UBC Initiatives

Objective:Creating favourable legal and economic conditions for business entities through tax mechanisms to ensure sustainable economic development of Ukraine.

Issues of the Ukrainian tax system:

1. A large number of tax privileges, exemptions from taxation of certain components of the taxable object and preferential regimes that significantly distort the tax ‘landscape’ and distort competition.

2. High level of tax burden, in particular on the wages fund due to excessive and non-optimal redistribution of gross domestic product through public finance.

3. Lack of comprehensive reform of the State Fiscal System and Customs Service (including their high level of corruption according to survey data), refusal to liquidate the Tax Police which has been working beyond the law for over a year implementing a punitive policy, power and administrative pressure on the business, a large number of employees with uncompetitive salaries.

4. Significant gaps in the current tax legislation enabling large business to use a number of tax evasion schemes by means of ‘off-shore techniques’.

5. Burdensome administration – violation of the stability principle, lack of timely methodological, advisory and technical support leading to:

• mistakes, and further on to penalties;
• controversial (sometimes confusing) legislative norms;
• avenue for a discretionary (selective) approach to the application of legislation for different taxpayers;
• indirect legislative norms resulting in a great number of taxation issues regulated by by-laws.

6. The structure of taxes is not in compliance with the national peculiarities and objectives of the economic development, in particular direct taxes and quasi-taxes (labour taxation) play a too important role for a country with systemic corruption, while real estate and land taxes (including capital taxes) are not significant. The established procedure for paying certain taxes often leads to overpayments, the need for preliminary (advance) payment or freezing of part of the company’s working capital.

Structure and tasks of the Development Tax Code

General provisions

• a legally established number of regulatory bodies;
• introduction of mandatory procedure for public discussion of legislative initiatives (zero reading procedure).

Taxes administration

• introducing a single payment for taxes and levies payment, and other mandatory payments (except for VAT and excise);
• expanding the range of electronic services for taxpayers and introducing new electronic services (electronic register of receipts, digital cash registers, electronic excise stamps);
• ensuring the openness of the State Fiscal Service of Ukraine by publishing the aggregated summary information on the activities of the service and taxpayers;
• implementation of new and improved approaches to administration facilitating the de-offshorisation process (OECD/G20 BEPS Project tools), in particular, taxation of controlled foreign companies, etc.

Value added tax

• implementation of a new concept of online control over the movement of risky categories of goods (tax invoice concept), (single electronic document);
• downward revision of VAT benefits granted to certain categories of taxpayers (including revision of the list of transactions exempt from VAT);
• improvement of the mechanism for applying the ‘cash method’ of VAT payment.

Income tax

• replacement of corporate income tax with capital withdrawal tax, which provides for the deferral of tax payment at the time of dividends or similar payments.

Land and immovable property tax

• modification of the existing land and immovable property tax to decrease its discretionary nature and ensure compliance with the concept of justice, in particular:
  • reduction of marginal rates;
  • reduction of immovable property and land tax exemptions, and cancellation of land tax exemptions regardless of social groups within a few years;
  • revision of land tax rates for commercial agricultural lands (to make land tax rates approximately equal to rates of the 4th group of the single tax system).

IIT, single tax, SSST

• reduction of tax burden on the wages fund, cancellation of military tax: in the first year of the reform – from 41.5% to 32%, second year – to 25%, starting from the third year to set the single rate – 20%, with compensation by reducing inefficient budget expenditure. Unification of IIT and SSST reporting;
• implementation of new forms of individual-entrepreneur taxation (patents) enabling to simplify registration, accounting, taxation, reporting and winding-up of business activity for individuals;
• introducing effective methods to combat fraud in the sale of goods, extending the scope of cash registers to risky categories (large retail areas, luxury and premium goods);
• encourage voluntary use of cash registers and receipt of fiscal receipts with verification of their registration – the Cashback for Buyers Project;
• retain the simplified taxation system;
• in order to reduce abuse on the 3rd form of the simplified taxation system to gradually increase the tax rate for the third group of the single tax (reducing the SSST+IIT) to the optimal rate;
• introduce a mechanism for paying individual income tax from immovable property rent, including land plots (shares), to local budgets at the location of such immovable property;
• cancellation of the discriminatory collection of SSST for ‘sleeping’ Individual-Entrepreneurs and double payment of SSST for part-time workers;
• encourage employees and higher educational institutions for cooperation in creating educational working places for students/trainees in the process of developing forms of dual education – cancelation of SSST for student/trainee jobs provided for by training/internship programmes and limited by the ratio to the number of jobs.

Transitional provisions of the Development Tax Code shall provide for:

• fundamental reforming of the State Fiscal Service, its rearrangement into an efficient, high-quality and transparent service that will be able to create a favourable business environment, introduce systemic changes and services to support and protect the business, and ensure trust of public and the business community in its work;
• creating transparent, complex and efficient legislation allowing the customs office to facilitate the international trade while ensuring the security of the state, its people and protection of financial interests of the state;
• creating a unified data centre that consolidates all state resources and databases of the regulatory (to determine the amount of taxes) authorities under the administration of the Ministry of Finance of Ukraine;
• final liquidation of the tax police and creation of a separate public authority of the Service for Financial Investigations (Finance Police) within the Cabinet of Ministers of Ukraine with a chairperson and employees selected under the procedures similar to the selection of the National Anti-Corruption Bureau of Ukraine employees with significant increase in salaries and eliminating duplication of functions;
• introducing personal liability of civil servants to taxpayers for damages caused by abuse or inactivity;
• drafting by the Government and adoption of legislative amendments to modify the property tax (concept is available here), in particular:
  • to combine the land tax and the immovable property tax based on the assessed value of land, including development;
  • to create an automated system to define the assessed value of land plots and immovable property;
  • to define quality criteria for the databases to be used;
  • to set the mechanism for revaluation of land plots and immovable property at the payer’s choice;
  • to set mechanisms for introducing all valuation results to the unified base of the State Property Fund of Ukraine to prevent underestimation;
  • to set mechanism for finding real owners (beneficiaries) of each land plot and, as a consequence, immovable property located on such plots;
  • to develop a method for inclusion of the residential property tax in the IIT;
  • to harmonise the residential property tax with the non-residential property tax;
  • to define a possible transitional period for assessment of taxable objects during which the calculation methods of estimated cost should secure the necessary amount of data for valuation;
• • conducting extensive audit of budget expenditure by the government and its decrease by 3-5% of GDP (in particular, by verifying social benefits/pensions (‘deadheads’, ‘pseudo-displaced people’, etc.) and decrease of inefficient budget expenditure) and taking into account its results in the State Budget 2020. The following actions shall be taken:
  • transition to medium-term budget planning, improvement of the development process of the General Directions of budgetary policy for the respective years, considering international trends;
  • reforming the budgeting process, in particular improving the result-oriented budgeting method;
  • implementing the fiscal policy aimed at considerable reduction in the share of public spending in GDP to the European average;
  • reviewing the budget expenditure items to optimise the structure and amount of state budget expenditure;
• introducing an optimal model of tax amnesty (based upon draft laws No. 8257 and No. 8258) along with adopting a single system document (Development Tax Code);
• improving the control processes over the transfer pricing;
• launching a Pilot Project on the Procedure for property taxation (land and immovable property) based on their market value in a couple of regions of Ukraine;
• imposing moratorium on amending the Tax Code of Ukraine for three years regarding tax and levy rates increase;
• analysing the possibility to implement the graduated (progressive) VAT rate (10% between the VAT payers, and 20% between a taxpayer and tax non-payer);
• reforming the Social Insurance Funds, cutting down on their functions and expenses.

Since adoption of the Customs Code of Ukraine in March 2012, the need for its modernisation and improvement has been repeatedly discussed, but no comprehensive solution has been achieved.

At present, complexity and excessive bureaucratisation of processes, exposure to corruption of customs control and registration procedures, lack of balance between security function and services provided to taxpayers (simplified customs procedures in particular), technological underdevelopment of the customs infrastructure, lack of progress in customs IT system update are the key issues in the customs procedures. Insufficient actions in automation of customs procedures, human factor mitigation, prevention of unauthorised interference, inability to apply the best international practices, and underfunding restrict the implementation of simplified procedures for trade and compliance with the legislation, and have negative impact on the possibility to carry out a lawful business.

By ratifying the EU-Ukraine Association Agreement, Ukraine has got a tool and a roadmap for implementing systemic reforms. Reform of the State Customs Service and integration into the EU customs community are among the top priorities.

As for changes to the legislation, there is a need to revise the processes having impact on the customs procedures. In particular, regarding unification of decision making, automation of customs formalities, implementation of the simplified declaration procedure, making decisions on goods release to a customs regime under the simplified customs procedures. Also, it is necessary to ensure a business entity with a simple and a one-time basis procedure for submitting information to the customs authority online and its use by all engaged in the supply chain.

It is noteworthy that evolution of the Customs Codes in Ukraine had a tendency to more detailed customs relations at the Code level. Despite a relatively recent adoption of a revised Customs Code of Ukraine in 2012 (hereinafter the CCU), it lags starkly behind the international customs standards, advanced technologies and practices. At the same time, while the international trade is changing rapidly, and the international customs standards are being constantly improved, the excessive detailing of the most customs issues at the Code level in no way contributes to the reforming and prompt adapting.

This is the biggest failure of the current CCU. As evidenced in practice for the last 5 years, its amending is a complicated and long-term process which in Ukraine is mostly of a political nature. At the same time, it should be noted that most issues regulated at the Code level are not political ones, but rather of a technological and procedural nature.

For example, the Ukrainian Classification of Goods of the Foreign Economic Activity (UCG FEA) is based on the International Harmonized Commodity Description and Coding System, and is approved by the Law of Ukraine On Customs Tariff. Bringing of a basically technical issue to the legislative level results in Ukraine constantly lagging behind in terms of updating the commodity nomenclature by 2-3 years. While the whole world has long been using the Harmonised System of the 2017 version, Ukraine is ‘stuck’ with the 2012 version. To compare, in Georgia, this issue is regulated by the Minister of Finance, which approves the commodity nomenclature by its order.

Therefore, adoption of the new Customs Code (hereinafter the NCC) is aimed not only at upgrading the ‘customs constitution’ of Ukraine in compliance with the up-to-date international customs standards and considering the customs obligations of Ukraine under the EU-Ukraine Association Agreement, but also simplifying and making more rational the customs legislation, cancelling the excessive detailing at the legislative level regarding technological and procedural issues which should not depend on the political will of the Government.

First of all, the NCC shall ensure the regulation of basic institutions, principles and approaches aimed at full digitalisation of customs processes, transition to non-paper electronic customs environment, introducing the customs simplification system, developing relations between the customs authorities and the business owners based on the principles of trust and cooperation.

More flexible legal regulation at the legislative level should promptly respond to information and technological and procedural changes in the customs sector and expand opportunities for their quick implementation in the context of extensive transition to e-communication and implementation of integrated system of customs simplifications for reliable and honest enterprises.

At present, the international trade has become a truly global, and demand for more efficient and secure supply chains is constantly growing. Therefore, on the one hand the customs office has to encourage honest economic operators in the international trade, and enhance security and protection of the national economic interests on the other hand.

This is the NCC which has to regulate the basic challenges and tasks in the customs sector at the legislative level: trade simplification and promotion, cost reduction for the business owners, modernisation of customs processes, and ensure electronic communication between the parties concerned. The NCC should set standards for the up-to-date system of relations between the customs office and the business.

In terms of needs and advantages for the lawful business environment, the key principles of the NCC shall become: simplification, service and rapidity. All customs solutions should be reasonable and as smooth as possible, focused on reduction of administrative cost and repeated actions for the honest business, efficient due to automation and working by electronic non-paper means.

NCC should include provisions (including transitional provisions) providing clear and gradual adoption of IT solutions for all customs processes. Transitional provisions should assign specific deadlines for adoption of any given IT solutions, online service, etc. Thereby, the paper-based procedures shall be only applied until information technologies are adopted and/or in case of IT system failure.

Considering the above mentioned approach stating that procedural issues of customs regulation should be brought to the legislative level (Resolutions of the Cabinet of Ministers, Orders of the Ministry of Finance of Ukraine and the State Customs Service), the following conditional structure of the NCC is suggested:

1. General provisions and notions.
2. Structure and organisation of the customs authorities operation.
3. Information on customs related issues.
4. Transportation and pass of goods through the customs border.
5. Customs formalities on different types of transportation.
6. International postal and express shipment.
7. Organisation and implementation of customs control.
8. Declaring of goods. Customs clearance.
9. Customs regimes (procedures).
10. Authorised economic operator.
11. Customs solutions. Preliminary solutions.
12. Customs value.
13. Classification of goods.
14. Country of origin.
15. Customs fees. Customs fees exemption.
16. Customs debt.
17. Guarantees.
18. Passage and taxation of goods transported by individuals.
19. Intellectual property protection.
20. Liability for customs rules violation.
21. Liability of customs officials.

Overview of the key institutions and divisions of the NCC is offered below.

Declaring of goods. Customs clearance.

The goods declaring procedures should be updated and fine-tuned, in particular, considering that customs declarations are submitted only online. It is also necessary to introduce a brief import and simplified declaration, as well as to ensure submission of customs declarations in the form of a record in the declarant’s accounting system.

The basic elements of the customs clearance system subject to regulation by the NCC should be an automated customs clearance system, as well as to disassociate the place of filing in the customs declaration from the place of physical location of goods, in other words to launch a centralised customs clearance procedure.

