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WHY THERE ARE SO MANY SEARCHES IN UKRAINE? WHO IS TO BLAME: BUSINESS OR LAW ENFORCEMENT?

 Each of us often hears the phrase “Search is a sign of success.” All politicians from the stands say that law enforcement officers “nightmare business”, even official statistics show that Ukraine today is a world record holder in the number of searches.

 At the same time, most searches are conducted in business, in offices, warehouses, at home of business owners and key managers.

 Is that really so? From personal experience I confirm: that it is so. Every business in Ukraine that has crossed the 1 million UAH mark. a month sooner or later meets the SFS, SBU or prosecutor’s office with a search warrant.

 What is the reason?

 Frankly, none of the searches in which my lawyers or I personally defended myself were completely unfounded. Of course, as a lawyer, I always found legal violations when making a decision in court, during the search itself and later when returning the seized property. And objectively, in most cases, the seized material evidence was later declared inadmissible, and the seized property (computer equipment, telephones, money) was returned to their owners.

 But each court ruling showed that the companies being searched were involved in the crime. Such enterprises either bought something from a fictitious firm or sold something to it. It does not happen that there are no contacts with the fictitious enterprise, and they came for a search. And this is 100 percent a fact! Of course, I allow exceptions, but in my experience I have not seen this.

 And now to the main thing, what is the reason for such a large number of searches?

 Let’s model the situation.

 You are a programmer. You have found a large customer of a VAT payer with an order for UAH 1 million. To do this, you first register a VAT company, open accounts and enter into an agreement.

 And so you were paid UAH 1 million.

 How much tax do you have to pay and how much will you have left?

 First of all, you need to register a tax invoice for your counterparty for UAH 1 million, and therefore you need to deposit funds in the amount of UAH 166,666.67 (value added tax) to the tax account. After this operation you have UAH 1,000,000.00 left – UAH 166,666.67 = UAH 833,333.33.

 Then pay income tax (18 percent). UAH 833,333.33 – 18% = UAH 683,333.33 left.

 After that we pay dividend tax (5 percent). UAH 683,333.33 – 5% = UAH 649,166.66.

 After that we actually receive funds on our card and we can go to withdraw them to the bank. But before that you have to pay income tax as an individual (18 percent) and the military tax (1.5 percent), a total of 19.5 percent. UAH 649166.66 – 19.5% = UAH 522,579.16.

 What is the result? From the received UAH 1 million. you will have a little more than half, you give 48 percent to the state.

 Or you have another way – to use the services of “schemers”. You will pay them only 10-12%, and the money will be brought to you in cash.

 The economic benefits are obvious!

 What about the risks?

 Today, the state fights tax evasion through 2 institutions – the first is the State Tax Service, the second – law enforcement agencies (SFS, SBU, DBR, Prosecutor’s Office, sometimes the Police, NABU).

 What happens in the case of the State Tax Service? The State Tax Service detects the fact of understatement of the tax rate, conducts an inspection, draws up an act, sends you a tax notice of the decision, and if you have not appealed to the court, the amount of unpaid taxes is collected. But most importantly, this amount is not charged from you, but from your company. To avoid paying a fine, simply sell the corporate rights. Slang – express liquidation. This procedure costs about 20 thousand UAH on the market, for these funds lawyers will find a buyer for your company and will carry out a “turnkey” re-registration without unnecessary worries. That is, the maximum risk in the relationship with the State Tax Service is an additional cost of 20 thousand UAH. You can afford it: if you save on taxes about 400 thousand UAH.

 What happens in case of detection of the fact of understatement of a tax rate by law enforcement agency. Criminal proceedings under Art. 212 of the Criminal Code of Ukraine (tax evasion), then you will be summoned for questioning, then demand documents on the relationship with the company for which you paid, then conduct searches, possibly seize a computer, phone, and of course money, if found.

