Business urges to revise the draft law No.2524

14/ 07/ 2020

The situation with the entry into force of Law 466 provoked a negative reaction from the business community. Thus, the business is dissatisfied with the terms of the application of separate norms, as well as the content of some norms. These are technical inconsistencies, taxation of controlled foreign companies, the principle of business purpose, rules of thin capitalization, changes for foreign representative offices, and others. Thus, the draft Law 2524 contained several positive proposals, which were developed jointly by a working group with the participation of representatives of the largest business associations at the Office of the President of Ukraine. Thus, the business expected the postponement of the application of the new tax rules: – for controlled foreign companies (CFCs), – for permanent representative offices of non-residents, – for income tax of non-residents. In general, during the working group meetings at the Office of the President, remarks were made on a much larger number of provisions of Law No.466. However, the draft law No.2524 includes fewer proposals made by the business. As a result of todays vote, the Verkhovna Rada adopted a version of the draft law No.2524, which takes into account even fewer proposals. Therefore, this version does not meet the expectations of the business community at all. In other words, todays vote has deprived the business even of these small concessions previously agreed on. Thus, a rhetorical question arises as to the real reasons behind those demonstrative meetings of public authorities with the business at the Presidents office. According to the community, this situation exerts additional pressure on the business. Therefore, the European Business Association calls on the President to return this Law of Ukraine for further revision, and deputies and authorities to continue working on errors in tax legislation with the involvement of business representatives, namely on: business purpose. The definition of business purpose is fiscal which puts the taxpayer in a losing position. For example, the regulators may consider any adjustment in transfer pricing as a transaction carried out without a business purpose. The proposed rules increase the inappropriate discretion of regulatory authorities and will lead to increased disputes between the business and taxpayers. interest deduction rules. The community is proposing to limit the application of these rules to transactions with non-resident related parties. In any case, we urge you to prevent the application of these restrictions to transactions between resident taxpayers. Besides, the rules need to be clarified, particularly in regard to the application to capitalized interest. contingent dividends. These rules can significantly increase the tax burden on business, even with the impartial application of new rules by regulatory authorities. Given the unusual nature of the proposed rules, in addition to the increased tax burden, we should also expect an increase in the number of disputes over the correct application of these rules by regulatory authorities. The community deems it necessary to continue the discussion of changes to the rules of transfer pricing for raw materials. The proposed changes expand the rights of tax authorities while exerting a significant burden on taxpayers. Law No.466 significantly changes the rules for determining the compliance of controlled transactions for export/import of raw materials to transfer pricing based on the outstretched arm principle (Article 39), while a number of rules introduce uncertainty and subjectivity in the analysis approaches. Norms concerning legal entities, which are established in accordance with the legislation of other countries and have effective management on the territory of Ukraine, appear to be incomplete and inconsistent with other forms of the Code. Therefore, it is necessary to postpone, at least until 2021, the rules for non-residents to perform the functions of tax agents for transactions with certain investment assets. The community also proposes to significantly reconsider the approach to the application of changes to paragraphs 215.3.4. on the excise tax to methanol-containing solutions. It is important to consider the transitional period to prepare for the application of the new rules and continue the discussion of the specifics of taxation of methanol-containing solutions, in particular, on the feasibility of their inclusion in the list of excisable goods. At the same time, it is necessary to consider the gradual increase of the excise tax rates on heated tobacco products by 35% from 2021 to 2025 and annual increase by 10% from 2026 to 2030 inclusive, and at the same time revise the schedule of excise tax rates on cigarettes, established by the Tax Code of Ukraine, by expanding it with a 10% annual increase in rates until 2030. Define transitional provisions for the application of the mutual agreement procedure initiated by payers before the entry into force of Law No. 466. Clarify that the tax adjustment on fines and penalties for violations of the law (paragraph 140.5.11) does not apply until the specified fine is paid by the payer. Thus, the current version of the law may be interpreted as it is necessary to adjust the amount of the fine, even if the payer appeals the fine. Correct the norms on the beginning of the application of provisions on land / real estate tax payment for the objects situated on the contact line territory of localities (land tax and rent for state and communal property land). According to the Law, legal entities must accrue liabilities from the above-mentioned taxes independently from March 1, 2020. The validity of this rule should be postponed to October 1, 2020. We hope that the voice of business will be heard, and technical and illogical inconsistencies will be resolved in the near future.