Preliminary customs declaration

To expand the scope of application of the preliminary customs declaration (hereinafter the PD), in particular by defining the following cases of its application:

1. Import of goods to the customs territory of Ukraine under the PD and ensure their delivery to the designated revenues and duties body, or
2. Release of goods according to the announced customs regime under the PD after pass through the customs border of Ukraine and without submission to the customs office which issued such PD; or
3. Release of goods according to the announced customs regime under the PD after pass through the customs border of Ukraine, delivery to the customs office which issued such PD and PD submission to such customs office; or
4. Release of goods according to the announced customs regime under the PD after importing them to the customs territory of Ukraine through the entry point at the customs border of Ukraine within the service area of customs office which issued such PD, and submission to the customs office at such entry point at the customs border of Ukraine or a relevant check point.

Customs formalities under the PD, except for customs clearance completion or those which can be completed only upon goods submission at the customs office, is completed prior to goods importing to the customs territory of Ukraine using automated customs clearance system.

Decision on goods release according to the announced customs regime under the PD is made by the customs office which issued such PD based of the risk analysis results within four business hours at most of: goods pass through the customs border of Ukraine (as provided for by clause 2); goods submission at the customs office which issued the PD (as provided for by clauses 3 and 4).

Advantages: defining the cases when a preliminary declaration is used not only as a document to control the goods delivery, but also as a valid customs declaration, which is used to release goods into the announced customs regime. This will reduce time spending and financial costs for the business owners on the movement and customs clearance of goods.

Brief entry declaration

It is offered to submit a brief entry declaration for goods brought to the customs territory of Ukraine.

Prior to goods importing to the customs territory of Ukraine, the brief entry declaration is submitted to the customs office governing the entry point through the state border of Ukraine where the goods are planned to cross the customs border for the first time.

In cases provided for by the Cabinet of Ministers of Ukraine, the brief entry declaration can be submitted to a customs office other than specified above.

For this purpose, the brief entry declaration is submitted to the customs office by a transportation carrier, or another person acting on behalf of such carrier.

The brief entry declaration is submitted as an electronic notification certified by electronic digital signature, or via interface for such declaration submission available on the official website of the State Customs Service.

In cases provided for by the Cabinet of Ministers of Ukraine, commercial port or transportation information system can be used for submission of the brief entry declaration provided that such systems ensure submission of brief entry declaration to customs office.

Brief entry declaration is registered by an automated customs clearance system upon its obtaining. A registration number will automatically be assigned to the brief entry declaration and sent to a person who submitted such declaration via automated customs clearance system.

Sample of the brief entry declaration and list of information to be indicated depending on type and means of transportation through the customs border of Ukraine are worked out in compliance with the EU customs legislation and approved by the Cabinet of Ministers of Ukraine.

Upon written request, information indicated in the brief entry declaration can be changed, except for the following cases:

1. If the customs office has informed on its intention to carry out customs formalities related to the physical inspection of goods;
2. Customs office has determined the inaccuracy of information indicated in the brief entry declaration;
3. Goods have already been submitted to the customs office.

Based on the brief entry declaration risk analysis is performed mostly to ensure national safety, life and health of people, animals, plants, environment, and customers’ interests, as well as customs formalities defined by the results of such analysis are carried out upon goods arrival to the first entry point of the state border of Ukraine.

If the need to carry out the customs formalities is defined based on the risk analysis, the customs office should immediately inform of such customs formalities, but nor before the goods arrival to the first entry point of the state border of Ukraine.

If goods defined in the brief entry declaration are not brought to the customs territory of Ukraine within 200 days from the date of its registration, such declaration should be automatically declared invalid by the automated customs clearance system.

Lack of the brief entry declaration to such goods during at the time of carrying out the customs formalities at the entry point of the state border of Ukraine is the ground to refuse the entry of goods through the customs border of Ukraine.

Depending on types and means of transportation of goods through the customs border of Ukraine, the brief entry declaration should be submitted within the following terms:

1. In case of sea and river transportation of goods:
   • in case of transportation of goods in containers – no later than 24 hours before the container loading onto the vessel;
   • in case of transportation of goods without using containers (in bulk, liquid, etc.) – no later than four hours before goods arrival to the first entry point on the customs territory of Ukraine;
2. In case of air transportation of goods:
   • for transportation lasting four hours and over – no later than four hours before goods arrival to the first entry point on the customs territory of Ukraine;
   • for transportation lasting below four hours – no later the aircraft dispatch time.
3. In case of railway transportation of goods – no later than two hours before goods arrival to the first entry point on the customs territory of Ukraine;
4. In case of transportation of goods by road – no later than one hour before goods arrival to the first entry point on the customs territory of Ukraine.

Advantages: brief entry declaration is a reliable and efficient mechanism for obtaining information about goods by a customs office before its arrival allowing to conduct risk analysis of a certain transaction to ensure customs safety as a high priority. Clear scheduling for brief entry declaration submission and automated processing will help to avoid delays at checkpoint.

Simplified customs declaration

The simplified customs declaration contains less scope of information comparing to the customs declaration filled in under the normal procedure which is sufficient for goods identification.

Only an invoice or other document verifying the goods value is submitted along with the simplified customs declaration.

Issue of the customs declaration by a customs office shall mean release of goods to the declared customs regime.

Customs formalities in the course of the simplified declaration procedure are carried out by means of automated customs clearance system.

Release of goods under the simplified declaration procedure is subject to provision of a general financial guarantee to the customs office.

An enterprise shall provide the customs office which has released the goods with an additional declaration (additional declarations) on such goods and pay customs and other fees subject to payment under the customs regime within five business days from the date of the goods release under the simplified declaration procedure.

Advantages: simplification of declaration procedure, less number of documents for submission for customs clearance, and, in fact, 5-day delay in customs fee payment.

Record in the declarant’s accounting system

Upon enterprise request, customs bodied can provide permission to submit customs declaration, including a simplified declaration, as a record in the declarant’s accounting system.

Such information is provided to the customs bodies via declarant’s electronic system when submitting the customs declaration as a record in the declarant’s accounting system.

The customs declaration is deemed to be accepted when information about goods is recorded in such system.

Upon enterprise’s application, customs office can release the goods without their submission; in this case goods are deemed to be released when information about the goods is recorded in the accounting system. Such simplification procedure can be applied under the following circumstances: declarant is an AEO; customs office is aware of the type of goods delivery; the regulatory customs office has access to all information it requires to exercise its right to goods review, if necessary; when information about goods is introduced to the accounting system they are no longer subject to ban or restriction. Although, the regulatory customs office can request submission of goods.

Advantages: record in the declarant’s accounting system allows enterprises to release goods to the declared regime by submitting simplified information via making record in the electronic system of commercial data without having to submit the complete customs declaration.

Automated customs clearance system

It is suggested that an automated customs clearance system is used to carry out customs formalities in the course of customs clearance, which performs automatically the following:

1. Receives the customs declarations and registers them.
2. Defines the scope of customs formalities required for the customs declaration submission depending on the type of customs declaration, customs regime, peculiarities, types and means of transportation, and considering the risk analysis results.
3. Defines if a customs official is required to carry out customs formalities under the customs declaration.
4. Appoints a customs official to carry out customs formalities under the customs declaration.
5. Provides a declarant with information on the progress of customs declaration processing, the list of customs formalities defined as mandatory for such declaration, and customs official appointed for (if appointed).

If automated customs clearance system requires no need to involve a customs official to carry out customs formalities regarding goods, such customs formalities will be carried out by the automated customs clearance system automatically.

It is also suggested to introduce the principle of ‘implied consent’ in case no formalities have been carried out within a certain time which prevents from dragging with decision-making process.

Advantages:

Bringing to minimum the ‘human factor’ impact on the customs control process and clearance by introducing an automatic release of goods to the customs regime (using customs IT system and involving no customs officials) and other modules of automated decision-making on carrying out the customs formalities regarding non-risky declarations and economic operators based on the automated risk management system;

introducing automatic completion of customs clearance and release of goods (for example, in cases when no significant risks were defined by the results of the declaration automated analysis) will significantly reduce time expenditure and financial cost of customs administration.

automated IT solutions will make it possible to redirect the unengaged customs personnel to the post clearance control and customs audit and/or dismiss employees who will be replaced by automated IT solutions, for higher pay to other employees;

anti-corruption mechanism and minimisation of judgement calls at the same time shifting responsibility from a customs office to a declarant.

Centralised customs clearance

Simplification which provides for separation of the place of filling in the customs declaration (one customs body) and place of goods submission (another customs body).

For example, the customs declaration is submitted to Kyiv City Customs Office, and the goods are within the jurisdiction area of Volyn Customs Office where the goods should be submitted to the customs office (if necessary).

Goods are released to the free circulation by the control results of two customs offices which share information between them.

An enterprise should have a certificate of automated economic operator entitling to simplified customs procedures to enjoy such simplification.

Advantages: introducing the customs clearance technology based on the principle of ‘remote declaration’ makes it possible to perform the clearance of goods at the location of the enterprise regardless of the actual place of submission of goods to the customs. Less physical contact between declarant and customs office, bringing communication between the business owners and customs office to electronic form of communication enabling to minimise the corruption risks.

Reducing participation of law enforcement bodies in the process of customs control and clearance.

In order to prevent pressure on the lawful business by law enforcement and regulatory bodies, it is suggested in the NCC:

to limit grounds and conditions for the law enforcement bodies to take part in the process of customs control and clearance, including regarding types of customs control initiative (inspection, revision, sampling);

to establish personal financial liability of law enforcement officials in case of failure to detect violations of customs legislation, and liability to reimburse for expenses caused by goods unloading, unpacking, weighting and defining other significant characteristics of goods subject to customs control, repeated sampling of such goods, etc. carried out at their initiative;

clear and transparent recording of all communication in the ‘customs office – declarant – law enforcement body’ triangle to ensure transparency and prevent abuse of any kind.

Advantages: preventing pressure on the honest business and dragging with the customs control and clearance, combating corruption and introducing liability for unlawful actions of officials of law enforcement and regulatory bodies.

Documents reviewing after goods release (post clearance control).

Documents reviewing after goods release (post clearance control) will reduce the number of documents submitted for the customs clearance.

Such control is based on the results of risk management system application and can be requested during the customs clearance or within 30 calendar days from the date of goods release.

Customs office carries out the post clearance control in order to establish documents which are mentioned in the customs declarations, and their authenticity, as well as compliance and completeness of information specified in the customs declaration, relevant customs declarations and information mentioned in such customs declarations.

Only documents not submitted to the customs office in the course of customs clearance of goods is subject to post clearance control. Post clearance control is carried out only by the customs office which performed the customs clearance of goods.

Customs office sends a declarant a notification in writing or online with the list of documents to be submitted for the post clearance control and terms of their submission.

Declarant is obliged to submit documents specified in the notification within ten business days from the date of such notification.

Results of post clearance control of an enterprise are taken into account by the risk management system applied by customs offices, and in the course of planning and carrying out the document inspections.

Advantages: less number of documents submitted for the customs clearance and shifting the focus of document control to the post-clearance stage.

Customs regimes (procedures)

It is suggested to leave the current structure of customs regimes unchanged – 14 customs regime:

1. Import (release to free circulation);
2. Reimport;
3. Export (ultimate export);
4. Reexport;
5. Transit;
6. Temporary import
7. Temporary export;
8. Customs warehouse;
9. Free customs zone;
10. Tax free trade;
11. Processing on customs territory;
12. Processing outside customs territory;
13. Destruction or demolition;
14. Abandoning in favour of the state.

The NCC should contain only general key provisions and peculiarities regarding the customs regimes. At the same time, conditions for entering goods to a customs regime and certain provisions for application should be brought at the legislative level. Besides, certain customs regimes require updating in terms of provision of greater benefits and opportunities to the business.

It is also suggested to update the ‘temporary storage’ option which point is that all goods are in temporary storage after import to Ukraine and submission to the customs office until their entering to a customs regime or reexport.

Temporary storage

Temporary storage declaration should be submitted on the goods to the customs office. The following documents and information can be accepted by the customs office as the temporary storage declaration:

reference to the brief entry declaration on certain goods accompanied by information from the temporary storage declaration;

cargo manifest or other shipment documents provided that it contains information from the temporary storage declaration, including reference to the brief entry declaration on certain goods;

customs declaration submitted prior to submission of goods to the customs office.

Customs office may allow submitting the temporary storage declaration via commercial, port or transport information systems provided that they contain all required information for such declaration and such information is accessible to the customs bodies.

Goods for temporary storage should be stored in premises for temporary storage, or in other places defined or allowed by the customs office.

Permission from the customs bodies to operate premises for temporary storage is required for temporary storage, except if the customs body owns such premises.

Maximum period of temporary storage is up to 90 days.

Goods under temporary storage are allowed to be transported without starting the internal transit procedure.

Advantages: upon actual movement of the goods to the customs territory of Ukraine, an enterprise has 90 days to enter goods to a relevant customs regime and pay required customs fees (for example, in case of import). Goods will be transported between different facilities for transported storage without transit declaration which facilitates logistics.

Export

1. Export without a contract on the date of customs clearance: To provide an opportunity to export goods based on the temporary customs declaration in cases when a foreign economic agreement (contract) wasn’t executed on the day of customs clearance. In this case, an obligation to submit an additional customs declaration no later the first business day after expiration of the settlement period under such export transaction stipulated by the legislation is provided.
2. Automated export release (without entering the customs terminal) for exporting manufacturers in the first turn with clear scheduling for the customs clearance: 30 minutes after registration of export customs declaration; application of the ‘implied consent’ principle, cancellation of any types of mandatory government control, introducing a declarative principle regarding compliance with the non-tariff regulation measures and imposing responsibility for going through the control on an enterprise.
3. Introducing such simplifications for the export transactions as ‘centralised customs clearance’ and ‘record in declarant’s accounting system’. Advantages: simplifications for exporters, to expand opportunities for goods export sales.

