CC BY
26
Section 5. Economic security
https://doi.org/10.29013/EJEMS -20-1-53-58
Vasylechko Natalii, postgraduate student, National Institute for Strategic Studies Kyiv, Ukraine E-mail: [email protected]
Vasyltsiv Taras, Doctor of Sciences (Economics) Institute of Regional Research named after M. I. Dolishniy of the NAS of Ukraine, Lviv, Ukraine E-mail: [email protected]
ADVANTAGES AND DISADVANTAGES OF THE DEOFFSHORIZATION POLICY IN UKRAINE IN THE CONTEXT OF THE IMPLEMENTATION OF THE BEPS PLAN AND RELEVANT INTERNATIONAL RULES
Abstract. in recent years, in Ukraine, as in many countries around the world, an active deoffshorization policy that has both a number of positive consequences and certain drawbacks was developed. The article analyses the impact of domestic and international anti-offshore policy measures on the financial security of the state of Ukraine.
Keywords: state financial security, BEPS, offshore zones, tax evasion, deoffshorization policy.
Global deoffshorization trends began as early as Soviet economy and became an active participant in the 1970s, when the processes of creating offshore international financial markets, including offshores. jurisdictions to optimize the tax burden became par- The rapid offshorisation of the Ukrainian economy is ticularly active, reaching the entire global community. conditioned by the establishment of a favourable for Due to the emergence of more aggressive tax burden such processes environment. On the one hand, there minimization methods, the fight against the offshore is a system of a great tax pressure on business and jurisdictions has become particularly important, and a low level of protection of corporate resources in global deoffshorization policy has been recognized Ukraine. On the other hand, general political instaas a strategic benchmark for global financial security bility and harsh investment climate complicate the from a sustainable development perspective. conditions for attracting investments and doing busi-
Ukraine's experience in anti-offshore confronta- ness, stimulating investors to seek a more favourable
tion is relatively small, since the practice of capital business environment. Moreover, with each passing
"laundering" through its outflow to jurisdictions year, the problem of black economy in Ukraine is get-
with favourable monetary and fiscal regimes began to ting a more negative traction, which is caused by not
emerge only from the moment when Ukraine left the only domestic factors, but also the influence of global
trends in social development. First of all, total digitization of the economy and high mobility of financial resources is to be addressed. In such circumstances, the establishment of a regime promoting the artificial taxation minimization by individual states poses a serious threat to the financial security of Ukraine through reducing budget revenues and deteriorating the financial stability due to shifting a part of the capital to offshore zones.
The question of guaranteeing security at different levels of economic relations has become urgent for Ukraine: the security of business entities and the security of the state as a whole, especially its financial component. To this end, active deoffshorization policies have been deployed in recent years.
Ukraine supports initiatives of the international community regarding mutual administrative assistance in tax matters, combating corruption and terrorist financing, facilitating financial investigations, establishing transparent mechanisms in the field of tax information sharing and joint control over financial flows. In addition, tax legislation is being improved, the number of taxes, their rates and taxation schemes are being reduced. According to the criteria of estimation of the International Tax Competitiveness Index (ITCI) in Ukraine there is a rather comfortable tax climate with a low level of income tax (18%) and tax on dividends, interest and royalties (15%) [1], with Ukraine not included in any list of offshore jurisdictions.
In addition to the obvious progress of the Ukrainian tax reform, the question of finding mechanisms for implementing many necessary measures and initiatives in the field ofcountering black economy ofthe national economy and its off-shoring remains. The main problem is the lack oftransparency in the mechanisms of exchange of financial and tax information. Foreign companies, moreover, controlling authorities of other states, do not have full access to Ukrainian banking and tax information. Formal accession of Ukraine to the BEPS Plan has not yet ensured a definitive transition to international inquiry-based information exchange standards (EOIR) and has not facilitated the introduc-
tion of standards for automatic exchange of information between fiscal authorities (AEOI) [2].
Similar to the EOIR/AEOI rules (FATCA) [3] were ratified by Ukraine in October 2019. The relevant bilateral agreement provides for requirements for Ukrainian financial and fiscal authorities to control accounts opened by US taxpayers in Ukraine and for relevant information automatic exchange with US fiscal authorities. Here, the main difficulties are related to the requirements for tax authorities' software and its compatibility with international databases. The questions of quality and level of information protection as important components of overall financial security also remain open.