 But the most important fact is that there is no corpus delicti in your actions, because in order for the corpus delicti to exist, there must be significant damage – which is UAH 6,306,000.00 (UAH 3,000 * 2,102.00). And even if they prove everything, your actions caused damage of only UAH 477,420.84, and therefore the criminal proceedings will be closed automatically 12 months after its opening (in accordance with Part 2 of Article 219 of the CPC of Ukraine and paragraph 2 of Part 1 Article 284 of the CPC of Ukraine). And this is a 100 percent fact! Confirmation of this is the fact that in Kiev for the last 3 years to responsibility for the crime under Art. 212 of the Criminal Code of Ukraine, no person who acted in this format was involved.

 And even with the maximum cost of a lawyer in the amount of 100-150 thousand UAH. for the whole process of pre-trial investigation, you still saved about 350 thousand UAH in taxes.

 It turns out that you can create a company, absolutely safely not to pay taxes, then sell the old company, open a new one and again in a circle. And it really is! Most medium-sized businesses do so today, because paying about half of their earnings to the state is completely unprofitable and unfair.

 And the most important thing is that the legislation really allows not to pay taxes and not to bear any responsibility.

 Irrational tax policy of the state has led to the emergence of a number of schemes aimed at optimizing taxes. Such schemes can be divided into 3 groups:

≡ White

 This is when costs are actually inflated, through the operation of a group of controlled companies or through the registration of employees by sole proprietors. The scheme is absolutely legal, all operations really take place, the goods are delivered, services are provided, works are performed, everything happens according to the current legislation.

≡ Gray

 This is an optimization that takes place between enterprises in the real sector of the economy. For example, a firm imports. After customs clearance, the goods are sold in Ukraine for cash, for the purchase of new goods abroad you need non-cash funds – for the purchase of currency, so there is an exchange of cash for non-cash funds. Or another example, the company is engaged in advertising, some customers have paid for advertising in cash, and the company needs non-cash funds to pay wages and rent equipment, the exchange takes place again. The difference between the “white” and “gray” scheme is that in the first case the services are actually provided (goods are actually imported), in the second case everything happens only on paper. But given that both firms are real, have the capacity, staff, actually pay part of the taxes, it is almost impossible to identify the facts of optimization.

≡ Black

 This is an optimization that takes place with the participation of a fictitious element (LLC, FOP, NGO, financial companies, etc.). Here, in most cases, the so-called “twists” are used, which are now much talked about by politicians and the press. In short, the essence is this: there are companies that are engaged, for example, in the import of goods such as fruit, fish, consumer goods, most of these goods are sold in Ukraine for cash, and in the end there is an exchange of cash for non-cash, as in case with the Gray scheme. But there is a nuance here, goods such as fruit and fish cannot be bought by a construction company or provide some services, it is obvious. Therefore, between the two companies puts a gasket company, which carries out the “twisting” of goods, buys bananas, and sells advertising services. Such a company does not last long, because it is noticed by the tax authorities and they are actively looking for a leader. And after they find him, the manager says that he is not the manager and does not know anything about the work of such a company, and he was simply given UAH 1,000 for coming to the notary. And after that, all firms of the real sector of economy which interacted with fictitious firm, potential clients of militiamen, from here both searches, and interrogations, and “nightmare business”.

 And now the main question: “So who is to blame for “nightmare business”? Law enforcement or businessmen themselves?”

 I am convinced that not one and not the other, but only the state!

 Law enforcement officers do their job, they come only to those businessmen who underestimated the tax base and did not pay taxes.

 Businessmen, in the current reality, can not give 50 % of their earnings. In most cases, the business does not even have such a margin. In addition, each of the businessmen, knowing the law or having a good lawyer, understands that with the right approach, there are no risks and no one will prosecute him. And therefore, “pay taxes in our country only l… ..”. And that’s a fact!

 But the government must understand a few simple things:

“ The tax system should be built on the same principle as business. The more you pay – the cheaper! Wholesale – more profitable! 

 And now we have the opposite, the more you pay taxes – the higher the rate. For example, the simplest sole proprietor pays about 1.5 thousand UAH per month for 1 million turnover, the second group of sole proprietors about 3 thousand for 5 million UAH, the third group 5% for 7 million UAH, and then LLC with VAT – 48 sums (all taxes together).

What will a smart person do with this approach? The first is to break the business into a large number of sole proprietors and limited liability companies, the second – when a certain turnover is reached, to open a new business entity and so on.

