Appendix I. Approaches to Develop and Maintain Up-to-Date Property Cadasters
For purposes of creating a fiscal cadaster it is worth noting that the United Nations with the support of the Federation Internationale des Geometrics (FIG) developed the “Bogor Declaration on Cadastral Reform”.70 The Bogor Declaration proposed the development of “… modern cadastral infrastructures that facilitate efficient land and property markets, protect the land rights of all, and support long term sustainable development and land management”. In this context land administration is considered to include land registration, cadastral surveying and mapping, fiscal, legal and multi-purpose cadasters and computerized parcel-based information supporting land use planning and valuation/land taxation systems. The question arises, how far has Ukraine advanced this process, and if so, what can the one-time asset declaration contribute usefully in this regard.
The Ukrainian government, if Bogor Declaration activities have not commenced or advanced enough, should develop as a priority a clearly defined national fiscal cadaster vision, strategy and national framework. Failing to do this could result in an un-coordinated and piecemeal approach to developing the fiscal cadaster. This would involve establishing the IT platform for the cadaster (which could be tapped by the proposed indirect method) which would reflect that most modern cadasters are based around GIS-centric spatial technology. It will follow that the strategy should meet the requirements of end users. Critically, the national framework should build upon the currently available data held by national and local government entities. In several Balkan jurisdictions, a national fiscal cadaster is developed as an integral component of the property tax reform. The experience also suggests that the creation and management of the fiscal cadaster is a Ministry of Finance function.
A key decision must be taken by the government in relation to ownership of the fiscal cadaster and where it shall be housed. Clearly, having a national cadaster is considerably preferable than having a multiplicity of separate cadasters at the local government level. Having centralized management will bring synergies that would not be possible if multiple local cadasters were to be developed. These would include efficiencies in the sharing of data with other entities and maintaining the integrity and quality of the data within the cadaster. The coordination for the initial development of the fiscal cadaster should ideally rest with the MoF.
A significant component of the fiscal cadaster is the data inventory. This represents detailed qualitative and quantitative information on each parcel and building across the Ukraine. The collection of this data is expensive and time consuming given the numbers involved. However, once the mass data collection has been completed only annual maintenance is required to deal with any physical changes to existing buildings or the addition of new buildings. There may be a number of agencies in Ukraine that hold data on real property, from physical attribute data to addresses to ownership details (which the one-time asset declaration seeks to address). It will be important that the fiscal cadasters at subnational level have the capability to draw data from these various sources.
For example, in the case of Albania, the Albanian Power Distribution Operator (OSHEE) initiated a mass collection of property data. The mission provides this information to indicate that building an immovable property ownership register is a rather intricate process if accuracy is the objective. A Memorandum of Understanding (MoU) was signed between the Ministry of Finance and the OSHEE to conduct a nationwide collection of physical data on buildings. A pilot project was conducted by OSHEE in late 2016 to develop the IT infrastructure and to integrate the various databases that would be used to plan workflows for data collectors. Some 1,200 data collectors were employed including around 400 GIS and mapping experts. Data was collected on hand-held tablets, and GPS co-ordinates were taken to identify the precise location of the property. The data collection exercise has largely been completed (mid-2017) and currently quality control is systematically checking and verifying the data. At the same time the Ministry of Internal Affairs was planning to conduct a large-scale project to identify property owners and the address of each property. The project would use the National Address Registry as baseline data for in-the-field verification. It was decided to merge the projects of OSHEE and that of the Ministry of Interior given the similarity of the projects’ field inspection methodologies. The total cost of the project was around 1 billion ALL (US$ 9million). This would translate to around a US$ 9 per property registration cost which is well within international standards for such a mass data collection exercise.
The OSHEE data collection project is limited to buildings and objects that have an electricity connection. Information on agriculture land is not part of the project. Nonetheless, an inventory of agricultural land should be undertaken for inclusion within the fiscal cadasters. Data on agricultural land is typically held by multiple organizations in a country and would require a different coordination.
