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200% Fine for Abuse of Tax Incentives

15 Mar 2010

Effective 1 January 2010 a new 200% fine for abuse of tax incentives applies in accordance with amendments to the Law of Ukraine "On Settlement of Tax Liabilities".

Persons affected: "Taxpayers (or company's officers) who use tax incentives contrary to purpose of the incentive and/or the conditions or objectives for granting such incentive as set forth under respective tax law, or other persons who use tax incentives which they are not entitled to';

Fine computation: 200% of the tax liability which would otherwise be due if the incentive was not applied by taxpayer;

The fine applies in addition to other fines which may be due in accordance with Articles 17.1.1-17.1.6 of the Law "On Settlement of Tax Liabilities" (e.g. 200% fine could be compound with fines of up to 50% for late filing of tax returns or tax understatement).

Depending on type of tax incentive (incentives related to imports or other incentives) the fine could be applied by customs authorities or tax authorities, respectively.

The new provision of the Law can hardly be called an example of perfect legislative draftsmanship. The wording is unclear and vague, with a potential for confusion and disputes with controlling authorities.

One major defect is lack of statutory definition for a "tax incentive". Some tax incentives are clearly listed in tax law. For example, transactions exempt from VAT which are indicated in Article 5 of VAT Law. Another example of tax incentive is import duty exemption for imports of property to be contributed by a foreign investor to the capital of Ukrainian company provided that such property is not resold within the next three years.

However, controlling authorities may interpret that any statutory rule providing for a possibility to reduce taxpayer's tax liability could be considered a "tax incentive". Such broad approach is currently the basis for the List of Tax Incentives published by the State Tax Administration of Ukraine. The List is used for statistical purposes and includes approximately 300 "tax incentives".

In addition, even for clearly listed incentives scope of eligible persons and conditions for application of the incentive often is uncertain.

Another flaw of the law is confusion regarding the persons who could be penalised. For a corporate taxpayer it is unclear whether the fine could be imposed on the company, its officers, both, or any of them.

The State Tax Administration of Ukraine and the State Customs Service of Ukraine shall amend respective regulations regarding application of the new fine.

Taxand's Take

The imperfect text of the law brings up the risk in relation to fines imposed as a result of tax or customs audits. Tax and customs authorities may be tempted for aggressive enforcement, i.e. they may try to apply 200% fine in the largest variety of situations and to as many persons as possible.

Your Taxand contact for further queries is:
Oleksandr, Maydanyk
T. +380 44 492-82-82

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