## _cr1648 ## Source details **Canonical URL:** [_cr1648](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1648.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1648.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1648.pdf.json) --- ### Mission purpose, timing, and composition - Mission dates: July 19 to August 3, 2015. - Purpose: - Review preparations for implementation of reforms to the State Fiscal Service (SFS) and update the reform plans. - Provide advice on project delivery and management approaches. - Examine key operational areas in tax administration: large taxpayer administration, value-added tax (VAT) administration, and Social Security Contribution (SSC) compliance. - Mission composition: - FAD mission head: Thomas Story. - FAD staff: Enriko Aav. - FAD external experts: William Crandall, John Crotty, David Hartnett. - Observer: Ms. Alexandra Janovskaia (European Commission). - Financing: supported by the Canada Department for Foreign Affairs, Trade and Development (DFATD). ### Context, high-level assessment, and reform rationale - SFS established in 2014 as successor to the Ministry of Revenue and Duties (MRD) with three components: tax, customs, and tax police. - Since May 2015: - A comprehensive reform plan approved and execution commenced. - Many regional and local leaders replaced; a change director appointed. - Integrity programs expanded and performance indicators initiated. - Preparations underway for merging field networks across tax and customs. - Key risks/enabling conditions: - Success requires sustained political commitment, adequate resourcing, and stability and unity in the SFS senior team. - Further senior management changes pending after departure of the Deputy Chairman responsible for customs. - FAD to mobilize a long-term expert from September, 2015 and recommended an on-going full time reform project team. ### Fiscal performance highlights and immediate risks - Revenue performance (Ministry of Finance, exact figures): - Revenue: 2013 UAH 634.9 (43.3 percent of GDP); 2014 UAH 639.7 (40.8 percent of GDP). - Tax revenue: 2013 UAH 551.2 (37.6 percent of GDP); 2014 UAH 561.2 (35.8 percent of GDP). - Tax on income, profits, and capital gains: 2013 UAH 127.2 (8.7 percent of GDP); 2014 UAH 115.4 (7.4 percent of GDP). - Personal income tax: 2013 UAH 72.2 (4.9 percent of GDP); 2014 UAH 75.2 (4.8 percent of GDP). - Corporate profit tax: 2013 UAH 55.0 (3.8 percent of GDP); 2014 UAH 40.2 (2.6 percent of GDP). - Payroll tax: 2013 UAH 193.7 (13.2 percent of GDP); 2014 UAH 184.2 (11.8 percent of GDP). - Property tax: 2013 UAH 12.8 (0.9 percent of GDP); 2014 UAH 12.1 (0.8 percent of GDP). - Tax on goods and services: 2013 UAH 175.8 (12.0 percent of GDP); 2014 UAH 201.3 (12.8 percent of GDP). - VAT: 2013 UAH 128.3 (8.8 percent of GDP); 2014 UAH 139.0 (8.9 percent of GDP). - Excise: 2013 UAH 36.7 (2.5 percent of GDP); 2014 UAH 45.1 (2.9 percent of GDP). - Other: 2013 UAH 10.8 (0.7 percent of GDP); 2014 UAH 17.2 (1.1 percent of GDP). - Tax on international trade: 2013 UAH 13.3 (0.9 percent of GDP); 2014 UAH 12.6 (0.8 percent of GDP). - Other tax: 2013 UAH 28.4 (1.9 percent of GDP); 2014 UAH 35.6 (2.3 percent of GDP). - Nontax revenue: 2013 UAH 83.7 (5.7 percent of GDP); 2014 UAH 78.5 (5.0 percent of GDP). - 2015 first-half performance: - VAT and CIT holding up well against budget estimates. - PIT, property tax, and excise broadly in line with projections. - SSC and other taxes lagging. - Risks identified: - Concerns that amounts for CIT advance payments and VAT refunds will erode future performance. - After a large reduction in VAT arrears in 2014, refund claims are growing in 2015. - From July 1, 2015, SFS adopted a new system for managing VAT payments electronically. - Advance payments of CIT had not been credited against tax assessments; authorities announced adoption of a common budget classification code to streamline accounting for advance payments and CIT assessments. ### The “new bargain” between SFS, government, business, and community - Purpose: balance urgent revenue needs, increase fairness in tax administration, and eliminate corruption. - Five key measures: - Improvements in revenue collection through higher tax audit yields and more efficient tax debt collection from the largest taxpayers. - Progressive vacating of roles, followed by vetting before re-appointment of staff; staging required to protect essential revenue functions. - Stage one targeted to be completed by December 31, 2016 covering not less than 25 percent of SFS staff, commencing with large taxpayer administration and dispute resolution, proceeding to include all tax auditors, all SFS headquarters and some Oblast staff. - New system for fast tax dispute resolution: establish a new department within SFS reporting directly to the Chairman. - More effective tax powers: streamlined access to bank account information, indirect audit powers, and powers for administrative actions on tax debts; moratorium on tax auditing affecting medium and small taxpayers to be removed from January 1, 2016. - Targeted compensation reform available to staff after vetting and re-appointment. ### Major recommendations and prioritized actions (exact dates preserved) - Priority actions through to December 31, 2016: - A new bargain with government—On-going. - Improvement in revenue collections—On-going. - Progressive Vetting and re-appointment of staff (items 1–4): large taxpayer administration; dispute resolution unit; Pilot Audit Office; and Regional Manager merger and appointment process—March 31, 2016. - Progressive Vetting and re-appointment of staff (items 5–6): Audit and audit managers—all offices; Headquarters staff—December 31, 2016. - Targeted compensation reform—From March 31, 2016 and after vetting and re-appointment. - Legislative changes to provide: 1) Access to Bank Accounts; 2) Indirect audit; 3) Administrative collection; 4) Cancellation of the audit moratorium—December 31, 2015. - Internal independent appeals unit reporting to Chairman—March 31, 2016. - Medium-term measures: - Develop a comprehensive integrity action plan for implementation from January 1, 2017. - Revise the large taxpayer definition so that around 60 percent of tax revenues are within the catchment from January 1, 2017. - Harmonize the bases for Unified Social Contributions (USC) and personal income tax (PIT) and provide a single filing and payment for business from January 1, 2017. - Continue consolidation from 50 regional structures into 25 tax and customs regions and reduce number of separate legal entities. - Continue development of five business streams with intention to consolidate to three—service/operations, compliance and corporate services—over the next two–three years. - Review the headquarters structure to eliminate overlap in the “tax type” structures by June 30, 2016. ### Staffing, organizational sizing, and office network consolidation - Current staffing: - Actual staffing level for the SFS is 47,543. - Current establishment levels (positions or ‘regular staffing’) are 58,124. - Comparable number in 2008 was about 80,000. - Officials suggested cuts could be in the order of 10–20 percent in 2015. - Organizational critique: - Structure described as overly bureaucratic, top-heavy and inconsistent with modern, leaner organizations. - Only registration and e-services and debt management appear truly functional; most functions are hybrid tax-type and function-based. - Office network (current configuration): - 25 Tax regions and 25 Customs Regions. - 7 LTI regions. - 3 specialized departments. - 311 Tax Inspectorates. - Total separate legal entities at present: 371. - Planned immediate compression: - Merge Regional (Oblast) level offices for both tax and customs to create just 25 separate legal entities (combined customs and tax regions). - Long-term goal: SFS should exist as a single legal entity. ### Audit Office pilot — Kyiv City (staffing and expected impact) - Pilot project merges audit staff from four departments into a new Audit Office. - Existing totals (exact figures