Tax policy: process is everything, result is nothing

The Business Ombudsman Council has published a report examining government tax policy. The main idea: it (tax policy) still performs a punitive function and is aimed at withdrawing funds from businesses.

The unpredictability and inconsistency of state policy in the field of taxation is painfully affecting the economy of our country, which is at war with the Russian invaders. The State Tax Service is perceived by business as a body whose main task is the withdrawal of working capital. The tax office sees its task during audits as additional assessments in connection with identified violations. The additional accrued amounts in the total amount of tax revenues are insignificant, while the costs of both monetary and human resources for litigation in connection with appealing the actions of the State Tax Service of Ukraine are considerable.

This is a strange game, the result of which is the withdrawal of working capital from businesses, the withdrawal of capital from the country, and the nullification of its investment attractiveness. So, the troubles of Ukraine consist not only in the large-scale Russian invasion, but also in the internal confusion of the relationships between business, on the one hand, and on the other hand, the tax service, other security forces, and supervising government bodies. Well, where there is confusion in business, the corruption component is activated, there is no creativity.

The Business Ombudsman Council conducted, on its own initiative, a qualitative and quantitative study of tax audits and published a report entitled “Tax Audits. Check, but trust." The Council clearly pointed out the number one problem in the relationship between the state and business – these are unfair rules of the game.

And if the National Economic Strategy of Ukraine until 2030 defines the restoration of taxpayers’ trust in the tax authorities as one of the main goals on which the success of further reforms depends, then in fact the vector has been turned 180 degrees.

“Business and the professional community generally perceive tax audits as a fiscal and punitive instrument of the state and, according to the Council’s research, they assess their trust in regional tax authorities in the context of conducting audits at 13%, and in the central apparatus of the State Tax Service of Ukraine at 19%.”, says the Council report.

For a better understanding: more than 99% of tax revenues to the budget are provided through voluntary payment of taxes. The share of revenues from additional accrued monetary obligations after 2017 and to this day has never reached 1% of the total tax revenues. But there is a lot of fuss and expenses for long legal proceedings. According to information provided to the Business Ombudsman Council by the State Tax Service itself, on average during 2017–2021, in 74% of cases tax audits resulted in the drawing up of acts, and in 2022–2023 this figure increased to 85%.

If the inspectors from the State Tax Service of Ukraine come, they will definitely find something. The Business Ombudsman Council notes: “Over the past seven years, the general trend in the results of actual and planned inspections has been constant: more than 90% of these inspections result in the drawing up of an act. For unscheduled inspections, the trend is significantly different: if in 2017 more than half resulted in the preparation of certificates, then from 2018 the proportion began to change towards a gradual increase in acts, reaching a maximum level of 75% in 2023.”

But acts of additional accrual are challenged by those being audited, and quite successfully. Over the past seven years, not counting 2020 and 2022, when there was a moratorium on inspections, the annual amount of additional charges increased from UAH 34 billion in 2017 to UAH 90 billion in 2021 and to UAH 75 billion in 2023. However, despite this increase in additional charges, the volume of actual budget revenues was significantly less: from 16% (in 2017) to 4% (in 2023). Thus, the pattern is clearly visible that the amounts accrued based on the results of tax audits only in a very small part turn into real budget revenues.

Another very important factor that does not make businesses more willing to operate in Ukraine is the delay in agreeing on additional charges. In particular, this concerns the amounts of budgetary value-added tax (VAT) refunds, which may not be considered in the budget for many years. But money tends to become cheaper. And if the state is subsequently able to compensate itself for the change in the value of money over time based on additionally accrued penalties, then the mirror norm of paying penalties to businesses for delayed amounts of budget compensation will be stopped for the period of martial law. This indicates a significant imbalance of power, which also does not contribute to building relationships based on trust and provokes corruption risks.

Based on the results of an analysis of the situation regarding administrative and judicial appeals of the results of tax audits, the Council found that the percentage of cases where the court decision was completely or mostly made in favor of business is about 85.

“During 2017–2023, the business received an additional UAH 346.2 billion in cash liabilities. The courts have filed appeals against UAH 358.3 billion in additional charges, which is an obvious manifestation of the massive non-recognition of tax audit results by business entities,” states the Business Ombudsman Council. – The Council systematically encounters cases of inconsistent government actions in the tax area. The unpredictability of legal regulation is especially painful for businesses, which are already forced to deal with a high level of uncertainty, first caused by quarantine, and later by war.” 

Here is another interesting conclusion of the Council: “The generation of tens of thousands of acts annually, which, according to the experience of the Council, are often extremely formalistic and insufficiently substantiated, in addition, a significant part of which will not be taken into account after many years [of proceedings] in the courts, creates an administrative, law enforcement, legal and judicial fuss, which does not significantly increase tax revenues to the budget of Ukraine. This approach places an unjustified burden on Ukrainian businesses to defend themselves through administrative and judicial procedures, taking away time from managers and working capital from enterprises... And even worse, it continues to undermine the trust between taxpayers and tax authorities, which the National Strategy seeks to restore.”

The Business Ombudsman Council's report also contains ideas for improving the current state of affairs:

• formation... of the State Tax Service of Ukraine of a new policy direction to ensure the application of the principle of the rule of law and practices that would meet the principles of proportionality and validity of tax audits;
• implementation of the “consultation first” principle, the main purpose of which is communication with taxpayers in order to correct errors before determining a monetary obligation or penalty;
• strengthening the role of legal departments in the bodies of the State Tax Service of Ukraine at the stage of tax audits to carry out, already at the level of the territorial body of the State Tax Service of Ukraine, a full analysis of the quality of the conclusions that auditors had previously reached, and to determine their judicial prospects;
• reducing the number of cases in administrative courts, especially in the city of Kyiv after the liquidation of the District Administrative Court of Kyiv (DACC), for example, through the introduction of alternative methods of dispute resolution. It is for this purpose that the Council is now expanding its capabilities to use mediation tools.

“In the third year of the great war, tax audits are still carried out with a presumption of “ill will”, when every taxpayer is considered a potential and even probable violator. Our overall goal should be to move toward the presumption of "good will" reflected in those 99-plus percent of voluntary tax payments, where the focus is on how to provide quality tax compliance support and advice, helping the law-abiding majority of taxpayers find and correct their mistakes, while simultaneously focusing heavy fiscal artillery on unscrupulous payers involved in “gray” and “black” schemes,” the Council’s report says.

Excellent conclusions. However, like deja vu, I recall similar statements by the leadership of the then tax inspectorate, then by the administration, which have been voiced more than once since the late 90s: about the need for dialogue with taxpayers, providing assistance to them and abandoning the attitude of “be sure to find violations and charge additional charges” ...