Opinion: Increased scrutiny by tax authorities of wealthy Ukrainians could become a tool for political reprisals

The Cabinet of Ministers of Ukraine plans to tighten oversight of wealthy citizens. Specifically, starting January 1, 2019, wealthy Ukrainians may come under increased scrutiny from tax authorities. The Ministry of Finance drafted the relevant bill and even placed it on the agenda for consideration by a government committee, but later withdrew the document for further revision. The ministry plans to resume consideration of the bill as early as September.

According to Andriy Fomin, a senior attorney at Barristers JSC, the implementation of the plan to counter strategies and practices aimed at eroding the tax base and shifting profits out of the tax system (BEPS) in areas such as combating tax abuse has become one of the Cabinet of Ministers’ priority tasks for reforming the public administration system for 2017–2020.

“The state stands to benefit greatly from the introduction of new mechanisms into legislation to monitor high-income taxpayers. Overall, the bill aims to bring individuals’ income out of the shadow economy and strengthen control over capital flows,” Fomin believes. However, it is too early to speak of positive results from implementing such measures to monitor high-income taxpayers specifically in Ukraine. Not all countries that have introduced such mechanisms have been successful. In particular, the Ukrainian bill addresses some rather sensitive issues.

“First and foremost, this concerns tax authorities’ access to the bank secrecy of high-income taxpayers upon first request. This will effectively allow tax authorities to obtain information about the balance of any individual’s accounts on the grounds that a high-income taxpayer is being audited. Therefore, it is reasonable to expect that taxpayers will seek other options to optimize the taxation of their income, which will lead to a capital flight from Ukraine to other jurisdictions.

Given that Ukraine is currently in a situation where those in power include, among others, representatives of the oligarchy—the introduction of such changes could become a tool of “political reprisal,” an administrative resource that could be used as a last resort in the struggle for power. “However, despite these considerations, the bill’s stated goal is realistic: the measures proposed by the bill, through certain restrictions, are generally aimed at achieving a positive economic impact for Ukraine’s economy,” the lawyer concludes.