As to registration of property titles, it will be essential that a common property identifier be established to ease the merger of data held by other government entities. This could represent a major problem if it is not agreed early in the establishment of the fiscal cadaster. A property or parcel identification number (PIN) should be created for every property/building and parcel. One organization should have clear responsibility for developing the standardized PIN methodology. This unique reference number would then be linked to all data associated with a parcel and/or building—including property taxation and the indirect method for income tax purposes.
Appendix II. Mexico’s Legislation on Indirect Method
See KPMG, Tax Alert, Poland to implement ‘Estonian solutions’ in CIT collections (June 2020)). It should be noted that the proposal to introduce an ECT for small taxpayer in Poland is, as of now, only a proposal, not a policy. Also, Poland has been a relative economic success story among emerging market economies, having comparatively high income tax rates in the region.
Bills 3665, 3665/1, 1185.
An asset tax was proposed as a compensating measure in the original ETC plan discussed in FAD (2019) Report. As pointed out there, this would have the opposite effect than the ECT, potentially nullifying it, since it inhibits business investment.
While companies under the ECT have to comply with their own type of transfer pricing rules when determining deemed dividends distributions, these rules only apply against profit shifting out of an ECT company, not for profit shifting from a CPT company into an ECT-related party.
See R. Schatan et al, (2015), Reducing Social security Contributions and Improving the Corporate and Small Business Tax System. IMF, Fiscal Affairs Dept. and R. Schatan et al (2017),
The international experience with special economic zones in countries with unequal regional development, where tax benefits have been used to promote investment in disadvantaged locations, show mixed results. A common argument when the incentives do not work in those cases is that the regions lack business potential, not that the incentive is ineffective. So, the logical conclusion is that the incentive should be used in an appropriate location, where investment prospects are better (and where investment would probably happen anyway). This is one expansionary driver of regional tax incentives.
Schatan, R., M. Grote, and L. Burns, 2019. Ukraine—Distributed Profit Tax; Voluntary Disclosure of Assets, and BEPS Implementation, IMF, Fiscal Affairs Department (Washington, DC), the 2019 TA Mission hereafter.
The National Bank of Ukraine’s discussion document on the VDP stated that one of objectives of the VDP is to prepare for the future implementation of the indirect (tax) control method over personal income.
Resident individuals are taxed on their worldwide income. Non-residents are taxed on their Ukrainian-source income only. Dividends received from resident companies are taxed by a final withholding tax at the rate of 5%, while dividends received from nonresident companies, mutual investment funds and entities which do not pay corporate income tax are taxed at the rate of 9% (article 167.5 of the UTC). The tax is levied on the gross amount; no deductions or allowances are granted from dividend income. Stock dividends are exempt, provided that the shareholding remains unchanged and the company’s charter capital is increased by the amount of the dividend distribution. Interest is taxed by a final withholding on the gross amount at the rate of 18% (article 167.5 of the UTC). Royalties are subject to a final withholding on their gross amount at the rate of 18% (article 167.5 of the UTC). Rental income from immovable property is taxable at the rate of 18%. Also, a ‘military tax’ at the rate of 1.5% is levied on the same taxable base as the personal income tax.
Draft Law 1232 by Mr. D. O. Hetmantsev, People’s Deputy of Ukraine, 2019 and an English Draft of a further amended Draft Law 1232, on which FAD TP commented on 25 May 2020.
Schatan, R., M. Grote, and L Burns, 2019. Ukraine—Distributed Profit Tax; Voluntary Disclosure of Assets, and BEPS Implementation, IMF, Fiscal Affairs Department (Washington, DC).
OECD. 2015. Update on Voluntary Disclosure Programmes: A pathway to tax compliance https://www.oecd.org/ctp/exchange-of-tax-information/Voluntary-Disclosure-Programmes-2015.pdf
Martin, L. and A. Camarda, 2017. “Best Practices in Tax Amnesty and Asset Repatriation Programmes”, Transparency International and Civil Forum for Asset Recovery, European Commission.
KPMG. 2015. Tax Amnesty – A viable Option for Boosting Revenue https://assets.kpmg.com/content/dam/kpmg/ng/pdf/tax/tax-amnesty-a-viable-option-for-boosting-revenue.pdf
Draft proposal by Mr. D. O. Hetmantsev, People’s Deputy of Ukraine, Draft Law, No. 1232 on which FAD TP commented on 25 May 2020.
