Corporate Profit Tax: an obstacle to GDP growth
A Сorporate Profit Tax is an enormous vacuum cleaner that pumps out Ukrainian resources to other jurisdictions. If Ukraine wants to turn it off, it should replace the Corporate Profit Tax with the Exit Capital Tax.
Finding a problem, determining of the cause and effectively eliminating it is a recipe of a successful reform. In 90% of cases for Ukraine the reform may narrow down to one recipe: “leave us alone”.
The massive emigration of Ukrainian citizens, hidden economy, the pitiful GDP will become a history as soon as the principle “leave us alone” becomes a universal way of eliminating problems in Ukraine.
This principle means the decrease of the relocated through the budget GDP’s percent, the substantial reduction of ministries, the comprehensive simplification of procedures and rules in order to minimize the discretion of remaining officials and spheres with state`s monopoly.
Сorporate Profit Tax (CPT) is a problem. We can name a lot of epithets, competing in eloquence with CPT adepts, but there are numbers: UAH 1.3 trillion of accumulated losses, 8 thousand of loss-making companies, 1% of companies pays the main tax and 24% of the whole CPT in 2016 were paid by 7 companies.
Effective CPT tax rate for profitable companies – 30% to the financial result before tax adjustments.
Only in 2017 payment of the UAH 34 milliards by formally loss-making companies to their foreign shareholders with 2.6% average tax burden from the amount of income paid – withholding tax rate, as a result of application of conventions for the avoidance of double taxation, ranges from 0 to 5%.
Although non-residents` income can be taxed at a rate of 15%, in fact such rate is almost not applicable.
The main CPT payers pay the tax based on the contractual basis. The set of arguments for negotiations can be always found out by tax authority. For example, do you want to reimburse the VAT fast? Do you want a year without audit?
Unsatisfied will get long VAT audit with possible withdrawal of the credit. They can also adjust the annual audit plan by including unsatisfied, despite the obligation to publish the final plan before the start of a year.
The CPT is determined by adjustment of financial result. In such a way, tax authority checks two objects: financial result and result after tax adjustments.
To check such objects means to check the accounting. Since 2019 the application of the IFRS for the main CPT taxpayers is obligatory. It means that tax authority will check the IFRS, where extent of perception allows to create worlds, decent for Freud`s attention.
From the moment of CPT adoption questions about accumulated losses systematically arise. These questions the state decides artificially by amending the CPT. There were more than 10 such amendments.
Over the last years such amendments were not introduced but the amount of losses raised to 45 billion of U.S. dollars with the annual growth of 3 billion of U.S. dollars. The CPT incentives, introduced for involvement of investors in specific area, were canceled in a few years since their introduction.
The CPT is a problem that distorts the managing and financial reporting, stimulating the growth of the hidden economy. Is there a solution? Is it possible to solve these problems within the system of the CPT?
Previous experience demonstrates that no. Is it possible not to audit financial result within the CPT system? Is it possible to cancel all tax adjustments? Is it possible to effectively deal with the issues of accumulated losses? Is it possible effectively resist to tax base erosion?
In order to avoid the checking of financial result, it should be trusted, and this implies particular system of control. For example, tax declarations are completed by certified tax experts – like tax consultants in Germany. Is it possible to create alike institution in Ukraine?
Tax authority usually double-check financial reporting, confirmed by auditors, although they are certified specialists. Why there are double-checks? This is because it believes that auditors bear no responsibility and several audit companies churn out audit reports not caring about consequences.
Are there any problems in Ukrainian audit? Ask auditors. For example, it`s worth recalling a story about confirmation of liquidated banks` reporting.
Corruption and degradation could not be only on one side of government and society relations. If they are on the state authorities` side, they are also on private institutions side, that cooperate with such authorities.
It is possible to predict the result of implementation of tax consultant institution in Ukraine with 100% probability. While in Ukraine dominates the principle ‘’bribe-solution is our everything”, all other solutions, which imply the creation of new structures, are fated to worsen situation. So here is a conclusion: within the CPT the financial result was checked and will be checked.
Abolition of tax adjustments will significantly decrease tax revenues and for some taxpayers will mean their full exemption from the CPT.
After the tax authority`s rampage in respect of bank reserves the tax adjustment amounting to bank reserves was removed from the Tax Code of Ukraine. As a result, the CPT revenue amounted to withholding tax related to payment of passive income to non-residents at the average rate 2.6%.
Occasionally the issues with accumulated losses resolves by the same ways: writing-off or instalment.
Each time it causes outrage as together with fake losses it disposes real losses.
Writing-off is a legislative acknowledgement of system`s ineffectiveness. It always means the expropriation of property because in so doing the system does not change, this process is just patching holes at the expense of those who are less lucky.
Under effective struggle with tax base erosion in the CPT system a lot of people understand BEPS steps – tax base erosion and displacement of income. Recently published by the Ministry of Finance bill regarding implementation of BEPS steps will increase discretion of tax authorities.
Perhaps the new powers of tax authority are good for the development of a grant, but they are bad for Ukrainian business. Nevertheless, even with such increase of discretion the companies with UAH 1.3 trillion of losses still have effective tax optimization tool.
In this respect the experience of Moldova is very interesting as it has established zero CPT rate and still retained all the CPT problems. As a result, Moldova was included into the low-jurisdictions list and subsequently cancelled zero CPT rate.
The CPT adepts cite Moldova`s experience as example of negative use of Estonian model of distributable income, which does not reflect the reality. Moldova`s experience is just a negative experience of solving the CPT problems within the CPT itself. Ukraine has repeated such experience a few times by providing the CPT incentives for specific areas and cancelling them in a few years. Selective provision of incentives is always connected with corruption indications.
The outlined indications reliably represent the Ukrainian CPT. Why one business must finance other business development? Who can strive for preservation of such CPT? The conclusion is obvious: adepts of the backstage decisions, corruption and inequality.
Reasoning in favor of preservation of withholding tax is exemplary – proving the status of beneficiary owner of the income recipient. If the status has not been proven, the withholding tax is deducted at 15% rate.
Disputes with tax authority about the status of beneficiary owner are the sample of backstage decisions for the CPT payers and the disgrace to the state.
Firstly, Ukraine has managed to apply the status of beneficiary owner not only to passive income but also to forwarding services.
Secondly, the status of beneficiary owner is applied even in those cases when bilateral agreements do not foresee it.
Thirdly, tax authority has claims to taxpayers using selective principle, although most taxpayers have borrowed from their foreign holdings according to the same schemes.
The change of tax authority`s approach to the beneficial owner issue has happened after years of the Tax Code rules implementation.
The beneficial owner example is an additional reason why withholding in Ukraine should be cancelled, if only the preservation of this tax does not aim at using principle “everything – for friends, the law – “for fools”.
Figuratively speaking, the CPT is a car, parked in a wrong place on a three-way road, where on the other side the State Fiscal Service is parked. It is not just a car, it is an enormous vacuum cleaner that pumps Ukrainian resources out to other jurisdictions. If Ukraine wants to clear a cork that blocks the GDP growth, the CPT should be evacuated.
Bill №8557 for replacement of the CPT with the Exit Capital Tax will help such successful evacuation.
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They looked as if they had complete confidence in their conclusions but then just changed their minds:
the State Fiscal Service of Ukraine insists that there is no need to make quarterly 30 % adjustments in transactions with companies registered in «low tax» jurisdictions and companies with legal forms included into the special list adopted by CMU
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