Alexander Minin and Ivan Shynkarenko spoke at the roundtable “Problems of exporters in time of war: regulatory challenges”

May 24, 2024

On 21 May, 2024, a roundtable organized by the GMK Center was held online. Representatives of the government and business, as well as experts and analysts, were invited to participate in the discussion. The event covered the following issues:

  • interaction with controlling authorities;
  • VAT refund issues;
  • currency restrictions;
  • tax burden and rent payments;
  • transfer pricing.

Senior Partner of Alexander Minin delivered the speech on the topic “Currency restrictions in terms of the lack of proper regulatory support for their current state and control over compliance”.

Alexander pointed out the excessive regulation, uncertain and unclear legislation that pose significant obstacles to the business. To provide a glaring example, Alexander mentioned the settlement deadlines for export and import transactions. These measures were introduced as protection measures by the Resolution of the Board of the National Bank of Ukraine (NBU) No. 5 as of January 02, 2019, along with the entry into force of the respective law on February 07, 2019. Such measures are still applicable, but not in the manner envisaged by the Resolution No. 5. For example, the settlement deadlines under the Resolution No. 5 have remained unchanged since the moment of introducing 365 day deadline. Instead, in practice, the special deadlines are applied as stipulated by the NBU Resolution No. 18 as of February 22, 2022. The question is what are the legal grounds for applying such measures, their legal nature, and the grounds for imposing a penalty for their violation as for violation of the deadlines for protective measures (which, however, are different based on Resolution No. 5)?

In practice, the tax authorities conduct audits in this regard and impose sanctions – a penalty of 0.3% per day for exceeding the nominal settlement deadlines. During administrative appeals and court litigations the tax authorities have not yet been able to provide a response – counterarguments – as to the grounds for applying such deadlines and penalties. There is also a number of other controversial issues, including which particular bodies are entitled to conduct the relevant tax audits and apply such penalties, in particular, whether the territorial bodies of the State Tax Service have such powers. And what about offsetting, is it possible in foreign economic relations now? According to Resolution No. 5, it seems as if possible. The Resolution No. 18 and other regulations do not seem to prohibit it. However, more recent regulations specify only that banks are not empowered to remove currency transactions from control in view of offsetting, but this is not a ban, is it?

Hence, there are a lot of controversial and uncertain issues, and so far, as Alexander noted, the tax authorities have no idea how to cope with them, and it is difficult to engage the tax authority into the dialogue – it seems that the purpose of the controlling authorities is not to ensure compliance with the law, but to collect fines at any cost to fill the budget. “The court litigations are still in progress, and even the decisions of the courts of the first instance are not delivered yet. Probably, the courts are not ready to set a precedent due to the complexity of this issue and uncertainty of the legislation,” said Alexander.

Ivan Shynkarenko, Partner at , spoke on “TP control in Ukraine and double taxation”. Ivan emphasized that “the worst expectations regarding the introduction of TP control rules in Ukraine in 2013 are starting to come true. Our tax authorities are not ready to work with such a tool as transfer pricing, which, as stated by the OECD, is not an exact science.” Quite often, the tax authorities manipulate the indicators and their approaches become more pro-fiscal, while judges with the absence of economic background sometimes find it difficult to assess such actions properly, as the issues are really complex.

One of the most striking examples is the case of Olympex Coupe International v. Odesa Oblast Main Department of State Tax Service, in which the tax authorities applied the net profit method quite “creatively”.

As a result, only three companies remained in the sample of tax authorities for 2014 and two companies for 2015. As follows from the texts of the court decisions, the lower quartile of the net profitability ranges was 13.37 % in 2014 and an impressive 44.39 % in 2015.

To illustrate, Ivan cited data from Forbes, according to which the most profitable companies in the US in 2015 were healthcare technology companies, with an average net profit margin of 21%.

Fortunately, after a second review in the court of appeal, a court decision was delivered in favor of the taxpayer. Ivan is hopeful that the “creativity” of the controlling authorities will be overcome in the courts. It is also possible to apply the procedure of mutual agreement with the competent authorities of the non-resident country. There is no clear-cut understanding of how this will work, but, as Ivan noted, given the current situation, such methods will have to be used.