The latest VDP draft envisages that the one-time declaration can be submitted in the period from April 1 to December 31, 2021 to the State Tax Service of Ukraine in electronic or paper form. These VDP dates need to be confirmed by the legislator’s final approval of VDP legislation.
Not all tax amnesties are fully aligned with the FATF’s Principles for Voluntary Tax Compliance Programs. See Said, E.W., 2017. “Tax Policy in Action: 2016 Tax Amnesty Experience of the Republic of Indonesia”, MDPI Laws, School of Law, Politics and Sociology, University of Sussex, Brighton. The IMF mission received assurances from the NBU that if funds are repatriated to Ukraine, they would be transferred from foreign bank accounts. When no income/assets are repatriated into Ukraine (disclosure of assets not held in bank accounts) separate AML and CFT procedures appear irrelevant.
Para 41 of the FAD 2019 Report explicitly makes reference to the underlying intention that “The VD shields natural persons from criminal prosecution for crimes set forth in the 2019 draft law (i.e., sham business activity, negligence, document forgery, tax default and penalties for tax transgressions with respect to the disclosed assets and sources of their acquisition). In assessing the tax penalty, chargeable income shall be decreased by the disclosed VD base.” Subsequent 2020 draft refinements to the VDP do not deviate from this underlying idea—immunity is however only granted for tax and foreign exchange control violations. Proceeds from organized crime and bribery can still not be regularized or laundered.
If the amount of funds or other assets acquired out of income reported in the databases of tax authorities or covered by all duly paid taxes is less than UAH 1 million, guarantees of voluntary disclosure apply to the amount not exceeding UAH 1 million.
Note that there is no minimum of amnestied amount for income stemming from committed crimes and bribes.
According to Article 121 of the Land Code citizens of Ukraine have the right to free transfer of land plots from state or communal lands in the following amounts: (a) If there are several agricultural enterprises in the territory of a village, settlement, or city council, the size of the land share is determined as the average for these enterprises. In the absence of agricultural enterprises in the territory of the relevant council, the size of the land share is determined as the average for the district; (b) for personal farming – not more than 2.0 hectares; (c) for horticulture – not more than 0.12 hectares; (d) for the construction and maintenance of a residential building, outbuildings and structures (homestead plot) in villages – not more than 0.25 hectares, in settlements – not more than 0.15 hectares, in cities – not more than 0.10 hectares; (e) for individual country house construction – not more than 0.10 hectares; (e) for the construction of individual garages – not more than 0.01 hectares. Thus, referring to Article 121 of the Land Code for the purposes of the VDP provide the exemption for the unnecessary declaring of the land plots, that were provided to the declarant in a legal way and duly registered.
Vito Tanzi and Milka Casanegra (1987). Presumptive Income Taxation: Administrative, Efficiency, and Equity Aspects. International Monetary Fund. FAD Working Paper; Victor Thuronyi, Presumptive Taxation, Tax Law Design and Drafting, volume 1; International Monetary Fund, 1996. Chapter 12.
Presumptive taxation includes the use of a proxy measure for taxable income. For example, some taxpayers, for reasons of simplicity, are taxed on their gross income, like the Simplified Regime for small taxpayers in Ukraine.
Centre for Applied Research, (2015), Global Financial Integrity, Financial Flows and Tax Havens. Combining to Limit the Lives of Billions of People. Norwegian School of Economics. Available at: http://creativecommons.org.
Obtaining information from other government agencies is also subject to limitations, for they require a collaboration agreement with the agency in question. STS does not have an automatic access to it.
Another way in which the tax authority may access taxpayers’ financial information is by establishing that bank statements are invoices for tax purposes, i.e. serving as legal proof of interest (or other type of financial) income. This is the case, for example, in Mexico.
For example, it should not be acceptable that all deposits into a taxpayer’s bank account be characterized as taxable income without first eliminating transfers form other own accounts, to mention only one such exemption.
Edmund Biber. Technical Notes and Manuals. Revenue Administration: Taxpayer Audit-Use of Indirect Methods. Fiscal Affairs Department. International Monetary Fund. April 2010.
The rules should allow also for the taxpayer to demonstrate that calculating his/her income under the normal tax accounting rules is less than the indirect method estimation.