Customs warehouse

It is suggested to update the services within this customs regime by expanding opportunities for the business, for example the list of measures to be taken on the warehouses, opportunity to store goods released to free circulation, and use the customs warehouse in the goods processing, etc.

The basic changes offered:

Authorisation (gaining a permit) is required only for warehouse premises meant for storage of goods. Authorisation is not required for entering the goods into customs warehouse regime.

Submission of the standard or simplified customs declaration is required for customs warehouse regime.

The guarantee is provided by the permit holder (warehouse holder) in the course of authorisation. The guarantee is not required from a declarant during entering the goods into a customs regime.

In case of violation of obligations, a declarant is declared a debtor. If they do not pay the debt, the guarantee provided by the permit holder (warehouse holder) should cover the payment.

Limits for the goods duration of stay within the customs warehouse regime are cancelled. Only under exceptional circumstances the customs bodies may set the storage term, in particular if in case of long-term storage, a type and description of goods can pose a threat to human health and environment.

Besides, it is suggested to place the Ukrainian goods which are in a free circulation to the customs warehouse due to economic necessity and lack of negative impact on the customs control regime.

It is also offered to introduce a wider range of transactions in goods allowed to do at the customs warehouse, for example: dressing, filtering; preservation by pasteurisation and sterilisation; irradiation or adding preservatives; dehydration and rehydration of fruit; fruit peeling, fruit pitting; desalination, demineralisation; dissolution or concentration of liquids; denaturation, etc.

To introduce a 4-type customs warehouses European system instead of 2-type system (outside and indoor) currently applied.

Outside storages: 1) type I public storage: liability is distributed between a permit holder (storage of goods under the customs control) and a declarant (storage of goods under the customs control and fulfilment of obligations arising under the customs storage regime); 2) type II public storage: a declarant bears full responsibility; 3) type III public storage: a storage is under control of the customs office; a declarant bears full responsibility.

Indoor storage: 4) private storage: permit holder and declarant is the same person.

It will be a big advantage for the business owners to enshrine provisions in the NCC which allow processing the goods or performing the ‘end use’ procedure at the customs premises, and making it possible to perform transactions with equivalent goods.

Advantages: significant expansion of services of the customs storage regime, in particular conducting transactions in goods, alignment with the goods processing regime ensuring continuousness of storage of goods for processing and the processing itself offering new advantages both for customs storages holders and enterprises carrying out manufacturing and other types of activity. Launch of the general guarantee provided to a warehouse holder ensuring the customs fees payment in case of unauthorised transactions in goods and failure to ensure the goods storage procedure.

Common transit regime

It is a type of customs transit regime which is being introduced for the purpose of Ukraine’s accession to the EU/EFTA common transit procedure.

Various types of customs declarations complying with the types of customs declaration adopted by the Convention of 20 May 1987 on a Common Transit Procedure are used to declare the goods to the common transit regime.

The electronic transit system is used to ensure performance of all customs formalities and electronic data exchange when applying the common transit regime.

The electronic transit system is an electronic system used for electronic data exchange under the common transit regime with electronic notifications structured in compliance with the standards applied for data exchange between computer systems in computer-based transit system which is used by the contracting parties to the Convention of 20 May 1987 on a Common Transit Procedure.

It is suggested to provide for the general provisions in terms of the common transit procedure and application of the EU/EFTA common transit procedure in the NCC. Instead, it is offered to enshrine the detailed regulatory procedure in a separate special Law of Ukraine aimed at implementing the provisions of the Convention of 20 May 1987 on a Common Transit Procedure and Convention of 20 May 1987 on the Simplification of Formalities in Trade in Goods in compliance with the obligations of Ukraine stipulated by the EU-Ukraine Association Agreement.

The Law provides for the basic principles of organisation and implementation of the common transit regime of goods through the territory of Ukraine, procedure and terms and conditions of transportation of such goods by enterprises through the customs territory of Ukraine under the common transit regime, carrying out of customs formalities, application of mechanism for customs debt guarantee, application of special transit simplifications, and other peculiarities of transactions under the common transit regime.

Advantages:

Easy-to-understand and predictable rules of the goods transit for the business owners, which are simplified by special IT solutions: use of the European Electronic Transit System (NCTS) and other advance technologies for the goods delivery control enabling, for example, cargo transportation between Lisbon and Kyiv based on a single T-1 customs declaration;

greater control over goods transportation, preventing ‘interrupted’ transit and goods substitution by introducing mandatory sealing, and ensuring the customs fees payment, etc.;

introducing the special transit simplification system: general financial guarantee; self-sealing with a special types of seals; authorised consignor; authorised consignee;

customs information exchange on the date of the customs clearance of goods and its application to expand opportunities of the risk analysis system: transactions analysis in terms of risk prior to arrival of goods to Ukraine, reasonable definition of types of customs control;

saving time and cost for the goods transportation, higher level of safety and communication between the members in the delivery chain.

Authorised economic operator

It is suggested to define the basic and key provisions of the institution of the authorised economic operator (hereinafter the AEO).

The AEO status is granted to a resident enterprise which is registered with the customs bodies and holds an AEO certificate.

The following types of AEO certificate can be issues to an enterprise:

• for simplification of customs procedures;
• on safety and reliability.

Any enterprise exercising any role in the international chain of goods supply can obtain the AEO certificate: manufacturer, exporter, importer, customs representative, carrier, forwarding agent, customs storage holder, etc.

The following criteria are applied to the AEO status:

1. Compliance with the Ukrainian legislation, including in customs affairs.
2. Satisfactory system of maintaining commercial and shipping records.
3. Solvency.
4. Providing performance standards of competence and professional qualification.
5. Compliance with the safety and reliability standards.

Compliance and adherence conditions are stipulated for each criterion.

AEO certificate is termless and issued by the State Customs Service.

In certain cases, AEO certificate can be terminated or cancelled.

Information about AEO certificate is available on the official website.

Types of certificates, applications, forms, summaries, notifications, procedure for compliance assessment, self-evaluation, monitoring, applications processing and granting AEO status, type of brief entry declaration, etc. are approved by the Cabinet of Ministers of Ukraine and Ministry of Finance. Whilst the recommendations are approved by the State Customs Service.

Upon getting the AEO status, an enterprise should follow the abovementioned criteria the compliance of which is monitored by the customs office.

AEO who was granted a certificate for simplification of customs procedures has the right to get permit for the following special simplifications:

• general financial guarantee;
• self-sealing with a special types of seals;
• simplified declaration procedure;
• release procedure at the place of location.

AEO who was granted a safety and reliability certificate enjoys the following benefits:

• submission of the brief entry declaration with the less scope of information;
• notification from the customs office stating that certain goods were selected for customs inspection at the checkpoint based on the risk analysis results under the brief entry declaration prior to transportation of goods through the customs border of Ukraine.
• AEO who was granted a certificate for simplification of customs procedures and/or a safety and reliability certificate enjoys the following benefits:
  • to carry out customs formalities in the priority order;
  • reduction of the risk score by the customs clearance automated system to define the list of customs formalities during the customs clearance of goods;
  • to use a special traffic lane, if available, in the entry point for transportation of goods.

Under the principle of mutuality of international treaties of Ukraine, non-residents who comply with the requirement of the country of their registration which are equal to the requirements for granting AEO status according to the Customs Code of Ukraine can enjoy special simplifications and benefits.

Advantages of AEO status:

AEO concept implies implementation of customs simplifications for authorised persons who underwent the reliability and safety assessment;

advantages of the AEO program for the business owners, first of all, simplified declaration procedure, customs clearance at the place of location (without entering the customs terminal), advance notice on physical inspection of goods, self-sealing, reduction of the risk score by the customs clearance automated system, use of a special traffic lane in the entry point;

AEO enjoys focus shifting from physical control during the customs clearance to post clearance control which is defined by the risk management system;

opportunities for gaining privileges from the international mutual recognition of the AEO status;

AEO will significantly reduce time expenditure and financial cost of customs administration for the business owners; improving the marketing status of a company in case of obtaining the AEO status.

Customs solutions. Preliminary solutions.

Despite some success in implementing the so-called ‘electronic customs’, many customs processes are carried out in a paper form; therefore, it is necessary to implement the following in the NCC:

regarding submission of all applications to the customs office and obtaining all kinds of customs documents (for example, goods processing permit, permit for transactions in goods, and other actions within the customs controlled area, etc.) in electronic form;

possibility for a declarant to make changes to the customs declarations via the electronic declaration mechanism (but not by means of filling in a correction sheet by the customs office as they do now), etc.;

obtaining decisions and extracts from such decisions (both from the customs office and the central administrative office) via handy online services (for example, reconciliation of customs fees; previous decisions on classification; registration of intellectual property with the customs register, and other).

It is also suggested to launch the unified IT system for making decisions regarding customs clearance: issue of permits to carry out certain types of activity, making preliminary decisions, registration of intellectual property with the customs register, granting relevant statuses, etc.

All processes and notifications regarding making any given decisions should be made and recorded in electronic system using software systems. Along with that, the decisions taken should be made public (except for confidential information) and updated on a daily basis.

A two-phase procedure for decision-making is suggested: 1) formal examination of the application for making decision; 2) examination of the application in fact.

It is suggested to set unified terms:

3 days for formal examination of the application;

30 calendar days for making actual decision, and

if necessary, to extend the processing period for 15 days to request additional information and/or documents.

The right to appeal

The customs offices should enjoy broad powers to ensure control with the purpose of reaching balance between customs office’s tasks to ensure compliance with the customs legislation on the one hand, and the right of the business owners to unified clear and transparent rules, procedures and relations with the customs office on the other hand, and the business owners should have the right to appeal.

Therefore, in addition to the ‘standard’ right to appeal any decision made by the customs bodies, it is necessary to provide each person with the right to be heard in a strictly specified terms before making any decision having negative impact on such person.

Preliminary decisions

An important institution in the system of making decisions by the customs bodies.

Thus, prior to the customs control and customs clearance of goods, an enterprise has the right to receive a preliminary decision from the customs office, having binding effect.

Preliminary decisions can be made on the following issues:

• classification of goods according to UCG FEA;
• identifying the country of origin of goods;
• defining the customs value;
• granting permission for entering goods to a certain customs regime.

Preliminary decisions are provided by the customs bodies for 3 years (regarding classification and country of origin) or for a certain transaction (regarding the customs values, in particular, the assessment method or its components); are valid throughout the customs territory regardless of the body which made the decision; is binding for any customs office and enterprise which received such preliminary decision; is public, etc.

Competence centres (units with the most qualified and experienced officials in terms of identifying the goods code, country of origin and customs value) are established to make preliminary decisions which consider and make preliminary decisions using advance software solutions.

Applications are submitted in paper or electronic forms. Term for making a decision is 30 days (with the 15-day extension opportunity).

If necessary, the customs office sends goods samples for lab analysis, for example, to identify or verify the goods components on which the goods code is assigned (for example, textile, fuel and lubricants, food products, etc.).

If the preliminary decision was revoked or declared invalid (except for if the decision was revoked due to provision of inaccurate or incomplete information by applicant), an enterprise which received such decision has the right to request the ‘extended use’ period of such decision from the customs office. That is, continue using such preliminary decision within a certain time (up to six months) despite becoming invalid.

Thus, the ‘extended use’ period prevents situations when the business becomes a ‘victim’ of unexpected changes, for example, in terms of approaches used for classification of goods or other products, and is kind of a tool ensuring stability and certainty of doing business. At the same time, the ‘extended use’ period can be provided only under certain circumstances and in certain cases, and for a certain amount of goods.

Advantages:

For example, implementation of the European Binding Tariff Information System (BTI). It will ensure the legal certainty of accuracy of application of the goods classification code by enterprise which defines the duty rate and amount of tax liability for customs fees payment amongst other things, and will make it possible to avoid unreasonable inspections regarding classification of goods and charging additional customs fees;

introducing the procedure for providing preliminary decisions regarding customs value, particularly the customs valuation method or its parts, verification documents, etc., will ensure predictability and certainty of doing business, allow prior calculation of the amount of customs fees which are priced in the cost of imported goods, and avoid unexpected expenses and delays in the customs clearance.

implementing the procedure for providing preliminary decisions will minimise disputes between the customs and the business owners.

Customs value

Along with implementing the preliminary decisions regarding customs value, first of all the customs valuation method or its parts, it is suggested:

1. to implement the procedure for deferred customs valuation of goods. Enterprises have the right to use the deferral (up to 15 months) of exact customs valuation of goods if on the date of customs clearance the numbers of the customs values of goods are not known for practical purposes. For example, when on the date of the customs clearance there are no exact data on the amounts of licence and other similar fees for the intellectual property use. It also refers to cases when during customs clearance the exact amount of income from further sale or use of imported goods which directly or indirectly belong to the seller is not known. Simplification also includes the goods which price depends on market quotation and is not known on the date of customs clearance. The point of such simplification is that enterprise has to define a preliminary customs value on the date of customs clearance based on the prediction data, and then within, for example, 15 months define an exact customs value and make changes to the customs declaration. In this case, if the exact customs value is higher than the preliminary, customs fees should be paid additionally without any penalty.
2. to cancel the customs value declaration and move its basic elements (data) to the electronic customs declaration.
3. to increase the value threshold (customs value data) to EUR 20,000 (it is EUR 5,000 now) when submitting the customs value declaration.
4. to allow defining separate compounds of customs value (for example, commission fees) based on certain criteria if they are impossible to calculate on the date of filling in the customs declaration.

Advantages:

deferral of exact customs valuation allows declarants define the customs value of goods based on the agreement value and do not switch to other ‘evaluation methods’ which result in additional financial expenses for verification;

simplified customs value declaration.

Customs debt

It is suggested to launch a customs debt which is a new concept in the Ukrainian customs legislation.