preserved): - Audit managers 166; Analytical staff 119; Auditors 628; Total 913. - New proposal totals: - Audit managers 30; Analytical staff 60; Methodology staff 50; Auditors 560; Total 700. - Expected outcomes: - Significant staff savings; tighter management supervision; break corrupt links between auditors and business. - Implementation risks: - Staff must resign and apply for posts; rigorous testing; compressed timelines (testing, selections, and appointments to be completed by end-October). - Absence of a full-time team in Kyiv City to drive implementation is a critical risk. ### Large Taxpayer Inspectorate (LTI) — scope, staffing, and audit resourcing - LTI reorganization: - New structure built around eight industry specializations in the Central Office and branch specialists in seven regions. - Staffing level: 2,108 as at July 2015. - International comparisons suggest the LTI is substantially overmanned. - Audit staffing calculation (exact assumptions and interpretation preserved): - Assumptions: - All large taxpayers on a four-year cycle of comprehensive audits. - Two LTI auditors required for each comprehensive audit and they could complete five audits each year. - Issue-based audits: one-third of non-comprehensive group each year; an auditor could complete eight issue-based audits each year. - Interpretation: Using these assumptions, Ukraine should be able to complete a reasonable level of audit coverage of large taxpayers with 200 or so skilled auditors. - LTI activity and assessments (exact figures preserved): - Scheduled Audits 2014 Comprehensive 237; 2015 Comprehensive 74. - Scheduled Audits 2014 Specialized 496; 2015 Specialized 241. - Total assessment (including fines and charges) UAH’000 Scheduled 2014: 497,916; Scheduled 2015: 151,465. - Total assessment (including fines and charges) UAH’000 Unscheduled 2014: 425,634; Unscheduled 2015: 179,463. - Desk audit proposal: require electronic submission of documents and conduct desk reviews using system-based risk criteria; formal audit only if significant risk identified; review utility after one year. ### Audit coverage, audit moratorium, and targets - Audit coverage and trends (exact figures preserved): - Approximately 600,000 legal entities; less than one percent (4,867) received a planned audit in 2014. - First semester 2015: 1,635 planned audits completed. - Unplanned audits 2014: 28,013; First Semester 2015: 9,882. - Total assessment (including fines and charges) UAH’000 Planned 2014: 3,024,054; Planned First Semester 2015: 895,659. - Total assessment (including fines and charges) UAH’000 Unplanned 2014: 4,016,218; Unplanned First Semester 2015: 1,567,501. - Individuals planned audits 2014: 3,455; First Semester 2015: 1,462. Unplanned 2014: 34,948; First Semester 2015: 8,144. - Collected revenues UAH’000 Individuals Planned 2014: 86,185; Planned First Semester 2015: 30,721. Unplanned 2014: 47,160; First Semester 2015: 19,280. - Audit moratorium: - Implemented for the 2015 and 2016 years. - Principal effect: prevents audits of small–medium taxpayers with turnovers less than UAH 20 million, except for VAT, PIT, and USC withholding, and excises. - Recommended target: - Rebalance audit program to increase planned audits to a 25 percent target in 2016 with incremental increases thereafter. ### Value‑Added Tax (VAT) administration, e‑VAT system, and arrears (exact figures preserved) - VAT administration actions and status: - VAT registration threshold increased to UAH 1 million on January 1, 2015. - New e-system for VAT accounts launched on July 1, 2015 (modified from earlier proposals). - VAT refund arrears and flows (exact figures preserved): - VAT refund arrears defined as those more than 74 days old. - As of July 1, 2015 the amount of VAT refund arrears reached UAH 7.075 billion. - By July 1, 2015 the stock of nonrefunded VAT claims was UAH 21.913 billion. - Opening stock at the beginning of the year: UAH 13.499 billion. - Growth in stock by July 1, 2015: "This is growth of UAH 8,413 billion from an opening stock of UAH 13.499 billion in the beginning of the year." (text as provided). - VAT refund arrears exceeds by UAH 1.305 billion the peak value for 2014. - New VAT refund claims in first half of 2015 total UAH 35.867 billion. - January–July 2014 claims: UAH 25.143 billion; increase of 43 percent—or growth of UAH 10.724 billion. - VAT refunds paid during current year to July 1, 2015: UAH 26.701 billion. - January–July 1, 2014 refunds paid: UAH 20.355 billion; increase of 31 percent representing UAH 6.346 billion additional refunds paid. - Drivers of 2015 growth in claims: - Legislative change allowing claims one month earlier (bring-forward effect). - Rapid exchange rate depreciation increasing costs of imported raw materials. - Budget constraints: average monthly refund claims around UAH 6 billion; budget allocated funds for refunds limited to UAH 5 billion (SFS figure not verified by mission). - Taxpayers brought forward claims ahead of e‑VAT system start on July 1, 2015. - e‑VAT system design features (operational constraints preserved): - Each VAT taxpayer has an individual treasury account; deposits required based on transactions and a legally determined formula. - Obligation to register VAT taxable sales in the e-system within 15 days after payment or shipment, whichever occurs first. - All claims for VAT credit denied in the absence of commensurate deposits in the VAT account. - Requirement for payment within 14 days of the sale — a partial limitation on access to working capital compared to standard VAT systems. - Concession: an amount equal to the 12-month average per month obligation may be under-remitted compared to the amounts of VAT payable on the invoice value. - If a supplier defaults on depositing to the VAT account, purchaser has no alternative to reliance on court-based dispute resolution before claiming input VAT. - Mission observation: - System adds burden to compliant taxpayers and it remains to be seen if it will deter VAT fraud. - If authorities are certain e-system will deter fraud, preceding and disproportionate anti-fraud measures should be removed. ### Corporate Income Tax (CIT) advance payments (exact figures preserved) - At end-June 2015, the amount of advance CIT payments was UAH 21.8 billion, equal to 54.2 percent of CIT revenue in 2014. - Origins: - Monthly CIT advance payments system introduced in 2013 for businesses with annual turnover higher than UAH 10 Million, based on tax payable on the previous year’s income. - Economic downturn and corporate losses led to rapid accumulation of prepaid CIT. - Excess CIT quarterly payments prior to 2013 could not be used to offset advanced payments in 2013 (and later) nor refunded due to lack of budget funds; included in the UAH 21.8 billion balance. - Measures and projection: - On July 20, 2015, an order combining advanced payments accounts with accounts of CIT liabilities was issued to allow automatic offsetting on a single account. - SFS estimates UAH 4.4 billion will be offset against monthly CIT installment payments due for July–December 2015. - Projection: By end 2015, SFS officials acknowledge the amount of CIT advance payments will have reached UAH 33.2 billion, with a net amount of UAH 11.4 billion in CIT installment payments added to the June 2015 stock of UAH 21.8 billion. - It remains unknown what amount of CIT advanced payments will be credited against 2015 liabilities. - Table 8 — Monthly offsetting July–December 2015 (values as presented) - July — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 942.1; Net Advanced CIT Payments: 1,688.3 - August — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 959.1; Net Advanced CIT Payments: 1,671.3 - September — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 804.6; Net Advanced CIT Payments: 1,825.9 - October — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 664.7; Net Advanced CIT Payments: 1,965.8 - November — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 577.5; Net Advanced CIT Payments: 2,052.9 - December — Accrued Advanced CIT