The STS obtains data on wages paid from employers, and generally on income paid by domestic sources, from other government agencies with which it has an agreement for such collaboration. The STS can also access information from notary publics on purchases of real estate (and other notarized transactions), all of which may be useful in individual audits.
Roberto Schatan, Martin Grote and Lee Burns (2019), Ukraine. Distributed profit tax; voluntary disclosure of assets; and BEPS implementation. IMF, Fiscal Affairs Dept.
Bill 2524 was voted by Rada on July 14, 2020, when the mission was preparing its preliminary report. Some provisions related to BEPS and TP issues were excluded but will be resubmitted to Parliament in a separate bill.
R. Schatan, et al, Rethinking dividend distribution tax, rationalizing simplified taxes, and adopting BEPS measures,
OECD, Model Tax Convention on Income and Capital (2017) (OECD Model).
United Nations, Model Double Taxation Convention Between Developed and Developing Countries (2017) (UN Model).
However, some countries tax on a withholding basis some items of business income, particularly technical fees and insurance premiums, derived by non-residents even if the income is not attributable to a PE in the country. In the case of technical fees, this taxing right is now included in Article 12A of the UN Model (2017).
While there is no unilateral relief from international double taxation under the UTC, foreign tax credit (FTC) relief is provided under Ukraine’s tax treaties. Given that Ukraine has over 70 tax treaties, a FTC for foreign withholding tax will be available in many cases. Also, the investments may be made in tax havens or low tax countries that do not impose withholding tax.
It is noted that the liquidation concession is not limited to CFCs and applies to interests in foreign entities generally.
If the period of deferral is less than 2 years, the dividend is taxed at the 9 percent rate under the distribution concession.
The 9 percent rate will apply if the change in residence gives rise to a deemed dividend if the period of deferral is less than 2 years.
Apart from technical issues raised in Part III(B) of the 2019 Mission Report and in this Part, the rules largely follow international norms in relation to the control and substantial shareholder rules, and in the calculation of CFC income, including the quarantining and carry forward of CFC losses on a “per CFC” basis.
It is proposed in Bill 2524 that the 25 percent or more threshold would apply for the 2022 and 2023 reporting years.
The tax treatment of dividends paid by a CFC to a resident controller is discussed at paragraphs 100 – 101 of the 2019 Mission Report. The rules apply to ensure that there is no “double counting” of CFC profits, i.e. that attributed CFC profits are not taxed again on repatriation as a dividend. A similar double counting issue can arise where a resident controller disposes of their shares or other interest in a CFC that has undistributed taxed CFC profits. In this case, the amount of the gain should be adjusted to avoid the double taxation of the CFC profits. It is noted, though, that given the distribution concession discussed at paragraphs 129 – 130, it is likely that the profits of a CFC (taxed or untaxed) will be distributed to the resident controller prior to the sale of the shares or other interest in the CFC so that little or no gain arises on the disposal.
See generally “Taxation of Offshore Indirect Transfers – A Toolkit” (2017) by the Platform for Collaboration on Tax accessed at http://documents.worldbank.org/curated/en/322921531421551268/a-toolkit-draft-version-2; and Burns L, Le Leuch H, & Sunley E, “Taxing Gains on Transfers of Interest”, in Daniel P, Keen, M, Swistak A, & Thuronyi V, International Taxation and the Extractive Industries, Routledge, 2016, pp 160–189.
Paragraph 28.7 of the Commentary to Article 13 of the OECD Model.
Law 466 states (as translated) that the use of the method is “mandatory” and an exception to the general rule of using the most appropriate method (UTC, art 188.8.131.52 & 184.108.40.206). This is not the most fortunate language; rather that an exception to that general rule, it could have been framed as CUP being the most appropriate method for pricing commodities.
OECD (2017), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Paris, OECD Publishing.
In essence, the law defines commodities as those goods which are traded by independents in exchange markets but does not define what might be considered an exchange market.
Transfer pricing for commodities was discussed at some length in previous missions.
R. Schatan, M. Grote & L. Burns, 2019, Distributed profit tax; voluntary disclosure of assets; and BEPS implementation, IMF, Fiscal Affairs Dept, (July 2019); p. 63.
