VAT-accounts – is an attempt of the Government to put out a fire by petrol
The temptation of easy solutions often fails due to the fact that behind the apparent simplicity there are always hidden consequences (no one thought about it on time).
If we look through the modifications (which were offered by government and voted by Parliament) about VAT administration, it seems to be quite progressive. It comes to a new electronic system of VAT administration. Its essence is implementation of special VAT accounts for the business and changing the criteria for automatic VAT refund.
Electronization of a dialogue between taxpayer and tax inspector – is definitely pros. It is also minimization of corruption risks, expected simplification of workflow and efficiency of tax administration.
At the first glance, everything is just perfect. However, if we see into the nature of this tax reform – I emphasize, the most vulnerable tax in terms of tax abuse – it can be assessed only as dangerous levity of the heads of State Fiscal Service and the Parliament and the Head of State, who believed them.
How can a model, which neither European country implemented, could be considered as a “reform”? Even in the midst of a severe economic crisis.
How can a model, which neither European country implemented, could be considered as a “reform”? Even in the midst of a severe economic crisis. Why would someone bring from under the table a model, which had been rejected by different Ukrainian Governments for three times – in 2004, 2006 and 2010?
Special VAT accounts, as far as I know, nowadays exist only in Azerbaijan, as an enterprise deposit in the State Treasury. Bulgaria had also once tried to conduct this experiment, but abandoned it soon. Thus, is the purpose of this “reform” to catch up and overtake Azerbaijan (with respect to this wonderful country, I would say that it is clearly not economic “monster” in the global arena)?
During the time when I was a head of the Ministry of revenue and duties, I thought about this idea. However, the conclusions of the Ministry experts and independent auditors were unambiguous: disadvantages of this approach significantly exceed all possible benefits for the State.
First of all, special accounts violate the basic principle of free enterprise. It obviously infringes on a right of private property. In fact, the payer loses unhindered access to one fifth of the funds in his account. The state decides how and on what the owner of the money has to spend it. It is easy to guess how this will affect the investment climate.
In practice it means that the lack of working capital of enterprises will be reimbursed by credits.
Secondly, consumer prices always grow in case of introduction of this model. The main reason is increase of administration costs. In addition, interests on the short-term credits with the maximum rates come out. What does business do with expenses? It includes it in the price of goods. This is logical and natural.
The concept of VAT accounts itself is vicious. At the same time, Ukrainian version turned out to be the worst of all known attempts to work on this scheme.
The concept of VAT accounts itself is vicious. At the same time, Ukrainian version turned out to be the worst of all known attempts to work on this scheme. Even in Azerbaijan VAT accounts – are deposits. Here, neither taxpayer nor his bank can use money from these accounts in its work. In other words, the fifth part of the money is “withdrawn” from economy and revolves in vain. For Ukraine it means to freeze UAH 2,3 billion monthly. Would these amounts be excessive for Ukrainian enterprises and the economy as a whole?
Business has no opportunity to regain the money from such account, even in case of enterprise closure. I am not even talking about the tax overpayment refund. By the way, VAT overpayment amounts have reached UAH 2 billion, whereas refund amounts are decreasing: by the August 1, remainders of non-refunded amounts to taxpayers – are over UAH 35 billion (since the beginning of the year it has grown by UAH 5 billion, while debenture bonds were issued in July). There are UAH 5 billion (by January 1 there was only UAH 1,6 billion) untimely refunded (overdue) sums. The state causes damage to business twice – it deprives of chances to receive refunds of overpayments and does not refund what it is obliged.
And finally, concerning the formula for calculating the amount, which should be deposited in the tax invoices, in the proposed “reform”. There are six variables, each of which is – formular. It is obvious that in order to do all this arithmetic, a company will have to hire a separate accountant and State Fiscal Service – will have to create, at least, a new section, or maybe even the whole Department.
Theoretically VAT accounts – is a tool, devoted to hold economy at the peak of rapid growth in order to smooth the inevitable transition to its collapse within a single cycle. However, this leverage is not used for its intended purpose in Ukraine today.
Theoretically VAT accounts – is a tool, devoted to hold economy at the peak of rapid growth in order to smooth the inevitable transition to its collapse within a single cycle. However, this leverage is not used for its intended purpose in Ukraine today. The fact that Ukrainian economy is in crisis has an additional burden due to military operations in the country. I have no doubts that in this case the Government attempts to put out a fire by petrol. The consequences are predictable.
However, there is an obvious concession to business, namely: the criteria for automatic VAT refund. In general, it is good, I have always supported partnership format of relations. But, these concessions are risky.
For instance, the abolition of the norm about the average salary and the number of employees in the company-applicant for an automatic refund can be not really a good sign. Earlier VAT could be refunded “automatically” by an employer, who paid the staff an average of 2,5 minimum wages, and employed at least 20 employees. Thus, the parameters were clearly defined for representatives of the real sector of economy. Moreover, the social aspect was taken into account – these norms were adopted in order to stimulate creation of jobs and legalization of citizen’s incomes. Nowadays, the employer simply has no more motivation to move from wages “in envelopes” to paying “white” salaries.
Also, it is surprising that there is the abolition of the “automaton” norm about the discrepancy between the VAT refund recipient’s tax invoices and liabilities of its counterparties, which shouldn’t exceed 10%. Modifications, which were made in this part, could open the way to the refund “market” to fly-by-night companies. In my time, I did everything to close loopholes for the “expendable” recipients of VAT refund. They are involved, mostly, not in real economic activity, but in pumping of budgetary funds into private pockets.
Choking because of shortage of funds during this difficult period, country will sustain new losses. Losses, compensation will be offered to be done by ordinary citizens.
It is obvious that the authors of fraudulent schemes all the time were looking for ways and opportunities to return to such practice, in fact, shameless robbing the state. Why should we give such chance them now? There is only one result of legislatively adopted tax innovations: choking because of shortage of funds during this difficult period, country will sustain new losses. Losses, compensation will be offered to be done by ordinary citizens. I mean so-called “military tax”, additional fee on the income of physical entities amounted 1,5%.
Plans on the collection of this tax are entirely unrealistic for an existing salary fund in the country. In the current situation, this fee cannot provide UAH 2,9 billion, which were planned until the end of the year. If the best happened, the tax administration will assemble around UAH 316 million. Without a sharp rise of salaries and other legal incomes (which is hard to believe, especially given the adjustment of the criteria for the “automatic” refund.
It is easy, but short-sighted decision to put all burdens on honest and law-abiding – citizens and legal business. In fact, there are more simple and accessible reserves, which will be enough to finance the army, and to restore the economy – at the expense of economy deshadowing. It is necessary to fight against corruption, “envelopes” and other tax fraud. It should be done not by changing laws, but via improving the quality of functionality. For instance, tax authorities, have forestalled illegal VAT refund amounted UAH 500 million by August, 1. By the way, this is the three (!) times less than it was last year.
There is a Law on Transfer Pricing. Where is the decisive fight against tax evasion through offshore? Do we need new Laws to simplify document flow, to improve service?
It is harder and more complicated to do this than introduce new taxes. However, it should be done. During this complicated period, the country should not obtain money from those who feel bad now, but from those, who are used to feel always good.
Link to source: Forbes