Payments: 2,630.4; Amount of Offset CIT Credit: 463.1; Net Advanced CIT Payments: 2,167.3 - End of 2015 — Amount of Offset CIT Credit: 4,411.1; Net Advanced CIT Payments: 11,371.4 ### Tax dispute resolution — stock, problems, and reform - Stock of unresolved disputes: more than 75,000 with a value of around UAH 180 billion (internal and judicial appeals). - Litigation outcomes: - SFS wins an overwhelming majority of internal appeals. - Judicial outcomes split roughly evenly between business and SFS; business wins more in money terms. - SFS expecting to win cases involving at least 30 percent of the total taxes in dispute (total taxes in dispute exceeding UAH 185 billion as noted). - Drivers of disputes and payment behavior: - Automatic waivers of tax where assessments are disputed drive appeal numbers. - Business uses appeals to postpone payment and may divest assets while appeals pending. - No material progress on requiring disputed tax to be paid in full or in part before appeals are determined. - Recommended reforms: - Implement a single-level internal appeals system managed in head office, staffed by appeals specialists, reporting directly to the Chairman. - Bring forward start of the new internal process and seek parliamentary passage of relevant legislation quickly. - Trials of mediation to be conducted within the new appeals unit. - Require a minimum payment or guarantee equal to a share of tax in dispute before tax appeals at first instance or court-based appeals are accepted. - Publish written processes, include private sector lawyers and international officials for capacity and credibility, and establish joint SFS/business/tax adviser forum for first two years. ### Integrity, anti‑corruption, and workforce vetting - Integrity resources and actions: - Anti-corruption/Integrity Division staffed with more than 450 employees nation-wide. - Asset statements for all staff (except support staff) have been completed. - SFS developing a specific code of ethics for SFS employees to sign. - Technological solutions under consideration (e.g., video cameras at customs ports). - Results in practice (exact figures preserved): - First six months of 2015: criminal proceedings launched against only 41 employees. - First six months of 2015: total of 142 employees dismissed (most for disciplinary reasons). - Out of tens of thousands of asset statements, only 17 infractions identified (most resulting in a small fine). - Integrity plan components and timelines (selected items and deadlines preserved): - #10 Increasing control over high-risk processes. Deadline: 31/12/2015. - #11,12 Focus on asset statements of top 500 SFS employees. Independent expert oversight. Deadline: 30/11/2015. - #13 First semi-annual report on fighting corruption in SFS. Deadline: 30/9/2015. - #14 Independent experts to assess degree of corruption; Deadline: 31/03/2015. - #18 Review IT systems to identify and eliminate opportunities for corruption. Deadline: 31/8/2015. - Diagnosis and recommended approach: - SFS needs a comprehensive, pro-active integrity approach: (1) measures to reduce opportunities for corruption, detect corrupt actions, and apply sanctions; (2) measures to assess and screen all employees, with necessary training and information. - Integrity strategy should be launched before addressing remuneration fully, though salary restoration is necessary for sustainable anti-corruption progress. - International tools (e.g., World Customs Organization’s Revised Integrity Development Guide (2014)) could be used. ### Unified Social Contributions (USC) compliance and payroll tax issues - USC register and filing: - Current number of registered USC contributors approximately 3.12 million. - In 2014, about 404,000 natural persons and 250 liquidated entities were removed from the register. - Filing compliance high, but reported USC liabilities in returns are seriously understated. - Burden and under-reporting: - Average burden of USC is 39 percent and 13.4 percent for PIT. - Combined burden of USC and PIT widely recognized as excessive. - Under-reporting: 57 percent of companies report salary payments to all employees at a level less than two times the minimum monthly salary level of UAH 1218. - Constraints on auditors: - Auditors cannot examine beyond formal labor contract documentation or use indirect methods to determine real remuneration. - No separate USC/PIT audit program; many audit staff assigned to other priorities. - Recommendations: - Harmonize USC and PIT bases and provide single filing/payment from January 1, 2017. - Remove legal obstacles preventing auditors from determining true remuneration (cash payments, fringe benefits). - Establish a separate audit program for USC/PIT liabilities and assign appropriate staff. ### Recommended governance, program management, and capacity support - Governance and program management recommendations: - Establish a full-time reform project team of up to 50 people. - Maintain an Executive Committee with clear remit and project secretariat. - Review headquarters structure to eliminate remaining tax-type functions by June 30, 2016. - Continue consolidation to 25 regions and reduce separate legal entities; long-term single legal entity aim. - FAD technical assistance (exact schedule preserved): - Mobilize a resident advisor to support SFS reforms from September 2015 for one year (September 2015–August 2016 (possible extension)). - Large taxpayer management STX visits: 1 X 14 days in October 2015; 1 X 14 days in December 2015. - Payroll tax compliance STX visits: 1 X 14 days in October 2015; 1 X 14 days in February 2016. - HQ Structure STX visits: 1 X 14 days in November 2015; 1 X 14 days in March 2016. - Dispute resolution STX visits: 1 X 14 days in November/December 2015; 1 X 14 days in March/April 2016. - General review staff visit: 4 X 5 days quarterly, starting in September 2015. - Follow up Headquarters mission: May/June 2016. - A customs diagnostics mission planned during September 2015. *Source: IMF Fiscal Affairs Department mission report, content unit _cr1648.* ### Preface ................................................................................................................ ### Preface ### Mission purpose, timing, and composition - Mission dates: July 19 to August 3, 2015. - Purpose: - Review preparations for implementation of reforms to the State Fiscal Service (SFS) and update the reform plans. - Provide advice on project delivery and management approaches. - Examine key operational areas in tax administration: large taxpayer administration, value-added tax (VAT) administration, and Social Security Contribution (SSC) compliance. - Mission composition: - FAD mission head: Thomas Story. - FAD staff: Enriko Aav. - FAD external experts: William Crandall, John Crotty, David Hartnett. - Observer: Ms. Alexandra Janovskaia (European Commission), who provided inputs to details of technical assistance in Section IV. - Financing: The mission was financed with the support of the Canada Department for Foreign Affairs, Trade and Development (DFATD). ### Principal interlocutors and stakeholders consulted - Government and parliamentary counterparts: - Prime Minister of Ukraine, Mr. Arseniy Yatsenyuk. - Minister of Finance, Ms. Natalie Jaresko. - Head of the Presidential Administration of Ukraine, Mr. Borys Lozhkin. - Head of the Committee on Tax and Customs Policy of the Parliament of Ukraine, Ms. Nina Yuzhanina. - Deputy Minister of Finance, Ms. Olena Makeieva. - Chairman of the State Fiscal Service, Mr. Roman Nasirov. - Senior officials of the SFS. - Business community consultations: - European Business Association. - American Chamber of Commerce in Ukraine. ### Structure of the report - The report consists of an Executive Summary and four sections: 1. Status of the State Fiscal Service Reform and a Plan of Action; 2. Achieving Sustainable Reform; 3. Operational Issues; 4. Fiscal Affairs Department Technical Assistance. ### Context and high-level assessment - SFS established in 2014 as successor to the Ministry of Revenue and Duties (MRD) with three components: tax, customs, and tax police. - Since May 2015: - A comprehensive reform plan has been approved and execution has commenced. - Many regional and local leaders were replaced; a change director was appointed. - Integrity programs were expanded and a set of performance indicators initiated. - Preparations underway for merging field networks across tax and customs. - Risks and enabling conditions: - Success requires sustained political commitment, adequate resourcing, and stability and unity in the SFS senior team. - Further senior management changes were pending following the departure of the Deputy Chairman responsible for customs. - FAD will mobilize a long-term expert to work with SFS senior management from September, 2015. - Formal project management arrangements have been initiated; an on-going full time reform project team is recommended. ### Fiscal performance highlights and risks - Revenue performance for 2014 and 2013 (Table 1, Ministry of Finance): - Revenue: 2013 UAH 634.9 (43.3 percent of GDP); 2014 UAH 639.7 (40.8 percent of GDP). - Tax revenue: 2013 UAH 551.2 (37.6 percent of GDP); 2014 UAH 561.2 (35.8 percent of GDP). - Tax on income, profits, and capital gains: 2013 UAH 127.2 (8.7 percent of GDP); 2014 UAH 115.4 (7.4 percent of GDP). - Personal income tax: 2013 UAH 72.2 (4.9 percent of GDP); 2014 UAH 75.2 (4.8 percent of GDP). - Corporate profit tax: 2013 UAH 55.0 (3.8 percent of GDP); 2014 UAH 40.2 (2.6 percent of GDP). - Payroll tax: 2013 UAH 193.7 (13.2 percent of GDP); 2014 UAH 184.2 (11.8 percent of GDP). - Property tax: 2013 UAH 12.8 (0.9 percent of GDP); 2014 UAH 12.1 (0.8 percent of GDP). - Tax on goods and services: 2013 UAH 175.8 (12.0 percent of GDP); 2014 UAH 201.3 (12.8 percent of GDP). - VAT: 2013 UAH 128.3 (8.8 percent of GDP); 2014 UAH 139.0 (8.9 percent of GDP). - Excise: 2013 UAH 36.7 (2.5 percent of GDP); 2014 UAH 45.1 (2.9 percent of GDP). - Other: 2013 UAH 10.8 (0.7 percent of GDP); 2014 UAH 17.2 (1.1 percent of GDP). - Tax on international trade: 2013 UAH 13.3 (0.9 percent of GDP); 2014 UAH 12.6 (0.8 percent of GDP). - Other tax: 2013 UAH 28.4 (1.9 percent of GDP); 2014 UAH 35.6 (2.3 percent of GDP). - Nontax revenue: 2013 UAH 83.7 (5.7 percent of GDP); 2014 UAH 78.5 (5.0 percent of GDP). - 2015 first-half performance: VAT and CIT holding up well against budget estimates; PIT, property tax, and excise broadly in line with projections; SSC and other taxes lagging. - Risks: - Concerns that amounts for CIT advance payments and VAT refunds will erode future performance. - After a large reduction in VAT arrears in 2014, refund claims are growing in 2015. - From July 1, 2015, SFS adopted a new system for managing VAT payments electronically. - Advance payments of CIT have not been credited against tax assessments; authorities announced adoption of a common budget classification code to streamline accounting for advance payments and CIT assessments. - Plans exist to clear some accumulation in CIT credit balances over 2015 (discussed in Section III). ### Reform implementation status and organizational sizing - The SFS is assessed as over-manned; a considerable downsizing is feasible but contingent on work process reforms and legislative changes. - A short-term target of a 20 percent cut in staff by December 31, 2015 is challenging but seen as achievable; a detailed plan of actions is required. - Integrity reforms have commenced but are judged not yet convincing or of sufficient scale. - Reforms to the tax police are tracking in the right direction but need public monitoring. ### The proposed “new bargain” between SFS, government, business, and community - Purpose: balance demands for urgent revenues, provide more fairness in tax administration, and eliminate corruption. - Five key measures: - Improvements in revenue collection through higher tax audit yields and more efficient tax debt collection from the largest taxpayers. - Progressive vacating of roles, followed by vetting before re-appointment of staff; staging is required so essential revenue functions are not jeopardized. - Stage one to be completed by December 31, 2016 and cover not less than 25 percent of SFS staff, commencing with large taxpayer administration and dispute resolution, proceeding to include all tax auditors, all SFS headquarters and some Oblast staff. - A new system for fast tax dispute resolution: establish a new department within SFS reporting directly to the Chairman. - More effective tax powers: streamlined access to bank account information, indirect audit powers, and powers for administrative actions on tax debts. The moratorium on tax auditing affecting medium and small taxpayers should be removed from January 1, 2016. - Targeted compensation reform available to staff after vetting and re-appointment. ### Major recommendations and prioritized actions (selected with exact dates) - Adopt priority actions through to December 31, 2016: - A new bargain with government—On-going. - Improvement in revenue collections—On-going. - Progressive Vetting and re-appointment of staff (items 1–4): large taxpayer administration; dispute resolution unit; Pilot Audit Office; and Regional Manager merger and appointment process—March 31, 2016. - Progressive Vetting and re-appointment of staff (items 5–6): Audit and audit managers—all offices; Headquarters staff—December 31, 2016. - Targeted compensation reform—From March 31, 2016 and after vetting and re-appointment. - Legislative changes to provide: 1) Access to Bank Accounts; 2) Indirect audit; 3) Administrative collection; 4) Cancellation of the audit moratorium—December 31, 2015. - Internal independent appeals unit reporting to Chairman—March 31, 2016. - Other medium-term measures and deadlines: - Develop a comprehensive integrity action plan for implementation from January 1, 2017 with two dimensions: - Measures to assess and screen all employees along with necessary training and information. - Measures to reduce opportunities for corruption, detect corrupt actions and apply adequate sanctions. - Revise the large taxpayer definition so that around 60 percent of tax revenues are within the catchment from January 1, 2017. - Harmonize the bases for Unified Social Contributions (USC) and personal income tax (PIT) and provide a single filing and payment for business from January 1, 2017. - Continue plans to consolidate 50 regional structures into 25 tax and customs regions and to dramatically reduce the number of separate legal entities in tax administration. - Continue development of the five business streams of SFS with intention to consolidate to three—service/operations, compliance and corporate services—over the next two–three years. - Review the headquarters structure to eliminate overlap in the “tax type” structures by June 30, 2016. - Institutional support: - FAD will mobilize a long-term expert to support SFS reform implementation from September, 2015. - Project management arrangements and a full-time reform project team are emphasized as key to implementation. *Source: IMF Fiscal Affairs Department mission report, Preface and Executive Summary.