Business will avoid paying Tax on Withdrawn Capital (TWC) no more than it currently evades the payment of income tax, says Pavlo Shovak, Senior Associate at Asters Law Firm.
“It is unlikely that the TWC will be more exposed to the risk of tax evasion or tax optimization compared to the current income tax. This is due to the fact that TWC will take cash flows under the control, and it will be harder to hide the withdrawal of circulate assets from business than to hide income in accounting,” – he told the Interfax-Ukraine agency.
Commenting on the risks of TWC evasion, the Senior Associate emphasized that “tax evasion, which is a punishable act, should be distinguished from tax optimization, which is a lawful action of the taxpayer, aimed at reducing tax liabilities.”
“Both of these phenomena are inherent in any tax system and the transition from profit tax to the TWC will not cease to exist,” he said.
P.Shovak noted that, based on the experience of other countries (for example, Estonia, Georgia and recently Latvia), the introduction of TWC did not lead to negative consequences.
“On the contrary, the TWC can be an incentive for increasing business activity in the state. This tax significantly reduces the cost of investing in capital, and also stimulates the reinvestment of profits, for example, in the expansion of production and retail space and acquisition of new equipment,” he said, explaining that the obligation to pay TWC does not arise until the profit is reinvested, and the owners do not withdraw funds from the enterprise in any legal form.
“All enterprises interested in expanding business and further expansion of the Ukrainian market should benefit from the transition to the TWC,” he said.
Among the possible “pitfalls” of such a tax, the Senior Associate pointed out, in particular, that not only the classic payment of dividends are considered withdrawal of profits, but also other payments equivalent to the withdrawal of profits, for example, payment to non-residents of passive income as royalties and interest, non-market operations.
“Given the already established relationships between tax authorities and business, a logical question arises whether the tax authorities will attempt to re-qualify economic transactions in operations equal to the profits withdrawal including TWC collection. Such operational re-qualification can simply replace the traditional “non-proprietary” operations, which are now widely attributed to a number of taxpayers,” P.Shovak said.
At the same time, the senior associate drew attention to the problem of implementating the TWC concept in Ukraine, as well as to the attitude of tax authorities to business.
“After all, no matter how good the taxation system may be, foreign investors are unlikely to invest their money in the state with unfriendly tax authorities and other bodies of power,” assures the associate.
In his turn, Oleksandr Maidaniuk, the Counsel of EPAP Ukraine law firm drew attention to the fact that the main argument against the TWC introduction is a significant loss of revenues to the budget, as it is impossible to accurately predict the flow of investment in Ukraine at the moment as well as unambiguously assume the impact of tax on the economic performance of the country as a whole.
“Under the best possible circumstances, the volume of tax revenues will recover already in the third year after the TWC introduction. Unshadowing and active economic growth should contribute to obtaining such a result. At the same time it is very difficult to forecast what will happen in Ukrainian realia. After all, similar example in Estonia shows that such a recovery may take more time,” considers the Associate.
Andriy Reun, head of tax practice at Evris, also believes that the risks of evasion from paying TWC do not exceed the risks of evasion from income tax payment.
In case of TWC introduction, the tax authorities will have an additional arsenal of funds and powers to assess additional tax to taxpayers,” re-qualifying the business operations that they do not like in the capital withdrawal operations.
At the same time, he does exclude that TWC will become the next mechanism for tax evasion, but after the TWC introduction the tax authorities will have enough methods to assess additional tax to Ukrainian “evaders”.
If the Parliament does not make amendments in terms of foreign companies passive income taxation in Ukraine, as it is stipulated now, then, in fact, Ukraine will “hand over” such taxes to other states. Accordingly, the evasion of foreign companies from Ukrainian taxes will be legalized at the legislative level.
A.Reun notes that the TWC can become a real incentive for investment in production “provided that the tax authorities will interpret the legislation in favor of taxpayers, rather than re-qualify the real business operations into the capital withdrawal operations in order to assess additional TWC”.
In the Associate’s opinion, tax operations will be the main pitfall in introducing TWC, resulting in the upheaval of tax officials abuse while interpreting tax laws and actual circumstances with the aim of re-qualifying business activities into the capital withdrawal operations and assessing additional TWC.
Only the industries which need the modernization or improvement of production facilities will primarily benefit from the TWC introduction. If the TWC operates as intended by the developers, the business will have the incentive to increase production capacity and expand at the expense of the amounts saved on TWC.
According to reports, the International Monetary Fund (IMF) considers it possible to introduce a tax on withdrawn capital in Ukraine with compensators to cover possible budget losses.
Ukrainian Finance Minister Oleksandr Danyliuk doubts the expediency of gradual introduction of the tax on withdrawn capital (TWC).
Petro Poroshenko, the President of Ukraine, postponed the submission of the draft law On Tax on Withdrawn Capital to the Verkhovna Rada, although he earlier stated his readiness to submit it to the Parliament, arguing that this was the position of international partners. O.Danyliuk stated that the agency planned to introduce it in one block with the budget resolution, which will take into account the compensators of budget losses, but subject to agreeing on a reduction in budget expenditures at the level of all ministries and departments, as well as the parliament and local authorities.
According to the draft law, the tax rates on the withdrawn capital should be 15% for dividends, 20% for equivalent payments.