Customs debt can arise:

1. in case of compliance with the customs legislation, specifically when importing goods subject to taxation and customs fee when entering goods to a customs regime (goods import or temporary import with partial exemption),
2. in case of non-compliance with the customs legislation (failure to fulfil conditions for entering goods to a customs regime; breach of requirements for transportation of goods which are under the customs control).

In the first case, the customs debt arises on the acceptance date of the customs declaration, while in the second case – when it is detected that liability resulting in the customs debt is not fulfilled or ceased to be fulfilled.

The following does not result in the customs debt:

1. failure to declare goods which are transported through the customs border of Ukraine, i.e. failure to provide in prescribed order accurate and valid information about the goods subject to mandatory declaring in case of their transportation through the customs border of Ukraine
2. storage, transportation, purchase and use of goods, transportation through the customs border of Ukraine beyond the customs control and without customs formalities;
3. submission of forged documents or illegally obtained documents or documents containing false information on name of goods and their weight (taking into account acceptable loss under the proper storage conditions and transportation), number, country of origin, consignor, consignee, number of packages, their labelling and numbers, false information required to define the goods code according to the UCG FEA, and their customs value to the customs body as a ground for goods transportation;
4. transportation or actions aimed at transportation of goods through the customs border of Ukraine beyond the customs control, i.e. out of location place of the customs body or beyond its working hours, and without customs formalities, or with illegal deprivation from the customs control due to abuse of authority by customs body officials.

In case of the abovementioned violations, the faulty persons will be hold accountable in the manner prescribed by law.

Guarantee

Large-scale implementation of guarantee system in the course of goods transportation, application of appropriate customs regimes and procedures, obtaining permits, etc. is one of the most important innovations of the NCC.

Financial guarantee as a type of guarantee is applied for the existing or potential debt.

The customs debt security is provided by means of:

1. financial guarantee provided by a guarantor;
2. deposit of funds to the account of the customs office (security payment);
3. the other type of guarantee ensuring payment of customs debt.

If provision of guarantee is mandatory, the customs bodies define the amount of such guarantee as equal exact amount of customs charges (customs debt) provided that such amount can be defined on the date the guarantee is required. If it is impossible to define the exact amount, the guarantee should be defined by the customs bodies as the maximum amount of customs charges (customs debt) subject to payment or may be payable.

Acceptance of financial guarantees, their registration, accounting, cancellation, revocation and release, reserve accounting and release of basic amount of general financial guarantee is made using the electronic system of guarantee management.

There are the following types of financial guarantee to ensure the customs debt payment: 1) individual guarantee which covers all amount of customs charges for goods subject to customs clearance under one customs declaration; 2) general financial guarantee which covers all amount of customs charges for goods subject to customs clearance under several customs declarations.

Individual guarantee can be provided as a security payment or financial grantor’s document. General financial guarantee is provided as a financial guarantor’s document.

If a guarantor is a loan, financial or insurance company certified according to the law, the authorisation (granting permit) from the customs bodies is not required.

Customs offices control and monitor the use of financial guarantee via the electronic system of guarantee management.

It is suggested to enable the use of unified guarantee which can be general and cover a certain number of transactions for all procedures and formalities. The general declaration falls within the simplification procedure and can be provided upon the customs office permit.

General financial guarantee is a financial guarantor’s obligation to pay upon request of the customs body the defined basic amount of such financial guarantee in case of failure to fulfil obligations to pay the customs debt under such guarantee.

Upon enterprise’s application, the customs office can grant a permit for special simplification:

general financial guarantee,

general financial guarantee with reduced amount of basic security payment by 50 per cent,

general financial guarantee with reduced amount of basic security payment by 70 per cent,

release of guarantee.

Reduction of basic security payment amount of the general financial guarantee by 50 or 70 per cent shall mean the use of a certain basic amount of the general financial guarantee, but with 50 or 30 per cent security payment accordingly, for such basic amount depending on its amount.

Along with that, it is suggested to grant the customs office the right to apply a temporary prohibition to use the general guarantee in case of increased risk of violation by an enterprise.

International postal and express shipment

Considering the global trends and specific features of international shipment administration, the NCC suggests:

1. To enhance control over transportation of international postal and express shipment from the border checkpoint to the consolidating station or an international postal exchange point by introducing: electronic document to control the delivery; mandatory delivery guarantee; vehicle sealing;
2. To adopt the following additional criteria (conditions) for obtaining express carrier and postal operator status: provide the customs office with prior information about parcels (name, number, goods value, consignee’s data, etc.);
   automation of parcel data accumulation process (registers, identification, online access to information), process shifting exclusively to electronic form.
3. To formalise basic provisions implementing the exclusive use of electronic registers for international postal and express shipment, identification of consignees, simplification of declaration procedures and customs charges, including by using web-services and granting status of tax agents to express carrier and postal operators.
4. To provide the gradual reduction of non-taxable limit from EUR 100 within 2019-2021 and introduce VAT on all postal and express shipment regardless of their value starting from 2022.
5. Creation of software solution at the central level and its application for parcel administration and relevant information accumulation, as well as for automated accruals and payment of customs charges, etc. Advantages: comprehensive and clear regulation of provisions in the NCC regarding control over parcel transportation, electronic administration will help to efficiently prevent the postal smuggling which destroys the lawful business and distorts competition, as well as decrease in budget revenues due to growing manipulation of goods price, parcels breaking off, invoice substitution, reduction of goods customs value, etc.

Passage and taxation of goods transported by individuals

It is suggested in the NCC:

to implement the Directive 2007/74/EC as of December 20, 2007 on tax exemption of goods imported by individuals within EUR 430 (air and maritime entry points) and UER 300 (other entry points);

to retain provisions providing that if an individual was absent in Ukraine less than 24 hours or enters Ukraine more than once within 72 hours, the tax-free minimum should make up EUR 50;

to define the basic provisions on organization or peculiarities of information exchange between data bases of the State Border Guard Service and the State Customs Service regarding control over passenger flow to ensure efficient enforcement of the abovementioned provisions.

Advantages: restrictions on the periodic import of goods by individuals by introducing benefits and greater control will allow reduction in the ‘grey import’ schemes which involve transportation of batches of goods by individuals within a tax-free amount by batches breaking off, and are used by the shadow business to avoid taxes and gaining non-competitive advantages.

Intellectual property protection

The following is suggested in the NCC regarding fighting against infringing goods and other goods suspected of infringement of intellectual property rights:

1. To expand the list of cases of application of measures related to suspension of customs clearance of goods suspected of infringement of intellectual property rights, including at the initiative of the customs body. The actual import of goods at an entry point of the customs border (even without the preliminary customs declaration) is sufficient to take measures to protect intellectual property rights in case of suspected infringement.
2. To expand the list of intellectual property rights to be protected during the transportation of goods through the customs border of Ukraine.
3. To bring the terminology in line with the EU legislation, in particular, regarding definition of the terms ‘infringing goods’, ‘counterfeited goods’, ‘goods suspected of infringing intellectual property rights’.
4. To introduce a specific simplified procedure for destruction of small batches of goods suspected of infringing intellectual property rights and sent through the customs border as international postal and express shipment.
5. To introduce the possibility of early release of goods suspended for customs clearance on suspicion of infringement of intellectual property rights.

Advantages: The offered changes will help in combating the import of infringing goods and other goods suspected of infringing intellectual property rights. The introduction of simplified procedures for the destruction of infringing goods, including small batches of goods sent as international postal and express shipment, will create an efficient mechanism for the pre-trial protection of intellectual property rights.

Information on customs related issues

Transparency in the customs office activity, information accessibility and its relevance are among the basic principles suggested to set forth in the NCC.

Determining and control over accuracy of determining the customs value is one of the demonstrative examples of non-transparency of the customs office work and subjectivity in decision-making process.

The basic cause of this issues is actually manual regulation of the level of goods customs value despite the legislative requirements, including General Agreement on Tariffs and Trade (GATT/WTO).

Such situation has resulted in that there are companies in Ukraine which for a certain fee and using their unlawful connections with customs office provide services in minimising customs charges subject to payment on imported goods. At the same time, information on customs clearance at reduced rates remains unavailable even for entire customs unites and is not in the price data base for the customs evaluation purposes.

This problem can be solved by ensuring public control and monitoring the goods customs clearance which requires from the revenue and duty authorities to ensure making the non-personally identifiable information about goods customs clearance public.

Therefore, in the NCC it is suggested to provide for the obligations of the State Customs Office to ensure public disclosure of information about the goods customs clearance, including information about the customs value of goods transported through the customs border of Ukraine on a regular basis without mentioning any business entities.

In terms of customs information sharing it is suggested to formalise the provisions in the NCC which:

entitle an enterprise to apply for and get an opinion electronically using online services;

on standard questions, with answers to them contained in the information and reference resource of the State Customs Service; response should be provided within 10 days;

ensure provision of clear and easy-to-understand explanations of the customs legislation with mandatory reference to consider specific situation of an enterprise;

intend to create and operate an online classified catalogue (taxation, non-tariff provisions, rules of origin, customs value, classification) of goods according to UCG FEA (similar to goods reference in brokerage programmes and the EU information resource Trade Helpdesk);

ensure information relevance, its periodic update, user interface convenience, as well as systematic and simple presentation of such information.

Advantages:

ensuring public control and monitoring the goods customs clearance in order to prevent full customs taxation avoidance by dishonest entities carrying out foreign economic activity;

ensuring transparency of customs clearance procedure, in particular, goods customs evaluation should create efficient motivation for proper performance of their duties and prevention of import tax avoidance;

availability and convenience in using the relevant customs information which raises the legal culture and compliance with the legislative requirements.

 

Liability for violation of customs regulations

It is suggested to introduce two types of liability for customs offences:

1. Financial liability (fines).
2. Administrative liability (fines and confiscation).

Financial liability should result from the following:

• unlawful transactions with goods;
• violation of duty-free stores operation;
• violation of procedure for goods processing;
• failure to declare goods, etc.

An enterprise is an offender and is liable to a fine.

With regard to administrative liability, in order to define a fair sanction for violation of customs regulation it is suggested to define the following as criterion:

• concealing the transportation of goods from customs control (storage, forged documents, or documents containing knowingly false information);
• transportation of goods beyond the customs control (out of place, time or unlawful release);
• transportation of banned or infringing goods;

Such violations result in mandatory confiscation.

All other violations are subject to fine. The mentioned should simplify the procedure for case consideration since fines will be imposed by the customs office exclusively.

It is offered to decrease the amount of fines to the amounts facilitating their voluntary payment (for example, 30% of the offending object value).

It is possible to impose alternative sanctions (fine or confiscation) for certain offences related to personal vehicles (violating the liability for reverse export or transit).

Violation of the ‘green corridor’ rules may result in fine or confiscation. However, a compromise decision may be taken – 30% fine of the goods/currency value before confiscation payable on the site (currency is allowed in a certain amount set out by the National Bank of Ukraine). Fine is imposed by the Manager of the shift.

It will facilitate prompt settlement of cases and prevent from conflicts due to passenger delays.

In case of violation of customs controlled area rules, etc., a fine may be imposed by customs official on the site right after discovery of such offence.

Change of significant data by customs office having impact on the full taxation after procedures for classification control, customs value, country of origin, etc. were applied (in case bo concealing was discovered) will not result in financial liability.

It is offered to define the following notions and institutions in the NCC: financial liability; enterprise as a financially liable party; customs fraud; compromise; fine imposition on the offence site; clear criteria for sanctions differentiation; reduction of fine amount.

Advantages: the abovementioned will contribute to failure-free process of customs clearance and collection of charges; encourage voluntary payment of fines; prevention of further offences;
elimination of discretionary powers and corruption factors.

Liability of customs officials

Liability of customs officer for illegal decisions/actions (actions or inactivity) and reimbursement for damage caused by such decision/actions.

However, to prevent unclear interpretation and dilution of responsibility, it is necessary to formalise the customs procedures and draw up and approve job description for customs officials with clear rights, obligations and grounds for bringing to liability.

Causing financial damage to foreign economic business entities by:

• implementing additional types of control not defined by the results of automated system of risk analysis if they did not result in discovery of customs rules violation or change in significant indicators having impact on the full payment of taxes after applying the procedures for classification control, customs values, country of origin, etc.;
• unreasonable dragging with time for checking procedures;
• making decisions on significant indicator having impact on the full payment of taxes after applying the procedures for classification control, customs values, country of origin, etc., within the terms provided for by the laws but using such terms with inefficiently.

For making unreasonable decisions and/or illegal actions or inactivity, a customs official shall bear:

• financial liability (charging scheme and deprivation of benefits and bonuses to the salary, reduction in qualification allowance);
• disciplinary liability (disciplinary penalties: admonish, dismissal, etc.);
• material liability (reimbursement for damage caused to foreign economic business entities and their business activity).

As an option for prompt and efficient reimbursement for material damage, a mandatory insurance of professional liability of customs officials whose activity may cause damage to third parties can be introduced. Subsequently, damage will be reimbursed from the insurance fund.

 

CONCEPTS OF TOP 10 BUSINESS PRIORITIES FOR 2020

1. Adoption of amended Tax Code and amended Customs Code which will contain provisions on de-offshorisation of economy, dramatic decrease in harmful direct taxes, modification of land tax, greater control over border and liability for smuggling, implementation of the EU obligations, and amended Budgetary Code which will provide for reduction in inefficient expenditures from the State Budget distributed through the public finance up to target amount of 35% of the GDP, cost efficiency.

Concept of the amended Development Tax Code

Objective: Creating favourable legal and economic conditions for business entities through tax mechanisms to ensure sustainable economic development of Ukraine.