The security aspect of de-offshore policy is addressed in studies by various international groups and organizations. Thus, according to FATF, Ukraine belongs to the group of countries with a medium level of risk for money laundering and terrorist financing (Basel AML index), listed 37 out of 125 as of the beginning of 2019 (risk level - 60.1%) [4]. In this context, a related indicator is the degree of noncompliance with the FATF standards calculated by the Council of Europe Monitoring Service (MON-EYVAL). For Ukraine, this indicator is 59.6% and characterizes partial implementation of international rules [5]. At the same time, in the context of financial openness, Ukraine is considered to be a country with an average level of transparency of the financial, including tax, system: the FSI index in 2018 was 69.2% (43th out of 112 countries) [6]. The main problems of the procedure for disclosing bank secrecy and accessing information contained in the depository accounting system still remain.
The main measures of deoffshorization of the Ukrainian economy, their benefits and problematic aspects of the implementation process derived from the content analysis of the tax regulatory framework in Ukraine, international strategic and program documents, studies of national scholars and practitioners in the field of counteracting capital outflow and "erosion" of the tax base are presented in (Table 1).
Table 1.- Advantages and disadvantages of deoffshorization policy in Ukraine in the vectors of its implementation
Deoffshorization measures Advantages Disadvantages
1 2 3
Tax administration and optimization
Introduction of a simplified tax system (STS) for small businesses (as it is known currently - since 2011) Reducing the number of bureaucratic procedures by simplifying tax accounting for small businesses and sole entrepreneurs, facilitating the counter measures against their dark income Inability of STS to act as an effective tool for counter measures against business' dark income
Implementation of the electronic administration system (EAS) for VAT (2014) Preventing the formation of fictitious VAT The imperfection and lack of security of databases in VAT EAS
Transfer pricing in controlled transactions (setting a «fair» price and tax obligations)
Changes to the Tax Code of Ukraine regarding Transfer Pricing issues - TP (20132018) 1. Introduction of the TP institute 2. Economic effect of the growth of the state budget revenues through tax obligations adjustments Failure of the TP to control the activity of small and medium-sized enterprises, as well as small amount transactions
Introduction of the arm's length principle as the basic standard for TCU (Law of Ukraine No. 408-VI as of04.07.2013, Article 39 of the Tax Code) Ability to compare transactions between interdependent entities from the standpoint of tax benefits, benefits or disadvantages they create to prevent tax evasion 1. The ambiguity and complexity of the application of the arm's length principle (subjectivity of methods). 2. Low efficiency of the taxpayers audits regarding TP issues
Deoffshorization policy planning and designing
Signature of the Decree of the President of Ukraine No. 180 of April 26, 2016 "On measures to counteract the tax base erosion and profits shifting to abroad" 1. Approval of the concept and establishment of a special working group on the development of deoffshorisaton legislation. 2. Strengthening the regulatory environment, tax administration and financial security of the state 1. The declarative nature of some initiatives and their preservation only at the level of legal drafts 2. Non-systematic approach in the development of legal and practical measures for deoffshorization
Joining the BEPS Project (2017) Development of an Action Plan to avoid tax base "erosion" and tax avoidance Ukraine's unwillingness to work according to BEPS requirements (inconsistency of actions)
Ratification of the Multilateral Convention on the Implementation of Measures Concerning Taxation Agreements with a view to counteracting tax base erosion and tax avoidance (MLI) (2019) Implementation of the BEPS "minimum standard" (actions 6, 7, 14) - the introduction of a ban on the use of a tax treaty between states in order to evade taxation or to benefit from tax exemptions by the application of a Principal Purpose Test Difficulty in implementing the rules of the MLI Convention in the absence of appropriate regulations (provisions, instructions, rules) that will allow the implementation of MLI procedures
Exchange of information in the field of tax regulation
The conclusion by Ukraine of 77 treaties with other countries on the avoidance of double taxation of income and property (DDT) (since 1993) Inclusion in most treaties of the concept of "beneficial owner" whereby, when paying in favour of a non-resident, income originating in another country, it is permitted to apply a reduced / zero rate of tax in the Difficulties and situational character in identifying the actual beneficiary of income due to the lack of clear criteria for determining it
1 2 3
country of origin if the recipient is the beneficial (actual) owner of the income
The ratification by Ukraine of the Convention on Mutual Administrative Assistance in Tax Matters (EOIR standard), 2009. Provision of mutual administrative assistance by the member states (parties to the Convention) for the exchange of information (simultaneous tax audits, participation in tax audits abroad, etc.) and assistance in collecting taxes 1. Applicability of the Convention to the member states only 2. Absence from the tax authorities of real access to banking information (including beneficiaries)
Joining the OECD Global Transparency and Information Exchange Forum (2013) Introduction of international financial and tax information transparency standards Formality of compliance with international transparency standards
Ratification of the US Tax Compliance Agreement and the Implementation of the US Foreign Accounts Tax Law (FATCA) (2019) 1. Implementation of standards for the exchange of information on financial accounts, which are taken as the basis for the automatic exchange of information in accordance with international treaties. 2. Cancellation of bank secrecy 1. Partial implementation of the measure due to lack of relevant tax changes in the Ukrainian legislation. 2. Lack of required software
Source: developed by the author based on [7; 8; 9]
One of the reasons for the slow modernization of the tax system in Ukraine is mainly the declarative nature of measures and decisions in this area that are often not coherent and uncoordinated.
