Tax Audits Resumed: Who Should Be Worried?
On August 01, 2023, Law of Ukraine # 3219-IX came into effect. As a result, several amendments were made to the Tax Code of Ukraine regarding schedules and unscheduled tax inspections. In this article, we will explain who should start preparing for a visit from the tax office, and what changes companies should be aware of.
An important change is that the moratorium on unscheduled inspections has been partially lifted. From now on, there shall be more legal grounds for conducting such audits.
Starting from August 2023 until the termination / cancellation of martial law in Ukraine, unscheduled inspections can be conducted either at the request of the taxpayer or based on the grounds defined in the Tax Code of Ukraine (TCU), i.e:
- If the authorities received any information about income tax violations committed by representative offices;
- Failure to submit reports related to transfer pricing in a timely manner;
- If the circumstances were not investigated during the initial audit, and their objective examination is impossible without conducting another inspection;
- If a legal entity is reorganized, or if an individual entrepreneur stops self-employment and closes their business.
- VAT reimbursement from state budget/negative VAT amounts exceeding 100,000 UAH;
- If a complaint has been filed against the buyer for failure to provide VAT invoices or excise tax invoices;
- If the conclusions of a prior inspection conducted by a lower-level supervisory body need to be checked by a higher-level tax authority;
- Regarding the "Arm's Length Principle" transactions, or regarding participation in an international group of companies;
- Upon receiving information on tax law violations from international authorities;
- If a non-resident conducts business activities through a permanent establishment without registration for tax purposes;
- If there is information about violations of foreign exchange laws (on compliance with deadlines for importing goods and/or export earnings in foreign currency);
- If a taxpayer is engaged in the production and/or sale of excisable products, organizing and conducting gambling activities in Ukraine (gambling business), or if they provide financial and payment services.
Who Can Relax?
Although tax inspections have been resumed, the tax authorities may not conduct audits of:
- Payers of the Single Tax, groups 1 and 2: until August 1, 2024).
- Legal entities and private entrepreneurs (FOP) whose objects related to taxation are officially located in temporarily occupied territories, combat zones, or potential combat zones: until the end of occupation, cessation of hostilities, or change of location.
Scheduled Inspections: Any Changes?
The temporary rules for conducting scheduled inspections can be found in the new paragraph 69.35 of subsection 10 of Section XX of the Tax Code of Ukraine. The taxpayers who may be included in the audit schedule are:
- Companies engaged in the production and/or sale of excisable products;
- Companies engaged in the organization and conduct of gambling activities in Ukraine (gambling business);
- Companies providing financial and payment services;
- Other taxpayers who, based on indicators of 2021, have one of the following risks:
- The level of Corporate Income Tax payment is 50+ percent lower than the level of tax payment in the respective industry;
- The level of Value-Added Tax payment is 50+ percent lower than the level of tax payment in the respective industry;
- The ratio of accounts receivable vs. accounts payable is 2:1 and higher;
- The total amount of expenses reported in the Tax Declaration on Assets and Income is 75 percent or more of the total annual income indicated in the declaration, provided that the total annual income received from entrepreneurial activities amounts to 10 million UAH or more;
- The tax agent (legal entity) is accruing and/or paying wages lower than the average wages in the respective industry in the corresponding region.
It is important to check the inspection plan on a monthly basis to make sure you learn about the inspection at your company beforehand. Please note that the inspection plan for 2024 will be based on the 'positive dynamics' data from the 9-month period of 2023. This alone should stimulate companies to make sure their financial reports are accurate, the wages are high enough / paid in a transparent manner, and the corporate income requirements are met. Remember that the tax authorities will analyze whether your have paid more or less corporate income tax than your competitors.
For other taxpayers, the moratorium is still in effect.
If an inspection cannot be avoided, make sure you are ready for it. Our experts will be happy to help you analyze your company's transactions, correct the mistakes, and tackle the shortcomings. We will also post an article on how to prepare for tax inspections soon.