Actual problems of Economics and Finance: Abstracts of ХІ International scientific-practical conference (Kiev-St. Petersburg-Vienna, October 31, 2017)
Section: Tax policy
Grona Andrii
PhD student at the Department of Business and Entrepreneurship
of the Kyiv National University of Technologies and Design
Kyiv, Ukraine
TAX CREDIT INDISPUTABILITY. KEY COMPONENT OF UKRAINE’S TAX POLICY
Summary: A line of economic reformations such as liberalization of regulatory policy becomes widespread in both developed and emerging countries. The development of tax policy in such states bends its’ steps to establishing trust relationships between fiscal authorities and entrepreneurs. A principle of tax credit indisputability in VAT makes a great impact on such an establishment, as subject to which entrepreneurs are not held liable for this tax non-payments committed by their counterparties. For this purpose, a system of tax administration is proposed to be built up the way it renders tax violations in VAT economically impossible. The paper brings the overall view on possibilities to set up such an administration system which allows an automatic prevention of any possible violations of remitting VAT in Ukraine. The author’s proposed system is implementable in any country where such a tax is charged as well.
This paper addresses the problem of combating minimization of VAT payments and VAT evasion. This issue is of contemporary importance not only in Ukraine but also in many countries where VAT is charged. Thus, according to analytical reports on VAT underpayments in the EU, the total amount of VAT underpayments in the EU was EUR 162.2 billion (14.09% of expected revenues) in 2014 and EUR 151.4 billion (12.77% of expected revenues) in 2015 [1, p. 19], reaching very high figures in certain countries (in Italy: 28.3% in 2014 and 25.78% in 2015; in Romania: 42.85% in 2014 and 37.18% in 2015) [1, p. 19].
The problem is that VAT is a tax applied not to the entire but to a portion of the product’s value (added value). In that case, the amount of tax that must be remitted to the budget is very easy to reduce by conspiring with the counterparty (who evades tax) to the effect that the latter overstates the liquidation value of its goods/services (or even sells nonexistent goods/services). As a result, the state budget receives much less in revenue than it should.
Therefore, many countries of the European Union, particularly the United Kingdom, were compelled to introduce certain forms of joint liability of VAT payers for tax evasion by their counterparties [2, section 77А]. Prior to 1 August 2015, measures of preventing VAT evasion in Ukraine also focused on invalidating VAT invoices and other ways of holding enterprises of the real sector liable for tax violations committed by their counterparties [3].
In 2015, Ukraine has introduced automatic prevention of VAT evasion as a way of solving this problem. The outcome of these reforms must be abolition of the principle of the buyer’s and seller’s joint liability for VAT evasion and real implementation of the principle of indisputability of tax credit. It is worth noting that the indisputability principle has already been established in Ukraine [4, part 3, paragraph 201.10, article 201]. In the author’s opinion, this principle was established prematurely, because it has not been underpinned yet by efficient automatic measures of preventing VAT evasion.
Real implementation of this principle is one of the key points of economic reforms in Ukraine. It would drastically enhance the freedom of doing business in Ukraine, pave the way to implementation of an automatic VAT refund procedure, and relieve companies from unfounded audits triggered by tax violations committed by their counterparties (and even more often by counterparties of their counterparties).
The history of implementing automatic measures of preventing VAT evasion did not end yet, and for the time being, it consists of three important steps which set the direction of development in this respect.
The first step was made on 01.07.2015 [7, par. 48]. An electronic VAT administration system was launched to prevent registration of fictitious tax invoices (a fictitious invoice means invoice showing no tax payable to the budget). It is worth noting that in the EU, nonpayment of output tax assessed by VAT payers remains widespread. In particular, this nonpayment practice is used as the basis for the “carousel” scheme [6, p. 13].
This first step left an exhaustive list of possible violations. All of them are based on the purchase of documents for a de-facto nonexistent product (which was sold for cash, in breach of the rules of using the register of debt settlement transactions, without showing this transaction in the seller’s accounting files) and the use of consequently assessed tax credit for certain other purposes. These purposes could be as follows.
The second important step was made on 01.03.2016 [7, par. 58, Section I]. An electronic fuel sales administration system was launched for the purpose of (in addition to administration of excise tax) preventing “twisting” transactions with fuel. This system is based on the accounting the commercial inventory of fuel which a registered fuel excise tax payer received from another registered payer (or imported to the customs territory of Ukraine) but did not write off from the balance yet. This system makes sure that any fuel “twisting” transaction automatically produces an excise tax liability (rendering impossible the sale of any quantity of fuel of uncertain origin without incurring additional excise tax liability).