Declared actions under the BEPS Plan and other international standards (the FATCA Treaty, the MLI Convention on Measures to Improve Double Taxation Treaties [10], CRS, CFC rules, etc.) are predominantly formal in today's realities of Ukraine. In addition, the lack of measures to prevent the outflow of capital abroad and the failure of the state to receive tax revenues in full determines the reactive nature of deoffshorization policy in Ukraine, focused solely on eliminating negative phenomena and processes.
The low level of financial and tax information protection and security, its partial compliance with the criteria of completeness, quality and transparency in accordance with the requirements of EOIR/AEOI CRS standards developed by the OECD and approved by G 20 countries, significantly impede Ukraine's integration into the global information space. In fact, Ukraine's accession to the EOIR standard in 2009 is declarative because it is not provided with practical implementation mechanisms. At the same time, the
implementation of the AEOI requires the involvement of competent authorities in the Multilateral Agreement on the automatic exchange of financial accounting information and is scheduled for 2020.
Another drawback of anti-offshore policy in Ukraine is the low efficiency of the transfer pricing institute, which in developed countries is one of the most effective tools to counteract the transfer of assets to offshore jurisdictions. Positive changes in this regard occurred by introducing the amendments to the Tax Code ofUkraine (clause 39.2.1.7, Article 39), according to which, starring from 2018, the quantitative transfer pricing criteria (criteria for transactions between a non-resident and its permanent establishment in Ukraine are recognized as controlled) were updated. Thus, in particular, the requirement on the amount of annual income of enterprises was tripled (from 50 to 150 million UAH), and the requirement of the volume of business operations of a taxpayer with each counterparty - duplicated (from 5 to 10 million UAH) [11]. Such changes require only large enterprises to submit audits regarding transfer pricing rules, thus offloading small and medium-sized businesses. At the same time, despite
the considerable potential of the transfer pricing institute, the results of its implementation in Ukraine are extremely low. The inappropriate adjustment of tax liabilities on the basis of a "fair" price due to the possible incompetence of both taxpayers and fiscal authorities, as well as the subjectivity of such adjustments due to different valuation methods, conceal the risk of increasing the tax burden. A separate threat is the potential misuse of transfer pricing tax audits.
A number of system deficiencies (policy formality, inconsistency of actions between different authorities and agencies, corruption component, weak political will), which create the risk of non-implementation (partial implementation) of measures planned under BEPS, were identified in the area of planning and designing of the deoffshorization policy. Despite the developed "roadmap" of the project implementation, the main problem is delaying the process of updating the tax legislation in force and harmonizing it with international requirements. In addition, due to the lack of relevant regulations in Ukraine, there is a likelihood of problems with the implementation of the Multilateral Convention on the Implementation of Measures Concerning Tax Treaties (MLC) provisions to counteract the tax base erosion and profit shifting (MLI) (actions 6, 7, 14 of the BEPS Plan).
An important trend in global anti-offshore policy is the elimination of barriers and the establishment of cooperation between countries in the exchange of financial and tax information. Ukraine formally supports such initiatives (EOIR, FATCA), however, due to insufficient data quality and the lack of security,
high level of confidentiality of banking information (in particular, regarding beneficiaries of income of economic entities) and, most importantly, lack of necessary software, there is a serious risk of delay in Ukraine's accession to the Multilateral Competent Authorities Agreement on Common Reporting Standard (MCAA CRS) and the final implementation of international EOIR/AEOI standards. Such risks entail the threat of distrust in the Ukrainian fiscal authorities and the financial and tax system as a whole by other states and international structures.