* ### 5. The 2014 FAD mission made a number of recommendations aimed at short-term ### _cr1648 - 5. The 2014 FAD mission made a number of recommendations aimed at short-term ### Summary of 2014 FAD recommendations and intent - Recommendations aimed at short-term revenue improvement pending long-term institutional changes. - Immediate actions intended to: - buttress collection of tax debts, - better manage the largest taxpayers, - streamline resolution of tax disputes to improve fairness. - Longer term objectives: - down-size the SFS, - remove large numbers of suspect officials, - change institutional arrangements. - Long-term actions were thought feasible by 2017. - The recommendations and progress are summarized in Appendix 2 (as noted in the source). ### Progress under current SFS leadership (first three months) - Rapid progress with adoption of a significant plan of action with very ambitious timescales. - Early successes include: - organizational structure and planning; - a new Charter for the SFS; - a new reporting relationship with the Ministry of Finance. Box 1. State Fiscal Service Reform Progress (highlights) - Replacement of the heads of Customs and the tax police has enabled radical rethinking of organization and operation; reforms in the tax police proceeding quickly; less progress in customs. - New Charter transfers the reporting line for the tax administration from the Cabinet of Ministers to the Minister of Finance; provides more operational freedom and accountability to the SFS Chairman. - A substantial reform plan adopted with short timeframes, expectation of very fast, transformative results, and broad internal participation; organized around: - governance and appointment of senior officials; - efforts to grow public trust by combating corruption; - upgrading tax and customs controls to improve performance, effectiveness and efficiency; - modernizing powers, addressing the informal economy and improving the tax code to promote taxpayer understanding. - Replacement of many regional leaders to promote reform and reduce opportunities for corruption—around 400 managers are being replaced; roles of tax and customs leaders in regions to be merged into a single leadership role. - Appointment of a change director with private sector reform experience to lead the SFS reform program; supported by a small team of senior officials and 50 staff drawn from across the SFS; consultant support tendered for the change function. - Territorial consolidation within the audit function proposed and pilots have started. - Short-term performance indicators adopted to deliver improvements within three months. - An Executive Committee of SFS established from the beginning of August. ### Overall assessment and political context - SFS beginning to achieve some stability after a year of turbulence (leadership removal, temporary chairman, new Chairman and two deputies appointed in May 2015). - Radical reform is essential to meet modern international standards; change on required scale needs strong, visionary, and stable leadership with committed political support. - Despite reforms, SFS lacks confidence of government, business, civil society and citizens who continue to regard tax administration as deeply corrupt. - Concerns include taxpayer harassment and inappropriate use of powers. - Internal investigators have uncovered significant corruption examples, but a more systematic approach is required. - Mission rejects simplistic view that paying staff a living wage alone will end corruption; reducing corruption is more complex. - Central theme: the “bargain” between the SFS and central government proposed in the report. ### Key challenges facing the SFS - Customs leadership remains vocal in opposition to a unified tax and customs organization, risking destabilization and undermining executive committee functioning. - Action against corruption insufficiently bold with few prosecutions; initiatives not comprehensive. - Ongoing existence of tax pits and cash conversion centers despite some successful detections and recoveries. - No material increase in voluntary compliance observed due to lack of public confidence. - SFS discredited in eyes of senior ministers; constraints imposed on powers—for example, in 2015 and 2016 the SFS is prevented from auditing business with annual revenues of less than Ukrainian Hryvnia (UAH) 20 million. - New electronic VAT system formally introduced on July 1, 2015 is an improvement on prior VAT bank account proposals, but prospects for success are uncertain given business and adviser ambivalence or opposition. - Legislative change necessary to support reform often held up by Ministers or parliamentary processes for many months; more ministerial and Parliamentary Tax and Customs Committee support needed. - SFS remains overmanned compared with many other tax administrations; plans to address this need rapid implementation and intentions beyond a 20 percent reduction are not known. - Many parts of the SFS exist as separate legal entities, challenging unified management of revenue administration. ### Plan of Actions (overview and timing) - Mission proposes actions to be implemented by end of December 2016 to enhance tax and duties collections and increase ministers’ and public confidence in the SFS. - Core premise: a new “bargain” between the SFS, the community and government is key to transformation—SFS offers commitments in return for targeted compensation reform and more effective powers. - Constituent elements of the new bargain (SFS commitments): - increase in revenue collection; - increased efforts to eliminate corruption (see Section II); - removal, vetting, and re-appointment of all officials in positions where they could be bribed or otherwise corrupted—starting with the Large Taxpayer Inspectorate (LTI)—by March 31, 2016, because it handles the largest part of revenues collected; - further vetting/re-appointment: dispute resolution unit; pilot Audit Office; Regional Manager merger and appointment process—all by March 31, 2016; - follow-up vetting/re-appointment of all Audit and headquarters staff by December 31, 2016. - Note: vetting expected to result in the full review of 25 percent or more of the total SFS; vetting must be thorough enough to expose hidden bank accounts and other assets in Ukraine and off-shore. Table 2. Priority Actions for 2015 and 2016 (selected items and timing) - A new bargain with government—In return for significant improvement in revenue collections, increasing efforts to eliminate corruption, fast dispute resolution, and the vetting and re-appointment of staff (where appropriate), SFS receives targeted compensation reform and more effective powers. Implementation: On-going. - Progressive Vetting and re-appointment of staff: - 1) large taxpayer administration; - 2) dispute resolution unit; - 3) Pilot Audit Office; and - 4) Regional Manager merger and appointment process; — March 31, 2016. - Progressive Vetting and re-appointment of staff: - 5) Audit and audit managers – all offices - 6) Headquarters staff — December 31, 2016. - Targeted compensation reform — From March 31, 2016 and after vetting and re-appointment. - Legislative changes (target date December 31, 2015): - 1) Access to Bank Accounts - 2) Indirect audit - 3) Administrative collection - 4) Cancellation of the audit moratorium - Internal independent appeals unit reporting to Chairman — March 31, 2016. Recommendations (explicit) - Adopt the priority actions set out in Table 2. - Establish a centralized internal and independent administrative appeals unit reporting directly to the Chairman to re-establish trust with business and provide a cost efficient and fair administrative appeals process (business appellants rarely win administrative appeals but win around 50 percent of all judicial appeals). ### Rationale for an integrated revenue administration (tax, customs, tax police) - SFS was established in 2014 on three pillars—taxes, customs, and tax police—but functioned as three distinct departments with tensions from powerful deputy appointments and early dysfunction. - Considered alternatives and findings: - Incorporation of customs into a border protection agency rejected because Ukrainian customs collect more than 40 percent of all taxes and duties, and border protection focus would risk revenue collection. - Splitting SFS into separate tax and customs departments offers advantages: exclusive customs focus on trade facilitation, border protection and performance; focused anti-corruption efforts; removal of top-level tensions. - Advantages of keeping SFS together were judged to significantly outweigh disadvantages: - synergies in information, audit and enforcement actions to maximize revenue collections; - credit for taxes collected at the border checked and given in a single organization; - better configuration of IT systems for information exchange and shared taxpayer knowledge; - coordinated enforcement planning around shared data; - easier achievement of a whole