Legal insignificance of vat legal regulation in Ukraine

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Augustin Voloshin Carpathian University

Uzhhorod National University

LEGAL INSIGNIFICANCE OF VAT LEGAL REGULATION IN UKRAINE

Serhii Pyroha, Ph.D. in Law, Associate Professor

Ihor S. Pyroha, Dr. hab. in Law, Professor

Problem statement

Having average tax rates as in Europe, Ukraine has a shadow economy of about 31 % during 2020-2021 of official GDP¹. The Ministry of Economy believes that business entities have adapted to work in conditions of restrictions and have developed new channels of shadow activity. It is to be hoped that by improving tax administration, the share of the shadow economy can be reduced. The “improvement” of administration actually changes only the corruption component at all levels of economic management, law enforcement and the courts.

Market mechanisms of regulation do not work in the economy of Ukraine. Reducing the tax rate from day one dramatically changes incomes, but does not stimulate economic growth. In 2016, single social contributions (SSC) rates were reduced by 50 %². We have seen zero growth in the legal economy, no new jobs have been created, and the shadow has remained at the pre-reform level. The only consequence of the reduction of the tax rate is the reduction of revenues from social contributions in the amount of 91 billion UAH, which automatically necessitated the introduction of subsidies from the Pension Fund of Ukraine from the budget and reduce the actual amount of pensions.

The problem is that the legislator tries to manipulate tax rates without establishing an unambiguous definition of the concept of tax base, the method of accrual of tax liabilities, the time of occurrence of tax liabilities and the procedure for payment of taxes and fees. To the greatest extent, these shortcomings relate to value added tax and income tax³. Shortcomings in the legal regulation of VAT have turned it into a purely corrupt tax, and illegal VAT refunds from the budget have become the most profitable business in Ukraine⁴. Ukraine has a full-fledged VAT economy with its own market, demand, supply and beneficiaries. And e-administration does not change anything in this system.

The aim of our work is to try to find out why all the mechanisms of economic regulation developed by world science in Ukraine are ineffective and what needs to be changed in the legislation to radically improve the system of legal regulation of taxation.

Presenting main material

VAT is paid by every consumer and should be a relatively stable source of revenue for the state budget of Ukraine. The VAT rate is high: the basic rate is 20 %, 7 % for medical supplies and 14 % for the supply of agricultural products with the Universal classifier of goods of foreign economic activity (UCG FEA) code: 1001, 1003, 1005, 1201, 1205, 1206 00.

The Ukrainian legislator has believed and continues to believe that to increase budget revenues and extra-budgetary funds it is enough to change the rate of tax or fee. Increasing the tax rate to a certain threshold, it is natural to expect an increase in revenue. Reducing tax rates initially reduces budget revenues, but should stimulate investment activity and accelerate economic development. Increasing production in the future will lead to an increase in the tax base and budget revenues.

Unfortunately, neither the reduction of tax rates nor their increase has little effect on the volume of legal production, but stimulates the redistribution between the legal and shadow sectors of the economy.

The Tax Code of Ukraine (hereinafter TCU) introduces VAT, but does not define the meaning of value added. In fact, the concept of turnover tax is used, to which the concept of tax credit (Articles 198, 199 TCU), which determines the amount of tax payable to the state budget or reimbursement, the difference between the amount of tax liability (Articles 188, 189, 190 TCU) and the amount of tax credit of the reporting tax period (Article 200, 2001 TCU).

By introducing a tax credit that no one needs, the legislator also introduces tax relations between VAT payers, ie the tax is paid not to the budget, but to the buyer of goods / services. Both innovations of the legislator are aimed solely at simplifying and even encouraging the use of primitive methods of VAT evasion.

Ukrainian innovation in the market mechanism of VAT taxation - tax relations between taxpayers introduce an intermediary between the actual taxpayer (final consumer) and the state budget. Such distortion of market regulators does not exist in the tax systems of civilized countries. Tax relations have the right to exist exclusively between the state and taxpayers, but cannot be established between taxpayers. Using the uncertainty of the price of goods/services, intermediaries (ie all VAT payers) are able to arbitrarily choose the amount of VAT they want to pay to the budget. They may not pay at all, using companies with signs of fictitiousness (tax pits), gaskets, carousels, etc.

