European Integration in Taxation: Tax Changes Required from Ukraine to comply with EU legal acts on taxation

Ukraine has been defending its European aspirations for over 8 years, and today the chances of obtaining the EU candidate status is more real than ever.

However, it should be kept in mind that a candidate country applying to become a Member State of the EU needs to take a number of so-called European integration steps, i.e. meet its clear requirements for the legislation of Member States.

Let us consider the required amendments to the tax legislation of Ukraine.

The principle is simple – each provision of EU legal act should be properly transposed to the national legislation of each Member State country, ensuring uniform application that taxation provisions, which are harmonised at Union level.

Paulius Majauskas
EU4PFM International Key Expert on Tax reform

For candidate countries, this entails preparing hundreds or even thousands of pages of different draft laws. In this regard, the Tax Code of Ukraine may also be significantly changed. There are about twenty directives that need to be harmonized and only two regulations that are already directly implemented and require no amendments to the legislation in force.

The EU tax policy consists of two components: direct taxation, which remains the sole responsibility of Member States, and indirect taxation, which affects the free movement of goods and freedom to provide services in the single market. There are also rules for administrative cooperation that ensure proper functioning of the tax system.

Indirect taxation

As the EU has its own economic zone, most indirect taxation directives establish the level playing field for companies from all Member States. First of all, in terms of value added tax and excise duties.

The EU-Ukraine Association Agreement contains provisions on harmonisation of VAT and excise tariffs. With the assistance of the EU4PFM Project, a comprehensive analysis of VAT system was conducted and only minor inconsistencies with the EU VAT Directive were found. 

Ukraine has also taken a number of steps towards its excise duly commitments. Although the official conclusions are still pending.  

However, there are a few more directives that go beyond the Association Agreement. They regulate, inter alia, the administration of excise duties, in particular the creation of a network of excise warehouses that meet the legal and technical requirements of the EU rather than the establishment of tariffs. This requirement is fundamentally important to prevent the circulation and manufacture of counterfeit and fake goods in the single market.

Direct taxation

The EU basic principle implies balance between the standards for personal and corporate taxation. First of all, measures to prevent tax evasion and double taxation are most important . With this regard, several EU directives have to be transposed to the national legislation.

Compatibility between EU acquis and OECD standards Ukraine has already implemented certain global and, consequently, European taxation standards on tackling tax evasion and on avoidance of double taxation into the national legislation. The EU4PFM Project has also devoted efforts to the implementation of  above-mentioned initiatives. It should be noted that the EU acquis in this field is somewhat more demanding and requires further implementation of such legislation as, for example, Directive on Tax Dispute Resolution Mechanisms in the European Union[1].

Administrative cooperation

Although the EU membership does not deprive a country of its full independence in decision-making, it requires some mutual integration in certain fields. This directly applies to the tax authorities.

The tax authorities of all Member States cooperate to exchange information, conduct joint control measures and facilitate the collection of tax debts. Their close cooperation is crucial for detecting and reducing tax fraud.

At this stage, the creation of a legal and administrative framework for automatic exchange of financial account information is of fundamental importance. EU4PFM actively supports the implementation of the standard for automatic exchange of information both in terms of drafting legislation and developing the required IT solutions.

Full implementation of the EU acquis on administrative cooperation will require introduction of further amendments to legislation, including imposition of certain obligations on business to collect and provide data for their further exchange between the competent authorities of the Member States. These data include information from the state registers, information on wages and incomes of the residents of other Member States, data on transactions provided by payment companies, information on the sellers’ income provided by electronic platforms, etc.

Ensuring proper application of transposed EU legislation

Finally,  only drafting and adopting EU tax legislation provisions will not be enough. It is necessary to build administrative capacity of tax administration for its application. Also,  certain IT solutions should be introduced and operational . In particular, the State Tax Service of Ukraine is required to implement/connect to:

tax information between the EU competent authorities;

information from the state registers, information on wages and incomes of the

residentsof other Member States, data on accounts provided by financial institutions,

data on transactions provided by payment companies, information on the sellers’

income provided by electronic platforms, etc;

economic operators registered in the EU for cross-border transactions;

for cross-border online sellers by allowing them to register as VAT payers in electronic

 form in one Member State;

movement of excise goods (alcohol, tobacco and energy products). More than 100,000

economic operators currently use the system, and it is a crucial tool for information

exchange and cooperation between Member States.

Obviously, Ukraine has a lot of work ahead. Fortunately, the foundation has already been laid and,

in fact, this is a list of steps that would sooner or later have to be taken to reinforce the European

aspirations of Ukraine. And these are the steps that will foster equality and transparency not only

in the EU-Ukraine relations, but also in the relations of Ukrainian entrepreneurs and tax

authorities.

[1] https://eur-lex.europa.eu/eli/dir/2017/1852/oj

[2] https://ec.europa.eu/taxation_customs/vies/

[3] https://vat-one-stop-shop.ec.europa.eu/index_en

Moving forward to changes together!

Paulius Majauskas, EU4PFM International Key Expert on Tax Reform,