Hetmantsev explains how the approach to tax audits will change

Danylo Hetmantsev, MP from the Servant of the People party, Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, Ekonomichna Pravda.

How will the approach to tax audits change by 2030?

Thosewho have been following the changes in the State Tax Service over the past two years understand that the main goal of reforming tax control is to implement it in such a way as to maintain and strengthen trust in the tax authorities and the entire tax system.

Trust is the key that opens the way to increasing the level of voluntary compliance by taxpayers.

Much has been said about trust between the taxpayer and the state, but its restoration is a painstaking work, a difficult path that includes such integral elements as

a) the state, represented by the tax authorities, prefers massive proactive preventive and explanatory measures to selective administrative influence. The tax authorities provide an opportunity for a bona fide taxpayer to understand where his risks should be improved;

b) the state makes every effort to ensure a reasonable, qualitative, risk-based and systematic approach to the selection of taxpayers for the application of the most severe and expensive tax enforcement measure - audits.

An effective tool for introducing these elements into the tax authorities' activities is the implementation of the compliance risk management (CRM) program, which has been successfully operating in Australia, Canada, the UK, and the US, and whose recommendations for use have been developed by the OECD and IMF. It is truly revolutionary in terms of the ideology of the relationship between the payer and the state.

And yes, it is complicated. First of all, it is complicated in terms of analytical component, because the system is aimed at detecting risks in the activities of taxpayers that require additional tax control remotely based on external signs of their activities and, accordingly, exempting all others from such control.

The system is constantly learning, developing and improving and forms the basis of interaction between the taxpayer and the state. It acts objectively and impartially and eliminates any human influence on the determination of a taxpayer's riskiness.

Since 2022 (with the exception of the first terrible months of the war), the team of the government's financial unit has been intensively implementing the Ukrainian CRM.

The work was carried out jointly with international experts and IMF experts to develop a new approach that meets the best international practices in the interaction of the tax authority with taxpayers, gave a chance to change approaches to the management of the tax authority, and the result of the work was materialized in the Resolution of the Cabinet of Ministers of Ukraine No. 854 "On the Implementation of a Pilot Project on the Functioning of the Tax Risk Management System (Compliance Risk Management) in the State Tax Service" dated 25.07.2024.

The Resolution lays down the foundations for the implementation and functioning of the tax risk management system (compliance risks) in the State Tax Service, which will be improved in accordance with the tasks set out in the National Revenue Strategy until 2030 (4.2.2(a) Tax Risk Management (Compliance Risks)).

Today, this is another powerful step in changing the way taxpayers perceive the work of the tax authority, aimed at increasing the level of trust and voluntary compliance with tax legislation by taxpayers.

The international standard ISO 31000:2018 "Risk Management. Principles and Guidelines", which is in line with the OECD recommendations.

The strategic goal of the tax risk management system and the activities of the tax authority is to increase the level of taxpayer compliance with tax legislation, or in other words, voluntary compliance.

The overall level of tax compliance is assessed in a combination of voluntary compliance by taxpayers with tax legislation (voluntary compliance) and the results of actions taken by the tax authority to minimize such non-compliance or counteract anti-compliance.

Tax risk management is a structured, repeatable, continuously cyclical process that includes a set of measures for:

1) detection (identification) of tax risk, its analysis, assessment and minimization, or, more simply, determination of what the tax authority should do to reduce the risk (this is a set of measures provided for by the TCU from various types of service to debt collection)

2) monitoring and review of such risks is an ongoing process aimed at keeping the system up-to-date - for example, if a tax risk does not materialize, it should be changed or canceled;

3) compliance assessment - checking whether the identified risks have been realized, whether the result has been achieved, determining the reasons for failure to achieve it - in fact, this is control over the quality of work of tax authorities, including territorial ones, with tax risks or the basis for monitoring and reviewing risks.

The system establishes new rules for the interaction between the tax authority and the taxpayer - solely on the basis of identified tax risks (compliance risks) of low, medium and high degree.

Depending on the degree of tax risks identified, the tax authority determines the ways of responding to the taxpayer, from sending notices and letters, training taxpayers, explanatory work, informing the taxpayer about tax risks to all types of tax audits and taking measures to collect tax debt.

Taxpayers are graded by risk level in a centralized manner and in accordance with a defined methodology.

It is clear that the most painful issue for a taxpayer is when he or she comes to the attention of the tax authority and is waiting for a documentary audit.

Therefore, it is the introduction of the tax risk management approach in the activities of the tax authority in 2024-2030 that guarantees the taxpayer that, in the absence of tax risks that have a significant impact on the budget, the tax authority will not come to the taxpayer for an audit.

It is clear that taxpayers have not yet felt the changes and it will take time to roll out the system. At the same time, we can already say with certainty that the process of revolutionary changes in the format of relations between taxpayers and tax authorities from the usual "cops and robbers" format to the "cooperative compliance" format, which is modern for European civilization, has become inevitable. And this is a real reform of modernization of tax relations in Ukraine.