In general, the more regulated the processes of the dark monetary flows to the offshores are, the more complex the schemes of avoiding such regulation become. At the same time, the success of reforming the tax system and the introduction of effective practical tools for deoffshorization of the economy are the flagships of a state's international image and the basis for the formation of the so-called "national economic patriotism". In order to achieve such ambitious goals in the face of external pressure and internal instability, Ukraine must first and foremost work to strengthen its own economy, increase its investment attractiveness, achieve financial protection and security.
As a result, it is obvious that Ukraine should not focus on rigorous deoffshorization methods, but on "soft" (often indirect) measures related to enhancing property protection, information security, liberalizing currency regulation, reducing the impact of a corruption factor, while minimizing the risks that accompany these processes.
References:
1. International Tax Competitiveness Index 2018 / Tax Foundation, Washington, USA, 2018. - 47 p. [Electronic resource] // URL: https://files/ITCI_2018.pdf (accessed date: 05.01.2020).
2. OECD (2013). Action Plan on Base Erosion and Profit Shifting, OECD Publishing. [Electronic resource] // URL: http://dx.doi.org/10.1787/9789264202719-en (accessed date: 05.01.2020).
3. FATCA (Foreign Account Tax Compliance Act) - tax rules, as fixed by the federal US law "On tax requirements regarding the foreign accounts" as of 2010. [Electronic resource] // URL: https://www. govinfo.gov/content/pkg/PLAW- 111publ147/pdf/PLAW- 111publ147.pdf#page=27 (accessed date: 05.01.2020).
4. Basel AML Index. A country ranking and review of money laundering and terrorist financing risks around the world: 8th edition / Basel Institute on Governance; International Centre for Asset Recovery, 2019. - 4 p. [Electronic resource] // URL: https://www.baselgovernance.org/sites/default/files/2019-10/ Basel%20AML%20Index%208%20edition.pdf (accessed date: 05.01.2020).
5. Anti-money laundering and counter-terrorist financing measures: Ukraine / MONEYVAL, Council of Europe, 2019. [Electronic resource] // URL: http://www.fatf-gafi.org/media/fatf/documents/reports/ fur/Moneyval-Follow-Up-Report-Ukraine.pdf (accessed date: 05.01.2020).
6. Financial Secrecy Index (FSI) / Tax Justice Network, UK. [Electronic resource] // URL: https://www. financialsecrecyindex.com/PDF/Ukraine.pdf (accessed date: 05.01.2020).
7. Dubrovsky V. Comparative analysis of the fiscal effect of the application of tax evasion/avoidance instruments in Ukraine / V. Dubrovskyi, V. Cherkashyn.- K.: NGO "Institute for Socio-Economic Transformation", 2017. [Electronic resource] // URL: https://rpr.org.ua/wp-content/uploads/2018/02/ Instrumenty-uhylyannya-vid-splaty-podatkiv-2017-1.pdf (accessed date: 26.12.2019).
8. Kruhmalyov S. "The principle "at arm's length" - the basic standard for control over transfer pricing / Sergiy Kruhmalyov, Evgen Kurilov // Bulletin. Official issue of the State Fiscal Service of Ukraine. 2013.-№ 41(41).- [Electronic resource] // URL: http://www.visnuk.com.ua/ua/pubs/id/6153 (accessed date: 26.12.2019)
9. Epifanova N. Deoffshorization - the Ukrainian projection / Natalia Epifanova // Protocol: legal Internet resource.2017.- Oct 2.-[Electronic resource] // URL: https://protocol.ua/ua/deofshorizatsiya_ ukrainska_proektsiya/(accessed date: 05.01.2020)
10. Multilateral convention on the implementation of measures concerning tax treaties to combat the tax base erosion and profit shifting (MLI). The Convention was ratified by Ukraine in 2019. [Electronic resource] // URL: https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf (accessed date: 05.01.2020).
11. Tax Code of Ukraine as of 02.12.2010 p. № 2755-VI (with changes as of 07.12.2017 № 2245-VIII) [Electronic resource] // URL: https://zakon.rada.gov.ua/laws/show/2755-17 (accessed date: 05.01.2020).