Issues of the Ukrainian tax system:

1. A large number of tax privileges, exemptions from taxation of certain components of the taxable object and preferential regimes that significantly distort the tax ‘landscape’ and distort competition.
2. High level of tax burden, in particular on the wages fund due to excessive and non-optimal redistribution of gross domestic product through public finances.
3. Lack of comprehensive reform of the regulatory authorities (Tax Service and Customs Service, including their high level of corruption according to survey data), refusal to liquidate the Tax Police which has been working beyond the law for over a year implementing a punitive policy (instead of offence prevention duties), power and administrative pressure on the business owners, a large number of employees with uncompetitive salaries.
4. Significant gaps in the current tax legislation enabling large business to use a number of tax evasion schemes by means of ‘off-shore techniques’.
5. Burdensome administration – violation of the stability principle, lack of timely methodological, advisory and technical support leading to:

• mistakes, and further on to penalties;
• controversial (sometimes confusing) legislative norms;
• avenue for a discretionary (selective) approach to the application of legislation for different taxpayers;
• indirect legislative norms resulting in a great number of taxation issues regulated by by-laws.

6. The structure of taxes is not in compliance with the national peculiarities and objectives of the economic development, in particular direct taxes and quasi-taxes (labour taxation) play a too important role for a country with systemic corruption, while real estate and land taxes (including capital taxes) are not significant. The established procedure for paying certain taxes often leads to overpayments, the need for preliminary (advance) payment or freezing of part of the company’s working capital.

Structure and tasks of the Development Tax Code

General provisions

– a legally established number of controlling bodies;

– improvement of mandatory procedure for public discussion of legislative initiative, in particular possibility for the people to make suggestion to the draft laws of the deputies online.

Taxes administration

– introducing a single payment for taxes and levies payment, and other mandatory payments (except for VAT and excise);

– expanding the range of electronic services for taxpayers and introducing new electronic services (electronic register of receipts, digital cash registers, electronic excise stamps);

– ensuring the openness of the State Fiscal Service of Ukraine by publishing the aggregated summary information on the activities of the service and taxpayers;

– implementation of new and improved approaches to administration facilitating the de-offshorisation process (OECD/G20 BEPS Project tools), in particular, taxation of controlled foreign companies, etc.

Value added tax

– implementation of a new concept of online control over the movement of risky categories of goods (tax invoice); // for more details see cl.10 TOP10 //

– downward revision of VAT benefits granted to certain categories of taxpayers (including revision of the list of transactions exempt from VAT);

– improvement of the mechanism for applying the ‘cash method’ of VAT payment.

Income tax

– replacement of corporate income tax with capital withdrawal tax, which provides for the deferral of tax payment at the time of dividends or similar payments. // for more details see cl.2 TOP10 //

Land and immovable property tax

– modification of the existing land and immovable property tax to decrease its discretionary nature and ensure compliance with the concept of justice, in particular:

✓ reduction of marginal rates, low threshold rate increase;

✓ launching the budgetary transfer model where the transfer amount is calculated based on the optimal rate

✓ reduction of immovable property and land tax benefits, and cancellation of land tax benefits regardless of social groups within a few years;

✓ revision of land tax rates for commercial agricultural lands (to make land tax rates approximately equal to rates of the 4th group of the single tax system).

Excise tax:

• to exclude the following from the list of excisable goods: car passengers, car bodies, trailers, motorcycles, vehicles for transporting 10 passengers and over, and cargo carriage
• to expand the list of excisable goods according to the EU policy (Directive 2003/96/EC on taxation of any products used as fuel for vehicle or fuel additives (fillers). This includes: coal; coal, water or producer gas; resins, mineral and vegetable oils (soya, peanut, olive, palm and other oils); animal or vegetable fats; petroleum jelly, paraffin, coke and bitumen)

IIT, single tax, SSST

– reduction of tax burden on the wages fund, cancellation of military tax:

in the first year of the reform – from 41.5% to 32%, second year – to 25%, starting from the third year to set the single rate – 20%, with compensation by reducing inefficient budget expenditure. Unification of IIT and SSST reporting;   // for more details see cl.3 TOP10 //

– possibility for individuals to pay a part of their IIT to accounts of non-governmental organisations or parties, at the payer’s discretion, define the best mechanism for implementing this model, in particular, to consider the application of tax credit mechanism. To provide efficient mechanisms to control such payments, minimise corruption risks and prevent fake transactions.

– retain the simplified taxation system for all groups and minimise schemes which apply the simplified taxation system; // for more details see cl.4 TOP10 //

– introduce a mechanism for paying individual income tax from immovable property rent, including land plots (shares), to local budgets at the location of such immovable property;

– ensure efficient application of mechanism of control over e-commerce.

Transitional provisions of the Development Tax Code shall provide for:

– fundamental reforming of the State Fiscal Service, its rearrangement into an efficient, high-quality and transparent service that will be able to create a favourable business environment, introduce systemic changes and services to support and protect the business owners, and ensure trust of public and the business community in its work;

– creating transparent, complex and efficient legislation allowing the customs office to facilitate the international trade while ensuring the security of the state, its people and protection of financial interests of the state;

– creating a unified data centre that consolidates all state resources and databases of the regulatory (to determine the amount of taxes) authorities under the administration of the Ministry of Finance of Ukraine;

– final liquidation of the tax police and creation of a separate public authority of the Service for Financial Investigations (Finance Police) within the Cabinet of Ministers of Ukraine with a chairperson and employees selected under the procedures similar to the selection of the National Anti-Corruption Bureau of Ukraine employees with significant increase in salaries and eliminating duplication of functions;

– introducing personal liability of civil servants to taxpayers for damages caused by abuse or inactivity;

– drafting by the Government and adoption of legislative amendments to modify the property tax (concept is available here), in particular:

• to combine the land tax and the immovable property tax based on the assessed value of land, including development defined by the automated system;
• to create an automated system to define the assessed value of land plots and immovable property based on market value subject to ongoing update;
• to define quality criteria for the databases to be used;
• to set the mechanism for revaluation of land plots and immovable property at the payer’s choice;
• to set mechanisms for introducing all valuation results to the unified base of the State Property Fund of Ukraine to prevent underestimation;
• to set mechanism for finding real owners (beneficiaries) of each land plot and, as a consequence, immovable property located on such plots;
• to develop a method for inclusion of the residential property tax in the IIT;
• to harmonise the residential property tax with the non-residential property tax;
• to define a possible transitional period for assessment of taxable objects during which the calculation methods of estimated cost should secure the necessary amount of data for valuation;

– conducting extensive audit of budget expenditure by the government and its decrease by 3-5% of GDP (in particular, by verifying social benefits/pensions (‘deadheads’, ‘pseudo-displaced people’, etc.) and decrease of inefficient budget expenditure) and taking into account its results in the State Budget 2020. The following actions shall be taken:

• transition to medium-term budget planning, improvement of the development process of the General Directions of budgetary policy for the respective years, considering international trends;
• reforming the budgeting process, in particular improving the result-oriented budgeting method;
• implementing the fiscal policy aimed at considerable reduction in the share of public spending in GDP to the European average;
• reviewing the budget expenditure items to optimise the structure and amount of state budget expenditure;

– introducing an optimal model of tax amnesty (except for criminal proceeds) along with adopting a single system document (Development Tax Code) after the tax authority reform is over;

– improving the control processes over the transfer pricing;

– launching a Pilot Project on the Procedure for property taxation (land and immovable property) based on their market value in a couple of regions of Ukraine;

– imposing moratorium on amending the Tax Code of Ukraine for three years regarding tax and levy rates increase;

– analysing the possibility to implement the graduated (progressive) VAT rate (10% between the VAT payers, and 20% between a taxpayer and tax non-payer);

– reforming the Social Insurance Funds, cutting down on their functions and expenses.

Additionally:

To explore the possibility to cancel the issue of fiscal receipt when payment is made by an individual to the check-in account of an enterprise.

Concept of the new Customs Code of Ukraine

Since adoption of the Customs Code of Ukraine in March 2012, the need for its modernisation and improvement has been repeatedly discussed, but no comprehensive solution has been achieved.

At present, complexity and excessive bureaucratisation of processes, exposure to corruption of customs control and registration procedures, lack of balance between security function and services provided to taxpayers (simplified customs procedures in particular), technological underdevelopment of the customs infrastructure, lack of progress in customs IT system update are the key issues in the customs procedures. Insufficient actions in automation of customs procedures, human factor mitigation, prevention of unauthorised interference, inability to apply the best international practices, and underfunding restrict the implementation of simplified procedures for trade and compliance with the legislation, and have negative impact on the possibility to carry out a lawful business.

By ratifying the EU-Ukraine Association Agreement, Ukraine has got a tool and a roadmap for implementing systemic reforms. Reform of the State Customs Service and integration into the EU customs community are among the top priorities.

As for changes to the legislation, there is a need to revise the processes having impact on the customs procedures. In particular, regarding unification of decision making, automation of customs formalities, implementation of the simplified declaration procedure, making decisions on goods release to a customs regime under the simplified customs procedures. Also, it is necessary to ensure a business entity with a simple and a one-time basis procedure for submitting information to the customs authority online and its use by all engaged in the supply chain.

It is noteworthy that evolution of the Customs Codes in Ukraine had a tendency to more detailed customs relations at the Code level. Despite a relatively recent adoption of a revised Customs Code of Ukraine in 2012 (hereinafter the CCU), it lags starkly behind the international customs standards, advanced technologies and practices. At the same time, while the international trade is changing rapidly, and the international customs standards are being constantly improved, the excessive detailing of the most customs issues at the Code level in no way contributes to the reforming and prompt adapting.

This is the biggest failure of the current CCU. As evidenced in practice for the last 5 years, its amending is a complicated and long-term process which in Ukraine is mostly of a political nature. At the same time, it should be noted that most issues regulated at the Code level are not political ones, but rather of a technological and procedural nature.

For example, the Ukrainian Classification of Goods of the Foreign Economic Activity (UCG FEA) is based on the International Harmonized Commodity Description and Coding System, and is approved by the Law of Ukraine On Customs Tariff. Bringing of a basically technical issue to the legislative level results in Ukraine constantly lagging behind in terms of updating the commodity nomenclature by 2-3 years. While the whole world has long been using the Harmonised System of the 2017 version, Ukraine is ‘stuck’ with the 2012 version. To compare, in Georgia, this issue is regulated by the Minister of Finance, which approves the commodity nomenclature by its order.

Therefore, adoption of the new Customs Code (hereinafter the NCC) is aimed not only at upgrading the ‘customs constitution’ of Ukraine in compliance with the up-to-date international customs standards and considering the customs obligations of Ukraine under the EU-Ukraine Association Agreement, but also simplifying and making more rational the customs legislation, cancelling the excessive detailing at the legislative level regarding technological and procedural issues which should not depend on the political will of the Government.

First of all, the NCC shall ensure the regulation of basic institutions, principles and approaches aimed at full digitalisation of customs processes, transition to non-paper electronic customs environment, introducing the customs simplification system, developing relations between the customs authorities and the business owners based on the principles of trust and cooperation.

More flexible legal regulation at the legislative level should promptly respond to information and technological and procedural changes in the customs sector and expand opportunities for their quick implementation in the context of extensive transition to e-communication and implementation of integrated system of customs simplifications for reliable and honest enterprises.

At present, the international trade has become a truly global, and demand for more efficient and secure supply chains is constantly growing. Therefore, on the one hand the customs office has to encourage honest economic operators in the international trade, and enhance security and protection of the national economic interests on the other hand.

This is the NCC which has to regulate the basic challenges and tasks in the customs sector at the legislative level: trade simplification and promotion, cost reduction for the business owners, modernisation of customs processes, and ensure electronic communication between the parties concerned. The NCC should set standards for the up-to-date system of relations between the customs office and the business owners.

In terms of needs and advantages for the lawful business environment, the key principles of the NCC shall become: simplification, service and rapidity. All customs solutions should be reasonable and as smooth as possible, focused on reduction of administrative cost and repeated actions for the honest business, efficient due to automation and working by electronic non-paper means.

NCC should include provisions (including transitional provisions) providing clear and gradual adoption of IT solutions for all customs processes. Transitional provisions should assign specific deadlines for adoption of any given IT solutions, online service, etc. Thereby, the paper-based procedures shall be only applied until information technologies are adopted and/or in case of IT system failure.

Considering the above mentioned approach stating that procedural issues of customs regulation should be brought to the legislative level (Resolutions of the Cabinet of Ministers of Ukraine, Orders of the Ministry of Finance of Ukraine and the State Customs Service of Ukraine), the following conditional structure of the NCC is suggested:

1. General provisions and notions.
2. Structure and organisation of the customs authorities operation.
3. Information on customs related issues.
4. Transportation and pass of goods through the customs border.
5. Customs formalities on different types of transportation.
6. International postal and express shipment.
7. Organisation and implementation of customs control.
8. Declaring of goods. Customs clearance.
9. Customs regimes (procedures).
10. Authorised economic operator.
11. Customs solutions. Preliminary solutions.
12. Customs value.
13. Classification of goods.
14. Country of origin.
15. Customs fees. Customs fees exemption.
16. Guarantees.
17. Passage and taxation of goods transported by individuals.
18. Intellectual property protection.
19. Liability for customs rules violation.
20. Liability of customs officials.