of taxpayer view; - greater opportunity for a “one stop shop” for taxpayers. - Creation of a single audit function for all taxes and duties has already shown value—bringing customs and taxes databases together led to identification of VAT frauds and increased collections. Example: one fraud involved more than UAH 200 million where imported fruit was supported by VAT inclusive invoices for computer parts with the VAT to be reclaimed in due course. - Tax police independence options were considered but tax police seen as intrinsic to SFS due to focus on delinquent officials and fraudulent taxpayers; a reformed tax police is essential to the merged compliance and enforcement stream over the next two–three years. - SFS preferred organizational approach: five business streams—tax operations, compliance, enforcement, finance and performance, and customs—with some discrete functions reporting to the Chairman; customs audit integrated into audit business; customs violations handled in enforcement business; other customs operations remain in a single stream for modernization before integration. - The five-stream structure approved in principle via the Reform Action Plan and the revised Charter for the SFS (high-level structure depicted in Figure 1 in the source). ### Other organizational observations (from 2010 FAD report still pertinent) - Business process re-engineering in core tax administration functions is needed to achieve efficiencies; tax block development was relying largely on yet-to-be-re-engineered processes. - Structures are not fully function-based (example: separate departments for legal entities and natural persons); combining into function-based structures could lead to substantial economies. - Office network consolidation previously reduced management layers but did not sufficiently reduce number of tax administration locations to modern levels; one long-term option suggested no more than 20 or so sites concentrating on VAT-registered taxpayers, with another 100 or so offices concentrating on small taxpayers and providing general services only. *Italic: Source — Excerpt from the IMF document provided in the content unit.* ### 26. Currently, the actual staffing level for the SFS is 47,543. ### _cr1648 - 26. Currently, the actual staffing level for the SFS is 47,543. ### Staffing levels and proposed downsizing - Currently, the actual staffing level for the SFS is 47,543. - Current establishment levels (positions or ‘regular staffing’) are 58,124. - The comparable number in 2008 was about 80,000. - Officials suggested cuts could be in the order of 10–20 percent in 2015. - The mission describes the current number 47,543 as excessive and notes plans are underway for significant downsizing. ### Actual staffing breakdown (Table 3) - Number of Employees — Headquarters (HQ) / Operating Offices Including LTI / Total - Taxation — 33,335 / 976 / 32,359 - Tax police — 5,347 / 327 / 5,020 - Customs — 8,861 / 216 / 8,645 - Totals — 47,543 / 1,519 / 46,024 - Source: State Fiscal Service. ### Organizational structure and critiques - The current organization structure of the SFS for tax administration remains complex, and a hybrid of tax-type and function-based approaches. - The structure is generally followed at HQ and in operating offices (regions, large taxpayer offices, and districts). - The organizational structure is described as overly bureaucratic, top-heavy and generally inconsistent with modern, leaner organizations. - The structure is more or less replicated in each region, district, and large taxpayer office, resulting in too many layers of management and diseconomies of scale. - Only registration and e-services and debt management appear to be truly structured on a functional basis; most remaining functions remain a hybrid of tax-type and functional structures. ### Office network, legal entities, and planned compression - The office network of the SFS remains largely un-modernized; the 2014 FAD report’s suggested significant streamlining has not materialized. - Current configuration (as depicted in Figure 3): - 25 Tax regions and 25 Customs Regions. - 7 LTI regions. - 3 specialized departments. - 311 Tax Inspectorates. - Total separate legal entities at present: 371. - Planned immediate compression of the SFS Field office network: - Merger of the Regional (Oblast) level offices for both tax and customs. - New configuration will have just 25 separate legal entities (the combined customs and tax regions). - No proposed merger of tax and customs operations at this point. - Long-term goal recommended: SFS should exist as a single legal entity. - Effect of change: expected economies of scale and more direct control by SFS headquarters. ### Audit Office pilot — Kyiv City - A pilot project called “The Audit Office” is being developed in Kyiv City office to restructure audit operations. - Project scope: - Merge audit staff from four departments (tax and customs audits, VAT refunds, tax frauds, and taxation of individuals) into a new Audit Office structure. - Corresponding rayon level units also merged and removed from local rayon office supervision. - Intended outcomes: - Significant staff savings. - Tighter management supervision of audit staff. - Break corrupt links between auditors and business taxpayers. - Expected impact (Table 4): - Existing situation totals: Audit managers 166; Analytical staff 119; Auditors 628; Total 913. - New proposal totals: Audit managers 30; Analytical staff 60; Methodology staff 50; Auditors 560; Total 700. - Specifics: - Audit managers — from 166 to 30. - Auditors — from 628 to 560. - Implementation and risks: - All affected occupants must resign and apply for posts in the new structure; rigorous technical and psychological testing to screen applicants. - Timelines highly compressed: staff testing, selections, and appointments to be completed by end-October. - Plan to accommodate most Audit Office staff in a single Kyiv City location. - Critical risks: absence of a full-time team in the Kyiv City office to drive implementation; project will not address current audit procedures and work practices given deadlines. ### Other restructuring measures under consideration - Options being considered by headquarters tax and customs audit group: - All scheduled audits might be done from regional offices, with only unscheduled audits performed in the districts. - Moving audit and debt management (back office functions) to the regional level, leaving only front office functions (registration, services, returns) for the districts. - Variation of the 2010 FAD suggestion to create a minimum number of medium taxpayer offices leaving districts to manage small taxpayers. - The mission supports these measures given the impending downsizing imperative. ### Headquarters review and functional re-organization - Headquarters structure is fundamentally important and will determine the shape of regional and district offices. - Recommendation: review headquarters structure with a view to eliminating remaining tax-type functions. - This review should be done concomitant with Reform Action #28 (reorganization of SFS structure by functional area) and should make use of technical assistance if possible. - More fundamental business process reviews could follow, with assistance from private sector experts. ### Zero-Based Budgeting (ZBB) - The Reform Plan calls for application and testing of zero-base budgeting. - Action Plan # 23 requires implementation of ZBB in a region and an appropriate central level unit; projects will be assessed and, if successful, implemented across the SFS. - Launch of the pilots is planned for 1 October, with results assessed by 31 December. - Clarification of concepts: - ZBB: a budgeting method where all expenses must be justified for each new period; starts from a "zero base". - Business Process Re-engineering (BPR): rethinking and redesigning how work is done to support mission and reduce costs; focuses on core business processes. - Suggested typical ZBB actions for SFS: - Engage organization and managers; explain ZBB