Upon the request of G20 member states the Organization for Economic Cooperation and Development created a plan of actions on preventing base erosion and profit shifting – BEPS. This document logically fits within the trend of financial operations transparency promotion including the fight against offshores and tax avoidance. Taking into account that Ukraine wants to have strong economic and political presence in the world arena, it has joined BEPS as well. The government is already working on the concept of the plan’s implementation.
In case you use tax mitigation measures in your company, you have to check whether the applied practices are in line with provisions of the plan adopted by Ukraine.
The aim of BEPS is to eradicate tax avoidance
BEPS was developed by OECD and contains recommendations with regard to fighting against tax avoidance. 15 steps, covering different spheres of aggressive tax planning, are laid out in the plan.
One of the aforementioned steps provides for unification of treaties regulating avoidance of double taxation. It means that the same (stricter and more operationally advanced) standards and regulations will be applicable in all countries. Provisions of old bilateral treaties will be replaced by new ones. That’s why some payments between residents of these countries will be conducted without tax exemptions and corresponding fees will be charged in the country where the payment is made.
Ukraine has partially adopted BEPS and currently develops mechanism of its implementation
Ukraine has accessed BEPS on 1 January 2017 and has pledged to adopt the minimal standards of the plan consisting of the 4 following stages:
- fight against tax abuse related to the usage of special tax regimes;
- avoidance of abuse in cases of tax conventions application;
- disclosure of information on the application of aggressive tax planning methods;
- improvement of disputes resolution mechanisms related to the application of bilateral treaties on avoidance of double taxation.
According to Nina Yuzhanina, the head of the Verkhovna Rada’s Committee on Taxation and Customs Policy, several laws should be adopted in 2017 in order to complete aforementioned steps. These laws should address the following issues:
- improvement of procedures related to the transfer pricing supervision and transfer of revenues abroad;
- introduction of regulations related to controlled foreign companies;
- elimination of abusive implementation of conventions on avoidance of double taxation;
- setting of financial limitations for operations with related entities;
- prevention of the avoidance of the permanent representation status registration.
In case everything goes as planned and all laws are adopted in 2017, in 2018 they will come into force and in 2019 we’ll have automated exchange of information among countries which accessed BEPS (country by country reports). Furthermore, starting from 2019 the Step 6 will become applicable – “Prevention of privileges abuse stipulated by treaties on avoidance of double taxation”.
Three solutions of the aforementioned problem are proposed in BEPS. The first one provides for the inclusion of provisions declaring parties’ intention to “refrain from non-payment of taxes through tax avoidance or tax omission”. The second one foresees indication of limitations on tax privileges’ application in treaties. The third solution consists in refusal from the allocation of tax privileges to those legal entities which conclude translational contracts for the single purpose of receipt of such privileges.
Currently, the government adopted recommendations on BEPS plan of actions implementation. Furthermore, on 04.07.2017 the Cabinet of Ministers of Ukraine adopted the decree № 480 which lists types of non-resident entities, which are exempted from the profit tax payments, including on profit obtained outside the country of non-residents registration, and/or in the country where they are not considered as tax residents even though they are registered as legal entities there. This decree entered into force on 27.07.2017 and on 14.08.2017 The State Fiscal Service of Ukraine issued a letter with recommendations on its implementation. Baker Tilly has already explained their essence in one of its previous publications.
Ukrainian business will have to bring their tax payment practices in accordance with BEPS
BEPS will have the major impact on companies which conduct transactions or create subsidiaries abroad with the single purpose of tax avoidance. Thus it’s important to start analyzing your international financial transactions and subsidiaries already now, as they might be considered as subjects to taxation. In this case, you’ll have to reorganize them or prepare strong arguments to challenge the authorities’ position.
Whatever way you choose, make sure that you are able to substantiate that the revenue receiver is its actual owner and has an official status of tax resident abroad. Furthermore, agreements should be economically viable i.e. to be conducted for real business purposes and not just for the tax avoidance. Thus, the form and the essence of the transaction should correlate.
Today the trend for tax avoidance decreases. Developed countries are fighting for the transparency of business and their right to collect taxes. The fact that Ukraine has joined this fight is a positive step. At the same time, we cannot impose similar strict tax regulations as developed countries as there is a risk of deterring foreign companies which will further undermine an already weak economy. It will also complicate the attraction of foreign investors.
On one hand, Ukraine has to fight against aggressive and harmful methods of tax avoidance. On the other hand, we have to decrease internal tax rates and improve procedures of tax administration in order to make payment of taxes inside the country more attractive.
In any case, we cannot simply ignore the choice of developed countries as it may result in the closure of markets as well as blocking of payments conducted contrary to new taxation regulations.