Main tasks of the amended Customs Code should be:

• providing IT solutions for all customs processes
• providing transparency and public control over the customs office activity – access to non-personalised customs bases information
• providing full data exchange with other countries and creating an efficient mechanism of automated comparison of relevant documents and customs value of goods indicated in such documents
• launching a clear electronic queue for customs clearance working under the First In – First Out principle
• preventing the use of postal channels and benefits for individuals in tax evasion schemes – to ensure identification of addresses of international parcels by identification code and storage of such information, to tighten criteria (conditions) for obtaining express carrier and postal operator status, granting status of tax agents to express carrier and postal operators, to set certain limits for value and number of tax free international parcels, within several years to transform certain element of control and administration into a complex national model of transportation of goods through the border, similar to the EU, One Stop Shop
• ensuring full and absolute reimbursement for all company losses through risk insurance in case of unreasonable claims of the customs service as found by court.
• imposing random control of goods by all similar services solely by the risk analysis principle.
• ensuring unification of customs charges
• implementing the rules of the EU/EFTA common transit procedure, the European Electronic Transit System (NCTS) and other up-to-date technologies for goods delivery control;

• implementing mandatory vehicle sealing and ensuring the customs fees payment when transporting goods through the territory of Ukraine;

Detailed Concept of the new Customs Code of Ukraine is available at the link.

2. Replacement of corporate income tax with capital withdrawal tax for all companies

The analysis of offers prepared by the experts shows that legislative proposal to introduce the capital withdrawal tax set forth in the draft law 8557 is reasonable. Basic concepts agreed by the experts and business association are the following:

• 5% interest payment in favour of related person –¬ non-resident;
• 15% dividend payment and overrun of liquidation contribution amount (effective rate is 13%);
• 20% financial assistance in case of non-repayment; free goods/services/works in favour of related person; payment as contribution to authorised capital if a company is not the capital withdrawal tax payer; payback of investments; off-shore royalty; royalty exceeding 4% of the net income amount; transfer pricing; payment made by resident-agent on account of non-resident, in favour of non-resident in the amount exceeding the amount of previously received funds or property value; repayment of obligations (including debts) by resident in favour of non-resident if made under the agreements and their fulfilment does not result in transfer of funds to Ukraine or receiving property, works and services by the taxpayer.

Experts say, implementation of this model will cause approximately from 30 to 40 billion UAH of budget loss in the first year, and at the same time according to the Ministry of Economic Development and Trade it will additionally increase the GDP by 1.5%-1.8%.

Given that the basic idea of introducing the capital withdrawal tax is change of philosophy and principles of corporate tax administration, but not reducing the tax burden, we find it possible to raise the nominal rate by several per cent, in particular the dividend rate from 15% to 20% (effective rate is 18%) to prevent significant gap between individual income tax and capital withdrawal tax rates. It also keeps the existing level of taxation for business entities and reduces budget losses during the first years which increases support of the Government and possibility to introduce capital withdrawal tax in 2020.

We find it possible to implement measures to minimise the budget losses during the first year after implementing the capital withdrawal tax – introducing advance payment in the amount from 30% to 50% (depending on the dividend payment tax rate) of the capital withdrawal tax for the previous year. Further on, the advance payment will be taken into account when calculating the capital withdrawal tax.

Whereas it is necessary to change the philosophy of relation in the tax area as the basic task of the reform, corporate tax reforming is the preferred step preceding the dramatic reforming of tax authorities, and is of the higher priority rather than reducing the burden on the wages fund since otherwise it is impossible to root out the corruption in tax administration and pressure on taxpayers, on the one hand, and reach the ‘pay all taxes for the peace of mind’ principle, on the other hand.

All other provisions not included in the concept – according to the draft law No. 8557.

3. Reduction of tax burden on the wages fund

The National Business Coalition has defined the reduction of combined tax burden on the wages fund among its TOP 10 priorities; its key parameters are provided in details in the Development Tax Code, which is: 32% in 2020, 25% in 2021, 20% in 2022.

Experts see this endeavour as positive for the Ukrainian economy due to the following:

• Level of distribution through the public finance in Ukraine is extremely high and reaches 41-42% of the GDP, whereas its optimum level is 35-37%. It is urgently needed to reduce the national expenditures down by 5-6% of the GDP which enables reduction in the most inefficient expenditures.
• According to the OECD study, direct taxes (pseudo-taxes) are the most harmful, and they need to be reduced in the first turn to boost the GDP growth rate. Therefore, economists see reduction of burden on the wages fund as the top priority.

It is offered to achieve the key indicator in 2020 by increasing the social tax benefit up to 50% maximum of the minimum salary rate of salaries not exceeding two minimum wages (UAH 8,347 in 2019). This offer will cover the majority of the Ukrainian population, therefore the key indicator should be achieved by applying an efficient rate of wage taxation which also includes social insurance contribution. Also, it will reduce the cost of wages legalisation (low taxes for minimum salary) which contributes to their unshadowing. The state budget expenditures will reduce by about 25-28 billion UAH due to this proposal, which will be compensated by reducing budget expenditures. Moreover, this proposal can have a social impact due increase of the amount of the social tax benefit for people with children if such a provision is adopted, as well as possible increase of the amount of this social benefit for the youth.

This means reduction of the general burden on wages fund by approximately 10% which, in its turn, reduces the percentage (regarding the nominal wages fund) by 10% (not points), to up to 37% in total. Better application and administration of land and property taxes should compensate the local budgets for such expenses. Further improvement of this taxation method should ensure transfer to 10% rate of the individual income tax and capital withdrawal tax.

The second element (for 2020) is reduction of the maximum base amount of the single social security tax for wages less than 5 minimum wages, with a limit on maximum pensions growth. This proposal has a minimum negative effect on the budget, but its main task is to shift responsibility for high pensions from the state to an individual by applying basic approaches for transition from pay-as-you-earn pension system to the funded pension plans.

The third element (for 2020) is reduction of the individual income tax rate to approximately 12% for salaries within 5-20 minimum wages with mandatory deduction of about 6% to non-governmental pension fund upon payer’s discretion, or public pension fund, or other types of saving provided by law.

In the nearest years (after 2020), with the purpose of achieving the TOP 10 target indicators the gradual abandoning the pay-as-you-earn pension system and facing the voluntary accumulation plan (by the example of New Zeeland and Georgia) is planned to launch aiming at abolishing taxation of employment as an ultimate goal (residual pension obligations of the current pay-as-you-earn pension system and provision of the minimum social protection for the elderly will be covered by other types of budget revenues – higher efficiency of public expenditures and GDP growth should contribute to that). For the implementation of the above, the work of the Pension Fund as an independent unit will be discontinued in 2020, and it will remain only as a structural unit for pensions accrual and distribution of the Ministry of Social Policy of Ukraine. SSST will be paid directly to the State Budget, and individual pensions will be reduced proportionally to reduction of the mandatory contributions. At the same time, measures to develop non-governmental mechanism for old-age insurance will be taken, as well as governmental (voluntary) accumulation pension plan for those who prefer to invest to the state.

There are two basic ways for transition, and the third one – combined. The key stakeholders have to take this political decision by choosing one of them.

Option	Economic effect*	pros	cons
1. SSST rate reduction – to 15%, and later on to 10%	Loss of revenue from the SSST rate reduction: to 15% – about 50 bln UAH, to 10% – about 35 bln UAH more.	Equal reduction of tax for all tax payers Reduction of unshadowing price for minimum wage and lower range	As long as pay-as-you-earn pension is applied, it is illogical to reduce the minimum pension contribution below the defined minimum which secures the minimum pension. Low-paid employees are less likely to make pension savings, or more likely to become fraud victims
Gradual reduction of the SSST upper threshold, starting from 5 minimum wages (symbolic effect in the first year) or 4 minimum wages and below (perceptible effect)	Loss of revenue from reduction of the SSST upper threshold up to 5 minimum wages – about 600 mln UAH, up to 4 – 21.6 bln UAH, up to 2 – 46.3 bln UAH. Thus, even in the latter case, the value at stake is less than reducing the rate to 15%.	Significant effect upon a certain employee group, in particular, managers (which can step up support) First, additional resources and reduction of future pensions will enjoy more qualified employees, who will set an example of creating individual savings, and their increasing number will gradually develop the relevant infrastructure (ideologically, higher-paid employees require less state paternalism)	The sense of unfairness will be developed among low-paid employees due to the more regressive labour tax (may become a key factor for promoting the reform from the top down)

* All calculations are made based on previous data of 2018 and on the very year, without further indexation on the year of reform. More clear calculations are possible upon receiving complete and final data for 2018.

4. Retaining the simplified taxation system.

Promoting lawful micro and small business which forms the middle class in Ukraine. Creating incentive tax system for Individual-Entrepreneurs, the self-employed, individuals who combine full-time work with business activity, for entrepreneurs who perform their activity occasionally, in particular, cancellation of mandatory SSST for Individual-Entrepreneurs when they do not carry business activity, cancellation of mandatory SSST for Individual-Entrepreneurs who pay SSST from their full-time employment.

Having analysed the Individual-Entrepreneurs practices, the experts came to a conclusion that the exciting system is a discriminating, therefore it is suggested to introduce the following changes in terms of the single social security tax meeting the set goal:

– To exempt Individual-Entrepreneurs from the single social security tax who is employed full-time and receive salary which is equal or exceed the minimum wage level;

– To cancel the obligation under the single social security tax for all groups in case of no business activity, i.e. in a month when no income/profit was gained the tax is paid on a voluntary basis only.

– To consider cancellation of mandatory SSST payment for all Individual-Entrepreneurs of the 3rd group, and increase the single tax rate for Individual-Entrepreneurs of the 3rd group by several per cent. Social security tax will be separated from the single tax (or these few per cent will be paid as a separate payment) and transferred to the Pension Fund automatically. In case of insufficient payment (SSST) in a certain period, the length of service in that period will not be accrued.

– To separate the land tax from the single tax for all single tax payers.

– At taxpayer’s choice, the possibility to switch to the defined minimum SSST for Individual-Entrepreneurs under the general taxation system.

– To increase the amount of income gained from goods/services supply transactions subject to taxation for the last 12 calendar months, and upon its reaching the registration as a VAT payer becomes mandatory.

– To extend the transfer pricing control (in case of compliance with the criteria set forth by Art.39 of the Tax Code of Ukraine) over the 4th group tax payers if the transaction amount exceeds UAH 10 mln and turnover exceeds UAH 100 mln per annum.

– To implement new forms of taxation for Individual-Entrepreneurs (patents) within the first group of the simplified taxation system which allows individuals to simplify registration, accounting, taxation, reporting and winding-up of business activity.

– To cancel the SSST for trainee jobs (students of higher educational institutions and vocational schools) employed under the fixed term employment agreement (contract) and limited by about 5% share of the average number of full-time employees for enterprises, institutions and organisations with over 20 employees.

– To make it possible for Individual-Entrepreneurs to maintain the income book electronically.

– To make it possible to use the 3rd Generation cash registers (smartphones, tablets) starting from 2020.

– To encourage customers to receive fiscal receipts where prescribed by law (Cashback for customers) together with other changes to the simplified system.

– To adopt efficient methods to combat abuse in sale of goods and services, to extend the use of cash registers on the risky categories of goods and services only (car parts, medicine, complex household equipment and electronics, hotels, restaurants, jewelleries, dispatch services/taxi technological platforms). Introduction of fiscal cash registers for all single tax payers of the 2nd and 3rd groups is inappropriate as it has significant corruption risk, worsens condition of doing business for the smallest business and has negative social impact.

– To increase the turnover limits for the 1st and 3rd groups of the simplified taxation system in tune with the consumer price index and growth of personal income. The 2nd group of the simplified taxation system should enjoy the differential tax rate (for example, for turnover from 0 to 1.5 mln per annum the rate should be x1, for turnover from 1.5 to 3 mln per annum the rate should be x2, for turnover from 3 to 5 mln per annum the rate should be x3)

– To simplify all employment procedures and liberalise labour legislation.

5. Institutional reform of regulatory authorities: implementation of personal liability, risk-oriented approach to inspections, holding open competitions to senior positions

Institutional reform of judicial system.

The experts believe that the recent competition to the positions of the Chairpersons of the State Tax Service was conducted in an open and transparent manner in line with international practices. We think it is worth organising competitions for other senior positions applying such approaches.

We believe that the Action Plan regarding conceptual directions for reforming the system of authorities implementing state tax and customs policy developed by the Ministry of Finance of Ukraine together with the domestic and international experts, representatives of business association, state authorities and people’s deputies, and approved by the Resolution of the Cabinet of Ministers of Ukraine No. 542-p as of July 09, 2019, complies with the business requirements and applies service approaches in providing services to the taxpayers by fiscal authorities.

The mentioned plan provides for:

• Optimizing organizational and functional structure of the authorities;
• Improving procedures for administrative appealing;
• Management of information systems and technologies;
• Personnel management, anti-corruption measures;
• Encouraging voluntary tax paying, development of additional services;
• Risk management, additional control and audit;
• Improving performance aimed at tax debt repayment;
• Preventing dilution of tax base and enhancing the transfer pricing analysis function;
• Contributing to safety and international trade, including simplification and harmonization of customs procedures;
• Contributing to efficient collection of customs charges;
• Development of infrastructure, electronic technologies and services for international trade;
• Protecting society, public health and environmental safety, and combating the illegal movement of narcotic drugs and weapon;
• Resolving the issue for liquidation of the tax police and creation of the unified body to investigate financial crimes;
• Increasing efficiency of the international customs cooperation;
• Supporting the institute of transfer pricing control;
• Creating the single data centre with all tax and customs information in the Ministry of Finance of Ukraine.

These focus areas comply with the up-to-date international standards and their implementation will eliminate shortcomings in the tax administration and customs clearance systems, as well as ensure implementation of the best international practices in the activity of the mentioned bodies, both through introduction of new procedures and modernisation of the existing ones.

In terms of introducing personal liability of the tax and customs bodies, as a high priority we find it necessary to ensure full and absolute reimbursement for all company losses through risk insurance in case of unreasonable claims of the tax or customs services as found by court. An employee should bear disciplinary liability for illegal decisions, and in case of proven of malice prepense – criminal liability.

