From "presumption of malice" to "tax" trust

Business Ombudsman Roman Vashchuk presented the results of an investigation on his own initiative into the phenomenon of tax audits.

The event was joined by representatives of leading business associations, including the American Chamber of Commerce, the European Business Association, the Ukrainian League of Industrialists and Entrepreneurs, the Chamber of Commerce and Industry, the Union of Ukrainian Entrepreneurs and the Federation of Employers of Ukraine.

Based on the statistics of entrepreneurs' appeals against tax audit results over the past seven years, as well as statistics and reports of the State Tax Service, the Business Ombudsman Council team investigated both the impact of tax audits on the business environment and the results for the state in terms of budget revenues. Thus, the Council found that 99+% of tax revenues are provided by voluntary tax payments, while the share of revenues from additional charges determined as a result of audits has not reached 1% over the past 6 years. Nevertheless, thephrase "tax audit" terrifies entrepreneurs.

According to BOC observations, business and professional community perceive tax audits as a fiscal and punitive instrument of the state, which further undermines trust between taxpayers and the state. According to the BOC's research, the level of trust in the central office of the State Tax Service is 19%, while the level of trust in regional tax authorities is 13%.

"The generation of tens of thousands of extremely formalistic and often insufficiently substantiated tax audit conclusions every year, many of which do not stand up after years in courts, creates administrative, law enforcement, legal and judicial fuss that does not significantly increase tax revenues in Ukraine. This approach creates unnecessary burdens for Ukrainian businesses to defend themselves in administrative and judicial proceedings, taking time away from managers and working capital from enterprises that could be better used to achieve wartime and post-war recovery goals. And, even worse, it continues to undermine the trust between taxpayers and tax authorities, which the National Strategy seeks to restore," said Business Ombudsman Roman Vashchuk.

Kateryna Hlazkova, Executive Director of the Union of Ukrainian Entrepreneurs: "We at the SUP also feel the concerns of business in relations with the State Tax Service of Ukraine. That is why we support the previous recommendations of the Business Ombudsman Council on the implementation of the "Consult First" principle, which provides for consulting and assistance to business first, and only then inspection and punishment, the introduction of transparent and public KPIs for the tax service, and the need to increase business confidence in the STS."

"Doing business in Ukraine is expensive. However, 99% of companies pay taxes on time and honestly, despite the war. And at the same time, they are increasingly suffering from the growing fiscal pressure. Businesses, including members of the Ukrainian Chamber of Commerce and Industry community, believe it is unfair that due to the tiny percentage of violators, all entrepreneurs are subject to the "presumption of malice." One of the reasons for such a discount is the lack of permanent leadership of the State Tax Service, both at the central and regional levels. We continue to work together to change the tax approach to business and build tax trust between the state and business ," said Gennadiy Chyzhykov, President of the Ukrainian Chamber of Commerce and Industry.

Yulia Drogovoz, Vice President for Tax Policy at the Ukrainian League of Industrialists and Entrepreneurs ,added: "The biggest problem remains the non-transparency of the tax authorities' decision-making on the results of audits, the lack of performance indicators of control and inspection work, which allows the State Tax Service to manipulate relevant statistics, misleading all users of this information with inflated rates of additional tax charges and penalties. It is necessary to change the philosophy of relations between taxpayers and the STS, turning the tax service into an advisory rather than a punitive body. To do this, it is necessary to fundamentally change the principles of their work and the principles of building their relations with taxpayers, transferring such relations to a different conceptual basis - the principles of freedom, humanism, human rights, etc."

"Predictable, fair, equal and transparent tax policy remains a priority for business over the years. In addition, the business community has identified ensuring the continuity of companies' operations during martial law as one of the important areas of work for 2024. To this end, we monitor and address business issues, including tax audits, to the relevant stakeholders. We are grateful to the team of the Business Ombudsman Council for conducting the research and highlighting the practical aspects of tax audits that are important for transparent business ,"said Oksana Shvets, Head of Taxation and Customs Policy at the American Chamber of Commerce in Ukraine .

"The official statistics of the State Tax Service of Ukraine shows that in 2023, the majority of court decisions were made in favor of taxpayers. The court costs of the State Tax Service of Ukraine in 2023 amounted to UAH 143,738,500. These statistics indicate that undue pressure is being exerted on bona fide taxpayers, which ultimately harms the development of Ukraine's economy. The business community believes it would be advisable to introduce administrative and disciplinary liability of tax officials for creating undue pressure on companies. Perhaps then tax officers, both ordinary and senior, will take into account the consequences of their actions ,"said Natalia Artemchuk, Manager of the EBA Tax and Customs Committee.

The Federation of Employers of Ukraine also supported the BOC's position on tax audits. According to Dmytro Oliynyk, Head of the Federation of Employers of Ukraine: "The published results of the Business Ombudsman's investigation into tax audits fully coincide with the Federation of Employers of Ukraine's assessment of business problems related to the control and inspection work of tax authorities. In particular, we are certainly concerned about the wave of unjustified additional charges by the tax authorities, which leads to an extraordinary overload of courts and forces business entities to divert time and resources to disputes over additional charges. Thesituation when the tax authorities inflate the indicators of additional charges only create problems for both taxpayers and the state (at least because of the need to finance the activities of the courts and the tax authorities themselves aimed at considering meaningless and senseless disputes) is not normal and needs to be corrected."

Taking into account theresults of discussions and consultations with industry experts, business and stakeholders, the Council outlined a number of ideas that could positively affect the efficiency of tax audits and help build partnerships between business and the state. The key to this is to establish a strategic indicator of the level of voluntary reconciliation of additional tax liabilities through a set of measures taken by the state.

Download the report with the results of our own investigation here.