Extensive opportunities for VAT optimization are provided by a parallel system of accounting for tax liabilities in the form of tax invoices (Article 201 of the TCU). No improvement in the tax invoice accounting system can in principle improve the administration of VAT, as the figures recorded in such an invoice do not oblige anyone to pay VAT, but give everyone the opportunity to reduce VAT liabilities (sometimes to zero or even more - to demand payments from the budget). Having a properly executed tax invoice allows you to reduce the tax liability by the amount specified in the invoice, regardless of the actual payment to the budget of the amount specified in the tax invoice. A properly executed invoice allows even in court to confirm the right to reduce the tax liability or receive the right to reimbursement from the budget. From a purely formal point of view, such an approach is legal (for honest taxpayers), but on the other hand - there are unlimited opportunities for abuse of rights (for dishonest taxpayers) due to the impersonal responsibility for paying taxes. If you do not personalize the responsibility for paying VAT, you can't waste effort on e-administration and any other attempts to improve the system.

The problem is that there are no simple and reliable methods that can justify the honesty of the payer. Instead of terminating tax relations between taxpayers and abolishing tax invoices, the legislator resorted to various restrictions, including an electronic register of tax invoices and electronic accounting, which are subjective and complicate the tax reporting procedure, without improving the situation with VAT in principle. The law provides for various methods of such control, but not all of them provide an objective estimate of the amount of tax to be paid to the budget.

Usually complex problems are solved quite simply. In the case of VAT, the decision requires four simple steps:

1) cancel the tax credit;

2) cancel tax invoices and everything related to them;

3) abolish tax relations between VAT payers;

4) determine the object of VAT taxation and change the procedure for calculating the amount of tax and the amount of refund.

VAT must be refunded for its actual meaning. The tax must be paid at each stage of the production and distribution cycles on the way of the goods / services to the final consumer as value added is created. The tax is charged at each stage, the value added created exclusively at this stage. The accrued tax must be paid directly to the budget when selling goods / services. The price also includes depreciation of fixed assets at each stage. The basis for the inclusion of depreciation in the price is the crediting of the corresponding amount to a special account with a special mode of use.

Value added obtained in all previous stages is included in the price at this stage as costs without allocation of value added. The actual implementation of the costs must be confirmed only by a payment document certifying the actual payment of the due amount. When buying a product, the buyer pays the full cost of the purchase, which includes:

Cost = VA1. + VATj + Depreciation 1 + Costs,

VA₁ - value added created by the seller in the value of the sold of a batch;

VAT₁ - accrued VAT on value added VA₁, created by the seller;

Depreciation - depreciation of fixed assets of the seller, used in the production of a batch of goods sold;

Costs - any costs actually incurred by the seller, used in the production of the consignment of goods sold.

VAT liabilities arise from the seller at the time of sale of goods / services and are determined by the amount of VAT₁. The order of payment of the specified amount can be made in real time or by the results of sales during the reporting period. At this stage, the buyer does not incur any tax liabilities, regardless of the purpose of the purchase and subsequent intentions to use the purchased goods / services. The cost of goods paid by the buyer is included in costs. The VAT liability of the buyer arises only at the time of resale of purchased goods, ie when he acts as a seller.

When crediting costs to the price, you can include only the value of those goods / services that are used directly in the production of the batch of goods sold. No stocks of factors of production should be included in the price. This requirement does not affect the VAT liability of either party, but encourages the acceleration turnover of working capital. It makes no sense to buy factors of production with a large stock. Such purchases not only distort the market distribution of limited resources, but also increase the price of goods / services and reduce their competitiveness.

When selling goods / services outside the customs territory of Ukraine, VAT is charged at zero rate. In this case, the seller is entitled to a refund of the amount of VAT previously paid as part of the costs. The need for a refund may also arise when the final goods are exempt from VAT, but at intermediate stages VAT was payable. He has no other grounds for obtaining the right to reimbursement.

The presence of a customs declaration issued in accordance with the Customs Code of Ukraine⁵ is not a basis or even justification for the right to a VAT refund. The right to reimbursement arises only if the proceeds are received as payment for a consignment of goods sold at a zero rate. Otherwise, we can't even talk about reimbursement, because the amount to be reimbursed cannot be calculated in principle (we have canceled tax invoices).