6. Creation of the single economic criminal investigation authority, liquidation of tax police and other economic units of law enforcement bodies/strong>

Experts believe that draft law on creating an Economic Crime Service which was worked out by the Ministry of Finance of Ukraine togerther the experts and includes the following tasks is the best option:

1. Financial Investigation Service will perform its activity as a qualified law enforcement body which is crutial for ensuring its functional independence in law enforcing.
2. Analytical function will be one of the most important functions of the new body. Performance of the conducted investigation will be ensured by the new experienced ‘out-of-the-system’ staff with exceptional abilities.
3. Three-level analytical system of work is planned to launch:

• Tactical (applied) level – analytical support of a detective within criminal proceedings;
• Operational – systematic analytical work at the regional level;
• Strategic – analytical work at the central office level which will mostly focus on systematisation, processing and analysis of information about systematic factors, reasons and cause of existence and development of economic crimes in Ukraine, analysis of the global trends in economic crime and development of up-to-date technologies which might be used in such crimes, forecasting of development trends in economic crimes in Ukraine and abroad, and informing the Ministry of Finance of Ukrane of such analysis results in order to shape the state policy to combat such factors, minimise them and prevent development of economic crimes, as well as developing new mechanism for combating.

4. As a law enforcement body, the Service will have the right to conduct criminal intelligence and surveillance operations (CISO) after in-depth analytical analysis and on the basis of a court decision.
5. Number of personnel of the new body should not exceed 3500 employees. The number will be defined by the resolution of the Cabinet of Ministers of Ukraine.
6. A committee consisting of the members of the public, scientists and international partners should be established to ensure transparency in selecting personnel to the new Service (by the example of mechanism suggested in the Law On National Ant-Corruption Bureau of Ukraine.
7. A competitive salary should be provided for the highly qualified professional and honest future employees to minimise the corruption risk.

7. Introduction of non-paper technologies: prohibition on demanding information from the state data bases by governmental authorities

We recommend development of new electronic services to provide e-services to people and the business owners. To extend the scope of the existing services and their functionality. In particular, to expand the functionality of the electronic account of taxpayers, namely, increase the amount of information a user can receive. To improve the interface of these services for a better perception of the posted information. To issue certificates with the register identifier, enabling to confirm their authenticity by checking them in databases. To legally prohibit state authorities from demanding information from individuals, legal entities and the business owners that is available in state registers.

Introducing electronic preliminary documents to the business flow will increase reliability, reduce the number of mistakes in the documents and allow optimisation of the business processes. In particular, expanding the use of electronic consignment notes, invoices, and acceptance certificates, their generating and exchanging using a free public service.

8. Introduction of up-to-date labour law based on free employment agreement, simplification of taxes administration and reporting, simplification of employee’s paper work, reduction of penalties for breach of labour legislation.

We think that the Soviet labour law which is still in force in Ukraine does not meet the requirements of the market economy. To implement the mentioned initiative, we offer to establish that contractual labour law which regulates the labour relations and sets up the specific working conditions at an enterprise through negotiations and agreements between employee and employer, which take precedence over the provisions of the Labour Code. Social guarantees established by the Constitution and international treaties ratified by Ukraine should constitute exception.

We also find it necessary to mention the clean signs of lack of proper execution of labour relations, and to cancel the mandatory maintenance of employment record books. In terms of penalties for failure to inform about an employee by an employer, we find it necessary to introduce a provision of law regarding waiver of penalties if information about employee was introduced in the relevant tax reports and employment tax was paid in full.

We believe it necessary to reduce the amount of fines for breach of execution of labour relations to the amount similar to fines for failure to comply with labour legislation (amendments to Article 365 of the Labour Code of Ukraine), in particular:

– For admission an employee to work without employment agreement (contract), or filing a full-time employee as a part-time employee, or paying salary (remuneration) without charging and paying SSST and taxes – the amount of fine should be reduced from 30 to 10 minimum wages;

– For non-admission for inspection of execution of labour relations – the amount of fine should be reduced from 100 to 30 minimum wages;

– For non-compliance with the national minimum wage – the amount of fine should be reduced from 10 to one minimum wage;

– For failure to registee as an Individual-Entrepreneur while carrying out business activity –fine in the amount of 10 minimum wages

– In case of breach for the first time within a calendar year, a warning letter should be imposed as a preventive penalty.

Consequently, there are three types of relations between employer and employee:

• • Civil contract – any relations which do not fall under employment relations. The fact of lack of properly formalised employment relations may be established in in a judicial procedure. The plaintiff shall prove the properly executed employment relations.
• • Employment agreements regulating relations between employer and employee and signed by mutual agreement between the parties shall have priority over provisions of the Labour Code and other legislative provisions regulating labour relations. Such agreements should provide for mimimum guarantees the limiting list of which is stipulated by the legislation, as well as social guarantees provided for by the Constitution of Ukraine and international treaties ratified by Ukraine.
• • Employment agreements executed according to the Labour and other legislation regulating labour relations. Such agreements are entered into if employer and employee a) failed to agree my mutual agreement of the parties; b) monopolised sectors and regions by employers (subject to a separate study and define); c) other exceptions are possible as shown by result of a separate study).

In terms of the Labour Code, it is necessary to revise provisions of law and dramatically simplify the regulation, in particular:

• • Provide the possibility to dismiss an employee on qualification grounds
• • Simplify the dismissal procedure if an employee is absent for more than several weeks
• • Enable dismissal of an employee under certain circumstances, including suspicion of theft, etc.
• • Provide clear definitions for gross misconduct.

Except for the mentioned clauses, it is necessary to analyse all provisions of the Code and liberalise them due to the basic goal – keep minimum guarantees for employees and ensure minimum government intervention in the private sector.

9. Demonopolisation of heat and power supply markets, ensure equal access of participants in related markets to goods and services of natural monopolies, including power grids and private traction

Experts prioritise the following tasks accomplishing the goal:

Gas sector. Key tasks.

1. Ensure sound work of the natural gas market according to the Law of Ukraine On the natural gas market by:

• introducing a daily balancing market in the gas transmission system of Ukraine;
• restructuring the NJSC Naftogaz to meet unbundling requirements and, accordingly, to separate the natural gas transmission and storage activities.

2. Ensure accessibility and transparency of information about the state of the natural gas market for consumers and market participant.
3. Introduce measures to boost competition and simplify access to the gas extraction to increase the volume of own natural gas extraction for the domestic market.
4. Ensure consumption metering of the natural gas and invoicing based on the consumption data as close to the consumer as possible.
5. Reduce losses of the natural gas in distribution networks.

Electric power industry. Key tasks.

1. Finalise reforming of the electric power market according to the Law of Ukraine On electric power market by:

• Introducing all market segments: bilateral agreements market, day-ahead market, intraday market and ancillary services market;
• Corporatising NPC Ukrenergo, certification of the transmission system operator (TSO), unbundling through transfer of NNEGC Energoatom and Ukrhydroenergo assets from the Ministry of Energy and Coal Industry of Ukraine to other central executive authorities;
• Becoming a transmission system operator membership in the European Network of Transmission System Operators (ENTSO-E)

2. Put on the agenda the issue on the opening up the domestic market for electric power import, particularly, by constructing the DC power plants
3. Ensure the balanced development of renewable energy sources, in particular:

• to develop and adopt the national road map for RES development by 2030 with goals reconsidering in 2023 taking into account climate change aspects pursuant to the EU countries practices;
• to adopt the incentive mechanism (the auction system) for application of RES with the purpose of long term development to increase the RES share;
• at the legislative level to stimulate development of dispersed low-capacity generation facilities at the local level by supporting energy cooperatives, and development and implementation of target financial programmes.

4. Support power generating enterprises in reduction of environment pollution by revising the carbon tax rate (CO2 emission tax) approximating to the European rates.
5. Determine the strategy for the future development of nuclear power engineering in Ukraine.
6. Introduce measures to stimulate the modernisation of power grids following the principle of balancing the interests of consumers and service providers.

Thermal power engineering. Key tasks.

1. 1. Create the prerequisites for competitive thermal power engineering market:

• to ensure 100% metering of the heat power on the entire chain, from generation to consumption;
• to introduce the heat power consumption management system for houses;
• to define criteria for heat supply systems separating production and transmission of heat power considering consumers’ interests (prices) and reduction of primary power volume in such systems (power efficiency, ecology);
• to make heat supply networks accessible to new market participants.

2. Set a minimum period for price revision for the main type of fuel (natural gas) for heat generating enterprises to ensure predictability of the tariff policy of district heating companies (DHC).
3. Introduce the pricing mechanism for heat power generated from alternative sources of energy through reverse auctions.
4. Ensure free access to the detailed structure and substantiation of cost items in the tariffs for heat suppliers at all levels.
5. Create conditions to encourage disposal of waste heat of enterprise and development of combined heat and electric power facilities (co-generation) which use RES.
6. Contribute to long-term planning of heat supply schemes of inhabited areas.

Coal industry. Key tasks.

1. Systematically reduce the coal share in power balance and reduce import to russia and occupied territories.
2. Create a transparent coal market, in particular:

• to work out and approve the unified rules of work for all participants of the market;
• to strengthen anti-monopoly policy on the coal market to ensure competition;
• to ensure control over the coal compliance with the environmental standards and consideration of quality indicators at pricing.

3. Reforming of state coal mining enterprises by:

• cutting off subsidies for enterprises from the state budget;
• finalising privatisation of profitable enterprises without signs of monopoly;
• shutting down unpromising, unprofitable enterprises in compliance with the requirements for mitigating environmental and social impacts;
• mothballing unprofitable enterprises that are promising but still in search of investors.

4. Develop and adopt social reconversion programs using the best European practices in certain regions where coal mining enterprises are planned for shutting down.

Power efficiency. Key tasks.

1. To implement the EU Directives on energy performance (31, 27, 844) to the national legislation.
2. To introduce the power consumption monitoring system and power management in local communities and state-owned buildings.
3. To improve the ESCO and PPP mechanisms for major energy modernisation in residential and non-residential buildings.
4. To ensure available, interruptible and sufficient financial resources for implementation of energy-saving projects in individual and multifamily houses. To allocate a part of rent from fossil fuel extraction for funding domestic energy-saving projects.
5. To ensure regular notifying of the actual condition and energy intensity of houses by the homeowner managers to enable them to take energy-saving modernisation decisions.
6. To finalise the housing and utility sector reform by implementing and critical understanding the provisions of the package of energy-saving laws (On Commercial Accounting, On Energy Efficiency of Buildings, On Housing and Utility Services, On Energy Efficiency Fund), in particular:

• to hold transparent competitions and define house managers who failed to establish condominium associations and choose the managing person/entity by themselves;
• governmental and local self-governmental authorities to deduct multifamily houses from the balance;
• to cease the state funding of housing repair if not funded partially by co-owners.

7. To promote installation of heat consumption regulation systems (individual heating units and similar systems) in houses with central heating.
8. To introduce cash subsidies for vulnerable consumers. Work out a mechanism to encourage subsidy recipients to implement energy efficient measures.

10. Unshadowing of economy, including land lease and agricultural markets. Introducing the single tax electronic document to control the supply chain of risky goods and encourage a purchaser to receive the fiscal receipt when purchasing them.

10.1. Comprehensive concept to combat shadow agrarian products market and lease/strong>

1. To correlate the single tax of the 4th group of the simplified taxation system and the land tax.

ST4 (plough-land) = land tax rate + 0.2%. See the described concept above for more details.

2. Credit of the paid land tax and part of ST4 as individual income tax by land owners (both directly and indirectly by a legal entity).

Individuals who rent their land out or cultivate it by themselves have the right to credit the amount of tax paid from the relevant land plot or part of ST4 (in the amount equal to the amount of land tax) as individual income tax from the amount of land plot lease or sale of agricultural products.

• In case of land plot lease to a legal entity, such legal entity as an individual income tax payer shall bear responsibility for such crediting.
• In case of land plot lease to an individual or its cultivation by the owner, the owner of such land plot shall bear responsibility for charging and paying the individual income tax.

Individuals who are the owners of legal entities-ST4 payers, will have the right to credit a part of ST4 from dividends as individual income tax (in the amount equal to the amount of land tax) paid from land plots cultivated by such ST4 payer and belong to them on the right of ownership.

Legal entities subject to general taxation system (corporate tax payers) will have the right to credit the land tax paid from land plots cultivated and owned by them on the tight of ownership as income tax.

3. Land tax increase to the level enabling to keep the existing level of taxes for legally employed agricultural producers.

Increase in minimum and maximum rate of the land tax to the level enabling to keep the existing level of taxes for legally employed agricultural producers upon granting them the right to credit the land tax and part of ST4 to the other equal taxes.

First, it requires an increase in the minimum rate of the land tax to 2%, and maximum – to 3% of the normative monetary value. ST4 will automatically increase resulting from the actions taken in clause No. 1.

1. Introduce the imputed income as a minimum taxation base for individual income tax on ownership / cultivation of land plot. The imputed income should be introduced with the following restrictions:

• Mechanism for the imputed income is introduced by the decision of the representative body of the territorial community (it cannot be applied if no decision was taken).
• The imputed income shall not be applied for calculating the minimum taxation base if an owner cultivates less than 1 ha of commercial land.
• Marginal rates of the imputed income shall be defined considering the land tax range to be defined within the clause 3 in such a way that the tax payable from the minimum amount of imputed income exceeds the minimum amount of land tax. Let’s assume that the minimum amount of land tax is 2%, the amount of imputed income will be from 10% of the normative monetary value which reflects the actual share rental fee.

1. Cancellation of the tax exemption on income received from cultivation of agricultural land plots of less than 2 ha, increase of the tax-free minimum income for all individual income tax payers.