Thus, the draft Law 2524 contained several positive proposals, which were developed jointly by a working group with the participation of representatives of the largest business associations at the Office of the President of Ukraine.

Thus, the business expected the postponement of the application of the new tax rules:

– for controlled foreign companies (CFCs),

– for permanent representative offices of non-residents,

– for income tax of non-residents.

In general, during the working group meetings at the Office of the President, remarks were made on a much larger number of provisions of Law No.466. However, the draft law No.2524 includes fewer proposals made by the business. As a result of today’s vote, the Verkhovna Rada adopted a version of the draft law No.2524, which takes into account even fewer proposals. Therefore, this version does not meet the expectations of the business community at all. In other words, today’s vote has deprived the business even of these small concessions previously agreed on. Thus, a rhetorical question arises as to the real reasons behind those demonstrative meetings of public authorities with the business at the President’s office. According to the community, this situation exerts additional pressure on the business.

Therefore, the European Business Association calls on the President to return this Law of Ukraine for further revision, and deputies and authorities to continue working on errors in tax legislation with the involvement of business representatives, namely on:

“business purpose”. The definition of “business purpose” is fiscal which puts the taxpayer in a losing position. For example, the regulators may consider any adjustment in transfer pricing as a transaction carried out without a business purpose. The proposed rules increase the inappropriate discretion of regulatory authorities and will lead to increased disputes between the business and taxpayers.
interest deduction rules. The community is proposing to limit the application of these rules to transactions with non-resident related parties. In any case, we urge you to prevent the application of these restrictions to transactions between resident taxpayers. Besides, the rules need to be clarified, particularly in regard to the application to capitalized interest.
“contingent dividends”. These rules can significantly increase the tax burden on business, even with the impartial application of new rules by regulatory authorities. Given the unusual nature of the proposed rules, in addition to the increased tax burden, we should also expect an increase in the number of disputes over the correct application of these rules by regulatory authorities.
The community deems it necessary to continue the discussion of changes to the rules of transfer pricing for “raw materials”. The proposed changes expand the rights of tax authorities while exerting a significant burden on taxpayers. Law No.466 significantly changes the rules for determining the compliance of controlled transactions for export/import of raw materials to transfer pricing based on the “outstretched arm” principle (Article 39), while a number of rules introduce uncertainty and subjectivity in the analysis approaches.
Norms concerning legal entities, which are established in accordance with the legislation of other countries and have effective management on the territory of Ukraine, appear to be incomplete and inconsistent with other forms of the Code. Therefore, it is necessary to postpone, at least until 2021, the rules for non-residents to perform the functions of tax agents for transactions with certain investment assets.
The community also proposes to significantly reconsider the approach to the application of changes to paragraphs 215.3.4. on the excise tax to methanol-containing solutions. It is important to consider the transitional period to prepare for the application of the new rules and continue the discussion of the specifics of taxation of methanol-containing solutions, in particular, on the feasibility of their inclusion in the list of excisable goods.
At the same time, it is necessary to consider the gradual increase of the excise tax rates on heated tobacco products by 35% from 2021 to 2025 and annual increase by 10% from 2026 to 2030 inclusive, and at the same time revise the schedule of excise tax rates on cigarettes, established by the Tax Code of Ukraine, by expanding it with a 10% annual increase in rates until 2030.
Define transitional provisions for the application of the mutual agreement procedure initiated by payers before the entry into force of Law No. 466.
Clarify that the tax adjustment on fines and penalties for violations of the law (paragraph 140.5.11) does not apply until the specified fine is paid by the payer. Thus, the current version of the law may be interpreted as it is necessary to adjust the amount of the fine, even if the payer appeals the fine.
Correct the norms on the beginning of the application of provisions on land / real estate tax payment for the objects situated on the contact line territory of localities (land tax and rent for state and communal property land). According to the Law, legal entities must accrue liabilities from the above-mentioned taxes independently from March 1, 2020. The validity of this rule should be postponed to October 1, 2020.