concept, purpose, process, and end result. - Perform in-depth analysis of targeted expenditure areas, review trends, compare to benchmarks. - Apply techniques such as expenditure value assessment and best practice comparison; evaluate individual expenditure items and identify cost savings opportunities. - Review consumption practices and expenditure-related policies; recommend changes where necessary. - Establish budget guidelines and targets for each expenditure. - Present to management for review and discussion. - Review budget submissions and determine impact on overall budget. - Ensure execution plans identify timeline, resources required, and assign accountability. - Monitor progress to ensure obstacles are cleared and targets met. - The SFS is advised to engage professionals expert in ZBB techniques. ### Reform of the Tax Police and Financial Investigation Unit - Current organization: tax police organized in three divisions—investigators, operatives (background information and intelligence), and teams working in the east of Ukraine. - Reputation and issues: - Tax police are feared inside and outside the SFS; seen as aggressive, armed, seriously corrupt by business and advisers. - Reported behavior: tax police see corruption where none exists; lawyers and others reluctant to drop lost cases for fear the tax police will suspect bribery. - Recent reform results: - New leadership changes; in the three months since leadership change, VAT of more than UAH 2.9 billion had been recovered and more than UAH 320 million from cash conversion centers had been returned to the budget. - This performance was said to be better than in any recent three-month period. - Key elements of tax police reforms: - Introducing a new top management team to promote behavioral change and lead by example. - Bringing in a new generation of investigators untainted by past corruption and scandals. - Merging investigative and operative teams to form a new Financial Investigation Unit focused on blocking tax and customs fraud and recovering money for the budget (Ministry of Finance) rather than long running criminal trials; objective for the Unit to be invisible to honest people. - Zero tolerance for bad behavior and poor performance by investigators. - Promoting via media the new strategy of recovering money and improved standards and behavior expected of investigators. - Improving investigators’ understanding of all relevant laws. - Demilitarization: - Financial Investigation Unit has given up over 10,800 weapons in recent weeks and many investigators have come out of uniform. - Weapons and uniforms remain essential for Special Weapons and Tactics Teams and other groups dealing with organized criminals, but are not needed for investigation of less violent fraudsters. - Ranks and compensation: - Removal of military ranks is not seen as essential because rank confers special financial benefits; removing ranks would reduce compensation and could trigger transfers out of SFS, diminishing capacity to recover money for the Budget. - Recruitment of civilian investigators without ranks is welcome but will take time. - Size considerations: - Financial Investigation Unit is around 10 percent of SFS staff, much larger than commonly found in other countries. - Increasing use of risk management supported by sophisticated IT reduces human intervention needed for case identification; complex algorithms to detect types of VAT fraud are an example. - SFS should carefully consider the right size for the department. - Monitoring and integration: - Deputy commissioner should arrange for regular independent surveys of public perceptions of the new Financial Investigations Unit to track reforms and adjust the program as necessary. - SFS should start planning how best to integrate within two years its separate business streams for compliance and enforcement. - Longer term: create a single tax and duties compliance risk management program led by a single deputy chairman responsible for compliance and enforcement. *Source: State Fiscal Service (content unit _cr1648).* ### 49. Corruption remains a significant problem for the SFS. The SFS has been making some ### _cr1648 - 49. Corruption remains a significant problem for the SFS. The SFS has been making some ### Integrity developments and current status - Anti-corruption or Integrity Division staffed with more than 450 employees nation-wide; steps being taken to ensure its independence within the SFS. - Unit focus shifting to more serious punishment for offences, and a policy of zero-tolerance, no excuses. - A code of ethics for public servants exists (three years old); a specific code for the SFS is under development and will be presented to all employees who will be required to accept and sign. - Technological solutions, such as video cameras at customs ports, are being considered. - Asset statements for all staff (except support staff) have been completed. - Results in practice remain limited: - In the first six months of 2015, criminal proceedings launched against only 41 employees (outcomes not yet known). - In the first six months of 2015, a total of 142 employees have been dismissed (most for disciplinary reasons). - Out of tens of thousands of asset statements (all employees except support staff), only 17 infractions have been identified, most resulting in a small fine. - SFS has no information on any prosecutions of taxpayers for offering bribes to government employees (not an SFS responsibility). ### Integrity-related actions in the SFS reform plan (selected items and deadlines) - #10 Increasing control over high-risk processes. Deadline: 31/12/2015 - #11,12 New employees in division to focus on asset statements of top 500 SFS employees. Independent expert group for oversight to publicize results. Deadline: 30/11/2015 - #13 First semi-annual report on fighting corruption in SFS. Deadline: 30/9/2015 - #14 Independent experts to assess degree of corruption, publicize outcomes, SFS to identify remedies. Deadline: 31/03/2015 - #18 Review IT systems to identify and eliminate opportunities for corruption. Deadline: 31/8/2015 - Note: Action item #18 is considered unlikely to be achievable within two months; similar initiatives in other administrations have taken much longer than two months. ### Diagnosis of integrity environment and required approach - Transparency International Corruption Perceptions Index: Ukraine rated 142nd of 175 countries in 2014 (in 2007, 118th out of 179). - Revenue administration is identified in separate surveys as a major place for corruption. - Business Ombudsman Council has received more complaints about the SFS than any other body; complaints include VAT refund delays, refusal of VAT taxpayer registration, and abuse of power during inspections by the SFS. - SFS needs a comprehensive, pro-active integrity approach based on systematic diagnosis and solution development. - Overall integrity plan must include two components: - measures to reduce the opportunity for corruption, to identify and detect corrupt actions, and to apply adequate sanctions; and - measures to assess and screen all employees, along with necessary training and information. - Internationally developed tools, such as the World Customs Organization’s Revised Integrity Development Guide (2014), could be used. ### Compensation and working conditions - Integrity strategy should be launched before addressing working conditions, including remuneration. - Reform Plan measure: With the Ministry of Finance, establish an independent expert commission on the labor remuneration system in SFS, publicize its recommendations, and implement the first recommendations (by 30 September). - Officials advise SFS salaries have been flat over 10 years and have sharply deteriorated in real terms; over the same period, there has been a three-fold rise in the cost of living. - Achieving some salary restoration is necessary for sustainable progress on anti-corruption measures. ### Legislative and operational gaps affecting compliance and enforcement - Legal framework of the Tax Code