 On the contrary, a large payer pays 5 percent of turnover, and a small 10-15. Then the small will strive to become big, will cherish the reputation and protect their business.

 Plus, with this approach, it will not be profitable to do the optimization mentioned above. Because optimization costs 12 percent, and the tax is 5 (for example).

 Some will say that such an approach will stop filling the budget and this will lead to a huge deficit. So, if you look at the statistics on large taxpayers, their tax burden does not reach even 2 percent. If such taxpayers start paying 5 percent, the budget will increase at least twice, and the cost of maintaining tax and law enforcement agencies can be reduced at least twice, because they will not have a job – business and without them will pay to the budget.

” Change priorities in the work of tax authorities 

 State tax service – should be customer-oriented. What it means? Each company must be assigned an inspector, whose salary depends directly on the feedback of those businesses that it serves. Such an inspector should be in touch 24 hours a day and facilitate business tax planning.

 For example, recently my company’s lawyers accompanied the filing of a complaint to the State Tax Service of Kyiv. The complaint was filed three times and each time a formal response (reply) came, from which it is not clear what the problem is. After the third answer, the lawyers tried to call and find out what was wrong. As a result, from 10 am to 6 pm, after continuous calls, it was not possible to talk like that. They answered the phone numbers they managed to call – call another phone, but no one picked up the phone on another phone during the day. Vicious circle! The only answers I managed to get somewhere in the office and other numbers: “Change the region of activity, everything is difficult in Kiev”, “Now everyone is blocked – it’s okay, go to court”, “Nobody picks up the phone, because we have almost all cut – there is no one to work. “

 Here’s to you and customer focus!

” Change the system of law enforcement. Law enforcement agencies – should be focused on filling the budget. With any reforms, there will still be a percentage of “schemers” who will look for options – how not to pay even the 5 percent. Therefore, the law enforcement system should be, but with a changed approach to work. 

 The main indicator is the filling of the budget through the seizure and recovery of state revenues from fictitious enterprises and the achievement of a tax compromise with the real sector of the economy, which has evaded taxes.

 In this case, it is necessary:

 Motivate employees with a salary, which should directly depend on the filling of the budget personally by each employee (group, department). For example, a group is created that includes a prosecutor, investigators, and operatives. This group documents the illegal activities of a fictitious enterprise or a group of enterprises of the real and fictitious sector, according to the results of the investigation the budget is filled by UAH 10 million, the group receives 5-10 percent of the filling and distributes it as a bonus among the whole group. Such an approach will motivate anti-corruption measures and lead to mutual control when one employee may not receive a bonus due to the corrupt actions of another. The structural unit has several groups that compete with each other on a single indicator – filling the budget. A group that does not fill the budget or has the worst performance is subject to reorganization or liquidation, and group members are subject to dismissal.

 Expand the powers of law enforcement agencies (simplify procedures for obtaining access to accounts, simplify obtaining permits for search, detention and arrest, simplify the procedure for collecting bail, proceeds from crime and the sale of property at public auction, etc.), while increasing personal responsibility of each employee. If the investigative action or procedural decision is declared illegal, the state will immediately (clearly define the term) compensate the damage in double amount or pay specific fines for violating the rights of citizens or businesses (for example: illegal search – 100 thousand UAH, illegal seizure of property – 20 percent of its value, etc.) with subsequent recovery of compensation from a specific law enforcement officer. This will first reduce law enforcement abuse to almost zero, and on the other hand will guarantee the security of the business.

” And of course the court! Given that in any case, the last word is always up to the court, the personal responsibility of the judges is essential. The Servant of the People party had a favorable idea, according to which, in the event of a court decision being overturned by a higher court, the judge bears personal responsibility for the decision he made. Every judge must understand that for making an unjust decision – he will be fired at best, at worst – criminal liability for damages. 

 Only in this way, it is possible to form a unified judicial practice and ensure the rule of law!

 The above is a completely innovative approach, it usually needs discussion and nuance. But the basic ideas have a right to exist and I am convinced that such an approach will make it possible to correct the absolutely deadlock situation with taxation in Ukraine.

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