The growing interdependence of world economies, driven by the reduction and removal of trade barriers, cheaper transport and communication costs, and increased use of the Internet (facilitating easier access to foreign markets), as well as by the growth of multinational corporations, has resulted in unprecedented cross-border trade and capital flows. At the same time, it has also opened up new opportunities for multinationals to reduce their profit in high-taxed jurisdictions by exploiting gaps and mismatches in domestic and international tax rules to artificially shift it to low-taxed countries (or tax havens).
As the largest country in Central and Eastern Europe, with a strong commitment to pro-European integration, Ukraine has to address the challenges in cross-border taxation resulting from economic globalization, such as tax avoidance through sophisticated tax planning mechanisms.
The most powerful weapons against tax evasion and aggressive tax planning currently in the armory of more than 100 governments are the 15 actions set forth in the context of the Organization for Economic Cooperation and Development (OECD) and G20 BEPS Project, aimed at tackling tax avoidance.
Not being a member of the OECD, Ukraine is under no formal obligation to implement the BEPS Actions. However, in furtherance of its commitment to joining international anti-tax avoidance initiatives, on January 1, 2017, Ukraine became an official member of the Inclusive Framework for the global implementation of the BEPS project and declared itself committed to implementing minimum standards in four key areas: countering harmful tax practices, implementing country-by-country reporting for transfer pricing, preventing tax treaty abuse, and enhancing dispute resolution.
According to the formal plan (the “Roadmap”) which was presented by the Ministry of Finance in May 2017, implementation of the BEPS minimum standards in Ukraine is expected by the end of 2018.
Prior to joining the Inclusive Framework on BEPS, Ukraine launched a deoffshorization campaign aimed at taxing the income and gains diverted to tax havens by businesses and individuals. The President’s Decree of April 28, 2016 calling for the development of legislative changes for counteracting BEPS in Ukraine marked the formal launch of the deoffshorization process.
A working group established by the President’s Decree has prepared draft laws aimed at improving transfer pricing control rules and anti-BEPS measures; introducing controlled foreign company rules; counteracting aggressive tax planning activities; and liberalizing currency control legislation of Ukraine. However, the legislative drafts that have been prepared so far in the framework of the deoffshorization initiative do not contain a unified approach to statutory regulation of these issues. After Ukraine’s formal adoption of the OECD/G20 minimum standards, it is expected that Ukrainian officials will undertake concerted efforts to efficiently implement anti-BEPS/deoffshorization measures.
Liberalization of the Ukrainian currency control legal framework, considered one of the most rigid in the world, is a key prerequisite for successful implementation of the deoffshorization/anti-BEPS strategies in Ukraine. To encourage disclosure of control over foreign companies by Ukrainian individuals the National Bank of Ukraine (NBU) intends to introduce amnesty granting relief from penalties for the failure to obtain an individual license from the NBU prior to acquiring shares in foreign entities.
Ukraine’s accession to automatic exchange of financial account information based on the OECD common reporting standard (CRS) is another essential precondition for effective implementation of BEPS initiatives in Ukraine, as it will reveal banking transactions carried out by Ukrainian tax residents in violation of tax and currency control regulations. An official statement on readiness to join a multi-party agreement on exchange of tax information was made in April 2016, however no formal commitments have been made by Ukraine so far.
Adoption of anti-BEPS minimum standards and consistent liberalization of the Ukrainian currency control regulations are definitive indicators of Ukraine’s readiness to implement international best tax practices and send positive signals to foreign investors.
Albert Bushnell Hart once contended that, “taxation is the price which civilized communities pay for the opportunity of remaining civilized.” Implementation of BEPS measures by Ukraine and over 100 other countries and jurisdictions will serve as the basis for a tax system that is fair and responsive to taxpayer needs and encourages them to pay their due share.
By Oksana Kneychuk, Head of International Tax Planning and Corporate Structuring Department, Eterna Law
This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