The method of calculating the amount of compensation must be changed. In the general case, we will assume that the exporter sells some of the goods produced at the VAT rate of VR = 0 (exports and equivalent transactions). Denote this share by the symbol S_VAT= ₀, which can vary from zero (did not perform transactions that are taxed at the rate of VR = 0) to one (all transactions are taxed at the rate of VR = 0). The share of goods sold at a non-zero rate is equal to 1-S_VAT=₀. Revenue from the sale of goods at zero VAT rate is equal to the sum of the following components:

Rvr=0 = VA1 + Depreciation1 + costs SvR= 0.

Revenue from the sale of goods at the rate of R_Vfe0:

RvR^0 = VA1 + VAT1 + Depreciation1 + costs (1-SV^R=0)

where VA_j - value added created directly by the exporter;

VATj - VAT accrued on the value added of VA_j and paid to the budget;

Depreciation_j - depreciation deductions from the exporter;

Costs - cost of purchased factors that were used in the production of actually sold goods;

S_VR=₀ - the share of goods sold at the VAT rate VR = 0.

From these two equations we can determine the share of goods sold at zero VAT rate. From the first equation we determine VA_j + Depreciation:

VA1 + Depreciation1 = RvR=0 - costs SvR=0.

After substitution in the second equation we find:

^RVR^0 = RVR=0 - costs SVR=0 + VAT1 + costs (1 - SVR=0).

The only unknown value in this equation S_VR=₀, which we determine:

1, Rvft₌₀+VAT₁-R_vltA-_l

Vf?=o - ₂ + ₂._costs

Knowing the share of goods sold at zero VAT rate, you can determine the amount of refund:

^refund = SVR= 0 *Costs 'S(VAT included)

^{where S}(VAT included) = ^VR/(j00 + ^VR)

VR - VAT rate.

If the production of goods uses materials and components that are taxed at different rates, the calculation must be made for each rate separately. Since the number of possible rates recommended for use in the European Union is three (excluding the zero rate), the calculation of the amount of reimbursement is simple. Article 193.1 of the Tax Code of Ukraine provides for three non-zero rates - the basic rate of 20 %; rate of 7 % for medicines and medical devices and rate of 14 % for the supply of agricultural products with the code UCG FEA: 1001, 1003, 1005, 1201, 1205, 1206 00.

For example, if the share of goods sold at zero VAT rate is equal to `A (ie Rv_R=o+ VATj - Rv_R^o = 0), and all purchases were taxed at the basic rate of 20 %, the amount of refund is equal to:

refund = 0.5A/6Costs = Costs /12

It will be recalled that the costs in this formula are the value of all purchases, provided that they are taxed at a rate of 20 %, ie only one twelfth (1/12) of the value of all purchased factors of production is refundable.

It is worth noting that the amount of reimbursement is significantly overstated, which is easy to see by looking at the cost components:

Losses = VAS + VATS + Depreciation

where VA_S is the total value added created at all previous stages of production / distribution (value added of all factors used);

VATs - the amount of tax actually paid to the budget at the previous stages of production / distribution;

Depreciation^ - total depreciation at all previous stages of production / distribution.

When calculating the refund, the base also includes the amount of depreciation costs at all previous stages of production, and when calculating VAT, depreciation was not included in the tax base. If necessary, depreciation can be excluded when calculating the refund, as VAT tax reporting requires the following data: VAT, accrued and paid VAT and depreciation for each taxpayer separately.

In general, the VAT report, regardless of the size of the company, number of employees, production volume, etc. can be limited to four figures: the total value added produced by the company (VAT base); VAT paid to the budget by the company; the amount of depreciation credited to a special account; total costs used in the production / sale of goods / services during the reporting period. The justification for these figures should be contained in the financial statement. If necessary, the tax office may verify the submitted reports or request a justification of the submitted data.

The proposed method of value added tax administration allows to assess the effectiveness of its operation in Ukraine. Using the total indicators of paid and reimbursed VAT, can estimate what share of the tax is actually reimbursed.

Table 1

VAT refunds from the budget (UAH billion)