Taking into account the global tendency to strengthen anti-offshore legislation and corresponding actions of Ukraine in this direction, what might the consequences be?
In recent years, the Ukrainian legislative agenda has been overwhelmed with tax-related issues. In tackling tax avoidance and evasion practices, Ukraine has committed itself to observe the OECD footstep, which resulted in implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (MLI) and a draft law to address basic BEPS issues that are not covered by the MLI. Needless to say, it is expected that such initiatives will prove their high efficiency and will not only enhance Ukraine’s international standing, but result in considerable tax revenues collected to the state treasury.
In addition to cooperation on the international plane, Ukraine recently extended its list of low tax jurisdictions, which now includes Trinidad and Tobago, Namibia, Guam, Palau and American Samoa. This, in itself, should not have significant impact on combating harmful tax practices in Ukraine as these jurisdictions have always been beyond the radar of Ukrainian companies and their tax advisors in terms of streaming Ukraine-sourced income/margins to low tax or no-tax jurisdictions.
Meanwhile, Ukrainian decision-makers might go even further in their attempt to combat tax abuse. Given the current political climate, a capital exit tax has never been as likely to be introduced as today. If and when it is implemented, a new capital exit tax will substitute corporate income tax and withholding tax. It is arguably expected to stimulate business activities in Ukraine by encouraging re-investment of income rather than its repatriation. Introduction of this tax appears to be a highly convenient option to kill two birds with one stone: ensure proper collection of taxes to the State Treasury and, at the same time, significantly cut spending on administering the collection of taxes.
That said, the number of capital exit tax supporters is about as high as its opponents, arguing that the introduction of the tax would bring nothing but an unaffordable State Treasury shortfall to the developing Ukrainian economy. It goes without saying that there is always space for “creativity”, which would obviously come up with viable substitutes for obsolete tax abuse techniques.
Nevertheless, the tangible impact of a new taxation system can be neither judged nor measured, as even in countries that have already followed this route (e.g., Latvia, Estonia, Georgia) the ultimate effect from introducing a capital exit tax is different. Moreover, in certain jurisdictions (e.g., Macedonia) the capital exit tax proved negative in terms of influence on tax revenues in the State Treasury and was later abolished.
Anton Kerimov-Varanytskyi, Manager, KPMG in Ukraine