it makes decisions in their favor. Therefore, it is reasonable to block only a very small number of invoices.

Will come to (almost) everyone

The return of audits will not lead to a significant increase in tax efficiency also because the tax service does not have sufficient capabilities for this.

“In relation to enterprises that produce and sell excisable goods, inspections were resumed back in July,” says Ilya Neskhodovsky. — But has there been a breakthrough in the fight against tax evasion at these enterprises? No, it didn't happen. And if fundamental changes have not occurred in an area where the scale of evasion reaches billions, then what reason is there to believe that inspections will change the situation in less risky industries?

According to the expert, the institutional failure of the tax service makes any audits ineffective. And if there is an inability to exercise effective control over the activities of a business, an increase in its powers does not lead to an improvement in the quality of work, but only increases corruption risks.

This is also facilitated by the provisions of the new law, which formulate very vague criteria for risk groups.

“Risk-oriented procedures require a very balanced approach,” explains Vladimir Dubrovsky. “We have a long tradition of selective application of legislation. Therefore, if the inspection criteria are not spelled out in very detail, this provides a lot of room for manipulation and bribery.”

The only clear criterion specified in the law is the absence of inspections for enterprises with an annual income of less than 10 million hryvnia.

“This amount is slightly higher than the upper limit for the simplified tax system,” says Dubrovsky. — Other criteria are formulated quite broadly and do not allow separating truly risky enterprises from bona fide payers. In fact, this means that tax officials can visit all enterprises that are not on the simplified system for inspections.”