The third important step was made on 01.07.2017 [8, 9, 10] by implementing the procedure of stopping registration of risky tax invoices. This procedure was designed as a method of automatically preventing the use of such a widespread VAT evasion scheme as “twisting” for all goods, not just fuel. Unlike the first two successful steps, this one was a failure due to a number of serious flaws mentioned below:
The flaw 1 allows the tax credit indisputability principle to be used by tax dodgers, because according to this principle, the tax dodger’s counterparty cannot be held liable.
The flaw 2 means that in addition to automatic halting of registration of questionable tax invoices, a separate procedure of registering (or declining registration of) stopped tax invoices is required; this procedure must be non-automatic (involve large number of State Fiscal Service’s personnel). Presently, it was insufficient number of State Fiscal Service’s personnel required to handle the procedure of registering stopped tax invoices that resulted in the appearance of the draft Law No 7115 of 15.09.17. This draft law abolishes automation of the stoppage procedure and the tax credit indisputability principle (par. 571.7 of the draft law).
Thanks to the flaw 3, tax dodgers have quickly learned to avoid the stopping of tax invoice registration (their companies have simply decreased monthly turnovers, and at the same time, the dodgers have increased the number of companies).
The author proposes to implement a new electronic VAT administration system capable of automatically preventing almost all of the aforementioned VAT evasion schemes. The only thing this system won’t be able to prevent is one particular case of the scheme 3: purchase by a goods manufacturer (service provider) of documents for a product (which has actually been sold for cash), and use of this product as a raw material for production of services or other goods. The proposed system is based on the same principle as the electronic fuel sales administration system, i.e. automatic accounting of inventory of goods received by a VAT payer from another VAT payer or imported to the customs territory of Ukraine and not yet written off from the balance (hereinafter referred to as “automatic inventory accounting”).
The key advantage of the proposed new system of preventing VAT evasion is that it can employ the same software as the existing tax invoice monitoring system used to stop their registration. Implementation of the new system would require some legislative changes concerning the requirements and rules of completing tax invoices by VAT payers (the paper [11] brings the detailed view on such changes to consist of 20 steps).
The author proposes to implement the new system in phases. The main purpose of the first phase is to implement an automatic inventory accounting system and introduce automatic (without intervention of State Fiscal Service officials) measures of preventing “twisting” transactions. For that purpose, it is proposed to supplement the information which VAT payers are required to file in the electronic VAT administration system. First of all, it means introduction of the requirement to complete a tax invoice when shipping goods after receiving a prepayment. It is proposed that the tax rate stated in tax invoice in this case should be 0% (for details, see: [11]).
In the first phase, the new prevention system would be already free from the aforementioned flaws 2 and 3 found in the existing prevention system. At this point, it is suggested to leave the stoppage procedure only for the operations of supplying:
The main purpose of the second phase is to render impossible the use of tax credit via accumulating inventory of goods and services. For that purpose, the procedure of automatic assessment of tax liabilities upon receipt of goods is introduced. The amount of these liabilities equals to the amount of tax credit received, and is assessed by registration by the electronic administration system itself of automatically generated tax invoice, which completely repeats the received tax invoice. Tax credit may be used as the received goods are shipped (or as the received raw materials are written off). Tax credit is to be used by registration of adjustment calculations to the automatically generated tax invoice (done by the taxpayer himself) as the received goods are shipped. In the second phase, the author proposes to abolish the stoppage procedure. To a certain degree, measures proposed for the second phase would bring back the tax credit assessment principle which was in effect prior to 01.04.2005 without impediment to the electronic VAT administration system (for details, see: [11, p. 40]).
The author expects several results from the implementation of such a two-phased process of amending the legislation and improving the electronic VAT administration system.
In terms of tax policy, the first result would be significant increase of VAT revenues to the budget, because almost all VAT minimization and evasion schemes would be rendered impossible. As mentioned earlier, only one particular case of the scheme 3 would remain possible. The second result would be rendition as impossible of almost all VAT minimization and evasion schemes, subject to preservation of the tax credit indisputability principle.
As far as the macroeconomic and general business environment is concerned, preservation of the tax credit indisputability principle would have significant positive effect on the entrepreneurial and overall economic freedom in the country, which would substantially improve investment climate. In addition to this result, the author also allows for the possibility of using products of any nomenclature as pledged property, because in a system like this, flow of large amounts of goods and commodities can be subjected to detailed monitoring, which significantly reduces the risk of disappearance of these goods or commodities.
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