Port costs could be deducted from quoted prices if paid by the buyer to an independent provider; otherwise it would have to show that those costs were paid at market prices.
This was adopted in the OECD TP Guidelines since 2010.
“Art 220.127.116.11: Economic activity for the purposes of transfer pricing are … e) transactions in which the taxpayer’s income and / or financial result is reduced as a result of …transfer of functions … tangible and / or intangible assets, benefits, risks and opportunities to another taxpayer in cases where in the relationship between unrelated persons such a transfer would not have taken place without compensation …”.
This is inconsistent with the adoption in Law 466 of the possibility of a correlative transfer pricing adjustment (L466, art 13. 4); UTC 18.104.22.168)
Translated loosely as the intent of having an economic gain from a business activity (a profit motive); UTC (2019), art 14.1.231.
The expressions in art 14.1.231 as shown in the English translation, economic reason or business purpose, do not appear again in a word search of the entire UTC.
This business purpose test is different and should not be confused with the ‘principal purpose test’ applied to tax treaty beneficiaries, referred to in UTC art 103.3. The latter test is not discussed in this report.
LTJ and beneficial legal forms are already defined in the law. These are subjected to deduction limitations unless the taxpayer complies with the ALP, treating them as if they were controlled transactions; UTC arts 22.214.171.124, 140.5.4.
For example, a taxpayer may claim that under an intra-group reorganization of functions, procurement of supplies for sale in local markets will be centralized globally in a (say) Swiss affiliate of the group. Under the reorganization all inventories of goods must be transferred (sold) to the Swiss affiliates so that the global stock is put immediately under its control. Under its new procurement functions, a few days later the Swiss affiliate sells the same goods back to the Ukrainian subsidiary at twice the price. The goods never move out of the Ukrainian warehouse. It can be argued that the transaction has no business purpose because no independent party would engage in such transaction. The realistically available option to the taxpayer is to keep the inventory and sell it directly to its clients; (this example is a simplified version of real case in another country).
Law 466 introduced in the UTC art 140.5.5–1 to clarify the consequence of not applying the ALP to sales to residents in LTJ or in counties where they benefit from legal forms that allow not paying any CPT. The consequence is an increase in the results by 30 percent of the value of the sale. However, it is not clear that this would also apply when the transaction fails the business purpose test.
Self-adjustment is permitted only if it will not decrease the tax liability. Law 466, art 4 (UTC 126.96.36.199).
For example, a transaction would fail the business purpose test if it involved a service that had no value at all for the affiliate liable for the charge. The correction is the non-recognition of the transaction and disallowing the deduction for the expense. No solution could be found adjusting the price, unless a zero value was admitted as a market price.
In the plenary session Rada voted Bill 2524 July 14, 2020 in the final days of the mission. The mission did not have access to the final version of the Bill as approved by parliament. The document mentioned here is a previous version that included numerous corrections to the Law 466 which apparently, according to the MoF, were not approved.
B2524, art 69, 5, eliminating UTC art 140.5.15 and modifying 140.5.4
These legal forms are identified in Ukraine cabinet of Ministers Decree # 480, July 4, 2017. The list includes over 100 legal forms in 26 countries.
To soften the impact of an “all-debt” thin cap rule, the European union, for example, has a de minimis rule whereby a specified, small amount of interest, regardless of origin of debt, is exempted from the thin cap rule. EU Council Directive July 12, 2016, art 4. The downside of this rule is that the relief is not proportional, but it benefits small taxpayers most.
The UTC has a flat withholding rate (15 percent) on interest payments to non-residents. However, some treaties do provide for a special reduced rate when the interests are paid to financial institutions (e.g., Austria and Luxembourg).
Two parties are related also when one is indebted to the other (directly or indirectly) by more than 3.5 times its equity (L466, art 3. 17); UTC art 14.1.159).
Federation Internationale des Geometrics. UN-FIG. 1999. United Nations-FIG Bathurst Declaration on Land Administration for Sustainable Development. International Workshop on Cadastral Infrastructures for Sustainable Development, International Federation of Surveyors and the United Nations, Bathurst, New South Wales, Australia.