1. For the transitional period (1 year) it is suggested to establish that tax land and ST4 will be applied to that part of the individual income tax that is paid to local budgets (60%), but not to those paid to the State Budget of Ukraine (40%). This will help to contradict the objection of the Ministry of Finance of Ukraine that introducing payment rates will not allow to balance payments to local budgets and the State Budget of Ukraine due to lack of data about the amount of such payments. However, such data will become available by the testing results of this mechanism in the first year.

Notes

At present, land tax exemption does not cover the commercial land. Considering the abovementioned, cancellation of the relevant benefits is not brought up to the table due to obvious disproportion of administrative and political losses and the result. Accurate calculations will be provided upon approval of this concept.

10.2. Control over the supply chain of risky goods

Objective: Creation of efficient Complex control system over the goods supply and sale chain

General description of the concept:

Creation of efficient Complex control system over the risky goods supply chain by updating the existing system of VAT electronic administration (VAT SEA). With this purpose, tax payers who purchase and sale risky goods shall be obliged by law to register the preliminary documents (for example, consignment note) with the Unified Register of Tax Invoices (except for requirements to open special accounts, peculiarities of application of the relevant formula and other encumbrances for VAT payers as provided for by Article 2001 of the Tax Code of Ukraine).

Warning: first, the project will be implemented for risky goods – grain, nuts, metal products, household appliance.

Stage 1: Execution Deadline – 2020:

Creation of electronic register of consignment note which allow to define the risks of tax evasion (avoidance) by using information on transportation of goods and materials together with analytical possibilities of the Unified Register of Tax Invoices and monitoring system (SMKOR).

Warning: first, the project will be implemented (2020) only for risky goods as light version (as risk-oriented analytical control system).

The following is suggested or implementation of this model:

– to amend the order of the Ministry of Finance as of December 31, 2015 No. 1307, registered by the Ministry of Justice as of January 26, 2016 No. 137/28267 (as amended) – to fill in the box ‘Recipient (purchaser)’ and ‘Tax number of the tax payer or passport series (if any) and number’.

– to amend the Tax Code of Ukraine – oblige the VAT non-payers to also register (under simplified scheme) the information on transportation of goods and materials with the Unified Register of Tax Invoices for all VAT non-payers under the consignment note form.

Thus, by implementing the abovementioned changes even today it is possible to ensure efficient control over the risky goods supply chain (grain, nuts, household appliance, metal products).

At the same time, it is inappropriate to set any restrictions on registration of consignment notes since it is direct interference in business activity of business entities and substitution of controlling functions of the fiscal (tax) service.

It is noteworthy, that at present there are already working systems which allow for the tracking of supply chains, not in full though. This automated monitoring over compliance of tax invoice/adjustment calculation with risk assessment criteria (SMKOR) and control over spirit transportation by electronic consignment notes.

But, both systems comprise the special functions of fiscal employees who evaluate the proper way of doing business based on specific features discovered by the systems. These are commissions and appeals for SMKOR and tax duty persons for control over the spirit transportation.

Considering that control over taxes payment, but not creating artificial barriers for the business owners, is the key function of the fiscal (tax) service, setting efficient control over supply chains and end sale of risky goods should first of all aim at implementing the existing supervising functions of the fiscal (tax) service (‘target’ actual inspections) based on risks defined by the system.

Stage 2: Execution Deadline – 2020::

Scope of application: the project is implemented only for risky bulk goods defined by generic characteristics (hereinafter the RG), a special risk category – grain and nuts.

– To create efficient Complex control system over the chain supply (from producer/importer to the end consumer, and from producer to exporter) and sale of RG, and integrate it into the system of VAT electronic administration (VAT SEA) and the Risk Criteria Monitoring System (SMKOR), i.e. Tax Invoices Blocking System for increasing the efficiency of their mutual work.

With this purpose:

a) the Unified System of Goods Flow Management (USGFM) which comprises the transactions in RG supply/transportation is introduced.

The limiting list of RG is provided for by the Tax Code of Ukraine. USGFM applies to the VAT payers and batches of goods exceeding 1 ton in weight, and does not apply to small business and short-run transportations, otherwise it will not prove its worthiness.

b) goods flow management is performed by drawing up and registration of the electronic consignment note (e-CN) with the USGFM having the status of preliminary document. Transportation (supply, shipment, unloading) of batches of goods which belong to RG is possible only if e-CN for the relevant goods is registered with the USGFM.

c) the e-CN should include the following details:

– description (nomenclature) of goods/ their UCG FEA code and their quantity/volume/weight;

– supply price (exclusive of VAT);

– total amount payable to purchaser exclusive of VAT;

– details of goods seller (consignor) and purchaser (consignee);

– date and time of registration of the e-CN (filled in by USGFM automatically);

– make, model, type and registration number of vehicle and carrier’s details (in case third parties are engaged to transportation), location of loading and unloading point, shipment period;

– for XAT payers – amount of advance payment and date of payment (if advance payment is made by the purchaser) indicating the number of tax invoice for goods supply registered with VAT SEA (if tax invoice has already been registered at the time of e-CN registration);

– signatures of the parties’ representatives: consignor, carrier and consignee of goods.

d) registration of e-CN for goods supply with USGFM is made only within the goods leftover limits, (åе-ТТН)(åе-ТТН), by the following formula:

åе-ТТН = + åЗаявкиПоповн + ∑е-ТТНОтр +  ∑ПродуктПереробки +∑Митн – ∑Втрат – åе-ТТНВид – ∑ТоварПерероб – ∑Митн;

де:

åЗаявкиПоповн – total volume of goods according to the applications for replenishment of the balance of goods registered in the electronic administration system of goods flow management; there two types of such applications: for goods purchased from individuals provided IIT is paid which is verified by settlement documents for the tax payment to the budget (Article 168 of the Tax Code of Ukraine), and if income of such individual for sale of agricultural goods is not subject to IIT based on the clause 165.1.24 of the Tax Code of Ukraine – IIT shall not be paid provided that conformation documents indicated in the present clause are available which details are indicated in the application and within the maximum scope set forth by the Cabinet of Ministers of Ukraine;

for goods produced (grown, harvested) by the pay payer directly (within the maximum scope set forth by the Cabinet of Ministers of Ukraine);

∑е-ТТНОтр – is a total volume of goods under the received e-CN/adjustment calculation hereto registered with USGFM

∑Втрат – is a total volume of goods lost, damaged, destroyed, including due to force-majeure circumstances or for other reason caused by natural phenomenon based on registered applications of losses certified by the relevant documents (write-off certificates within normal limits of natural loss provided for by the Cabinet of Ministers of Ukraine);

åе-ТТНВид – is a total volume of goods under the issued e-CN/adjustment calculation hereto registered with USGFM. Wherein, e-CN is registered regardless of whether the goods were supplied to a member of USGFM or a person/entity non-member of USGFM (similar to tax invoice which are not provided to purchaser);

∑ТоварПерероб – is a total volume of goods processed into goods with a different code of goods subcategory according to the registered UCG FEA; processing standards of the relevant goods are approved by the Cabinet of Ministers of Ukraine;

∑ПродуктПереробки – is a total volume of goods obtained after processing under the processing applications registered with the USGFM which resulted in the UCG FEA code change;

+ ∑Митн – is a total volume of goods imported to the customs territory of Ukraine under the import and/or temporary import regime duly documented by customs declarations;

– ∑Митн – is a total volume of goods exported from the customs territory of Ukraine under the export and/or temporary export regime duly documented by customs declarations, as well as relevant unified shipment document (AWB – airwaybill, MAWB – master airwaybill), CMR, bill of lading, etc.).

e) USGFM integrates with the VAT SEA when the e-CN is indicated in the VAT SEA. VAT SEA based on the information received from the USGFM on goods unloading automatically fills in the tax invoice/adjustment calculation with information available in the e-CN. At this time, registration of the tax invoice/adjustment calculation for the goods supply with the VAT SEA is made only in case e-CN available at the System for the relevant supply. Also, in case of goods partial supply, it is possible to register several tax invoices on one e-CN if the total amount indicated in such tax invoices does not exceed the amount indicated in the relevant e-CN. At the same time, in case of tax invoice for advance payment, prior registration of e-CN is not required, but should be registered in case of actual supply.

) tax invoice/adjustment calculation will include the following details: e-CN number, code of goods with all numbers according to the UCG FEA, but not only first four numbers (similar to the current requirements for excise goods), as well as new boxes ‘advance payments’ and ‘supply’ which are mandatory for all VAT payers. Therewith:
– in case of tax invoice for advance payment the box ‘goods nomenclature’ shall not be filled in (nomenclature will be indicated upon goods supply), but only VAT rate is indicated at which goods will be supplied in the future;

– code of goods according to the UCG FEA with all numbers, but not only first four numbers shall be indicated in case of transactions in RG;

g) USGFM provide information to VAT payer and regulatory authorities on e-CN for which tax invoice/adjustment calculation has not been registered and their registration period has expired; in this case if goods is returned to seller, the system provides information on difference between volume/quantity/weight/price of the supplied and returned goods and shows balance for which no tax invoice/adjustment calculation was registered.

h) recording system of units of measurement is being created which provides for unification of RG units of measurement from when the goods appeared on the domestic market before their sale to VAT payer, while RG include only goods explicitly identified by code and universal unit of measurement which can be applied to all types of the relevant goods;

i) tax invoice/adjustment calculation which registration was suspended within the SMOKR, shall be registered on the date of confirmation of the business transaction by the authorised representative personally by submitting application (personally or notarised).

j) administrative penalty is imposed on RG subject to business transactions without e-CN registration, and the regulatory authorities apply to court with the purpose of making decision on seizure of goods to the state.

k) vehicles used by a member of USGFM for transportation of RG shall be listed to the List of vehicles transporting RG (maintained by the State Fiscal Service) automatically based on the e-CN data registered with the USGFM. Therein, upon termination of the transportation period specified in the e-CN the vehicle should be excluded from the List.

 

 

10.3. Encouraging a purchaser to receive the fiscal receipt

Concept

of encouraging a purchaser to receive the fiscal receipt

Issues: the existing system of cash payments in retail trade using cash registers does not work properly – it is expensive both to install and to maintain; parties to the transaction both seller and purchaser are not interested in fiscalisation of transactions; cash registers do not guarantee the issue of fiscal receipts, they are easy to ‘chip’ or pseudo-receipts can be printed on thermal printer, etc.

Objective: to develop innovative technical solutions for cash payments on all sale channels (only for those who is obliged by law to issue fiscal receipts) and action plan aimed at financial encouragement of purchasers to receive receipt, and control over its fiscalisation in all systems of cash transaction registration (including 3rd Generation cash registers), to implement relevant control measures and development of legislative and regulatory support for such solutions. The mechanism for financial encouragement of purchaser should be simple, reliable, ensure maximum per cent of bonuses, prevent possible falsification and take into account successful international experience.

Key tasks of the concept:

• to develop efficient mechanism for identification of purchaser and the list of documents for submission to avoid misuse when filling out the applications
• to ensure Interruptible work of electronic register of fiscal receipts to make the inspection possible at any time
• to develop the action plan by State Fiscal Service officials to ensure maximum per cent of bonuses for purchaser and minimize the corruption risks

The following software is offered to use to deal with the mentioned issues:

Seller’s software system to ensure:

• reliable authorisation of seller and employee performing cash transaction;
• to generate a receipt code by a private key which set down as a QR-code when printed;
• to send to any printing device for printing, or send to a purchaser’s software system;
• to send the receipt to fiscal receipt server and get confirmation on its registration;
• to implement the receipt of notifications from fiscal services on cash transactions.

Purchaser’s software system (or a special website with simple interface for purchaser) to ensure:

• authorization of purchaser by entering the tax individual number, surname, name, patronymic and phone number
• QR-code scanning on the fiscal receipt or receipt check by phone number, as an option;
• possibility to get electronic receipt from seller electronically (subject to discussion);
• decryption of the following information from the received receipt to verify its authenticity: name of seller, date, time and amount of the transaction;
• sending inquiries in case of invalid receipt issued by seller;
• verification of the receipt on the fiscal receipt server and sending inquiries in case of failure to register it.

 

Assessment of transaction stages:

1. In case of failure to issue a receipt to purchaser, purchaser can apply to the regulatory authorities with a written application, this information is then verified by the State Tax Service officials who check the seller for compliance with the legislation on cash register application and cash transaction procedure. These regulations are provided by the current legislation and additional amendments are not required.
2. Issue the receipt to purchaser
3. Purchaser can verify the receipt code by scanning QR-code on their smartphone or using a special website and get the following information encoded in the receipt:

–        EDRPOU code, company name who performed transaction;

–        transaction date and time;

–        transaction amount.

4. If such information is distorted and the receipt total amount exceeds 50 tax-free minimum income, purchaser can promptly apply with the request to the fiscal authority which will inspect the accuracy of execution of the non-cash transaction.
5. Seller has 72 hours (3 days) to register the receipt with the fiscal receipt server.
6. If receipt is not registered, purchaser can send an inquiry on receipt non-registration using this software.
7. When it comes to the seller who failed to register the receipt, an in-office audit (or other inspection called differently) is conducted and seller is offered to voluntary pay the fine in the amount of 200% of the transaction amount.
8. If the in-office audit (or other inspection called differently) confirms violation of the settlement transaction procedure, purchaser will get back 100% of the amount of the purchase after the fine is paid by seller.
9. If in the course of in-office audit (or other inspection called differently) seller does not confirm violation, the actual inspection of compliance with the legislation on cash register application and cash transaction procedure will be carried out.
10. By the results of the inspection, purchaser can get back 100% of the amount of the purchase only if inspection shows breach of legislation on cash register application and cash transaction procedure. In case no violations found, seller is free from any fine, and purchaser is refused any reimbursement.