does not provide critical tools SFS staff need for effective audit and compliance enforcement. - Public and business community view: existing SFS powers should be further curtailed because officials are seen to use those powers to harass taxpayers and facilitate rent-seeking. - Specific legal impediments: - Requirement for SFS to rely on documentary evidence to identify noncompliant tax behavior; inability to use indirect measurement methods limits recovery where documentary trails are absent. - Draft legislation to authorize indirect methods for individuals was submitted to parliament in early 2015 but was rejected. - SFS inability to access bank account information is a fundamental impediment to effective audits. - Requirement to provide 60-days’ notice before collection enforcement against a company may allow disposal of assets. - Requirement for court involvement in any collection enforcement action against an individual imposes unnecessary constraints. - Audit resources focused on formal business operations; informal/shadow economy and many high net worth individuals receive little SFS scrutiny. - Recommendation summary (addressing legislative gaps): - Undertake a fundamental review of all tax audit and collection enforcement powers to strengthen SFS capacity to address major tax compliance problems, including the informal/shadow economy. - Ensure the review addresses documentary requirements that inhibit identification of unreported tax liabilities, authorizes the use of indirect means to identify tax liabilities, provides for access to bank account information in appropriate cases, and empowers timely SFS collection enforcement actions. ### Governance and reform implementation - Reform plan governance measures and status: - Subordinate the SFS to the Minister of Finance (action completed). - Delegate powers from the Minister to the SFS Chairman (under examination). - Establish executive committee (completed). - Appoint reform coordinator from private sector (completed). - Create a unit in charge of reforms (mission advised a reform unit of up to 50 full-time persons would be established). - Executive committee established by executive order to operate from August 3, 2015; membership: chairman, leaders of SFS business streams, chief counsel (adviser), head of HR, change director. - Recommended practices for executive committee: - Separate meetings for performance and reform. - Clear remit including delivery of SFS business, shaping organizational behaviors, oversight of business streams and strategies, business planning review, leading change, oversight of key strategic risks, managing external relations. - Meeting papers commissioned by a secretariat; papers address key points without great detail and are presented by a committee member or senior official. - Members encouraged to challenge and support each other. - Latent conflict: Ukrainian law requires the Chairman to make significant operational and strategic decisions and does not formally recognize an executive committee role; the committee will operate “under license” from the chairman and consensus-building is essential. - Recommendation summary (improving governance and program management): - Establish a full-time team of 50 people for reform project management. - Establish an executive committee for the SFS. - Consider international best practice in making project management governance arrangements for the SFS. - Implement the Audit Office pilot in Kyiv City to achieve management delayering. - Review the headquarters structure with a view to eliminating remaining tax-type functions by June 30, 2016. - Continue to develop five business streams—tax operations, compliance, enforcement, finance and performance, and customs—with intention to consolidate to three streams—service/operations, compliance and corporate services—over the next two–three years. - Continue plans to consolidate 50 regions into 25 tax and customs regions, and to dramatically reduce the number of separate legal entities; in the long term, seek to have a single legal entity for the SFS. - In the longer term, undertake more fundamental business process reviews with assistance from private sector experts. - Engage private sector experts to assist in ZBB initiatives and follow the report processes to complete an in-depth review of expenditures and identify cost savings opportunities. - Initiate independent and regular surveys of public perceptions of the new Financial Investigations Unit. - Commence preparations for the integration of the compliance and enforcement business streams to be completed by end of 2017. ### Large Taxpayer Inspectorate (LTI) operational changes and selection criteria - From November 15, 2015 all taxpayers meeting LTI selection criteria required to register with the Central Office of the LTI; this ends prior arrangements under which over half of large taxpayers remained under local office supervision. - Presently, there are 1,978 large taxpayers with less than half (804) registered in the central office. - Changes mean LTI has authority to compel any large taxpayer that fails to register to change their place of registration and can transfer their files to the LTI Central Office, effective from January 2016. - Current large taxpayer definition: - turnover exceeds UAH 500 million over four consecutive quarterly reporting periods or - total taxes paid (or payable) exceed UAH 12 million over the same time period. - LTI currently supervises approximately 1,340 large taxpayers. - Changes to registration rules will double the LTI case base; it is estimated that up to 3,000 taxpayers could come under supervision. - Proposed new large taxpayer definition under active consideration: - turnover exceeds UAH one billion over a period of 12 consecutive months or - total taxes paid (or payable) exceed UAH 15 million over the same time period. - LTI management’s analyses: 1207 taxpayers would either satisfy the turnover criteria or a UAH 15 million tax liability criteria. - Revenues to be secured from large taxpayers under the proposed new selection criteria are expected to be in the range of 50 to 55 percent of total government revenues. - Recommendation on supervision continuity: - LTI should have the right to maintain close supervision of any large company facing serious financial challenges even if it no longer meets selection criteria, with consideration to maintain supervision for a two-three year period. *Source: IMF staff report content from the provided PDF excerpt.* ### 73. LTI management is moving forward with organizational changes that will ### _cr1648 - 73. LTI management is moving forward with organizational changes that will ### LTI organizational changes and staffing - LTI new organizational structure: built around eight industry specializations under the Central Office providing coordination and enhanced support to branch office specialists located in seven regions. - Reorganization intent: strengthen delivery of services to taxpayers under LTI supervision. - Staffing level: 2,108 as at July 2015. - Assessment: international comparisons suggest that the LTI is substantially overmanned. - Recommendation: a careful review of LTI staffing as operations are re-organized; start the review with audit operations using conventional workload and staffing ratios. ### Approximate calculation of audit staffing requirements (Box 2) Assumptions - LTI would place all large taxpayers on a four-year cycle of comprehensive audits. - Two LTI auditors would be required for each comprehensive audit and they could complete five audits each year. - A program of issue-based audits for those large taxpayers not subject to comprehensive audits would also be undertaken with say one-third of that group of large taxpayers subject to an issue-based audit each year. - An auditor could complete eight issue-based audits each year. Calculations (assuming 1200 taxpayers) - Comprehensive audits: No of auditors required = 1200 x 2 = 120 auditors / 4 x 5 - Issue-based audits: No of auditors required = 1200 = 50 auditors / 3 x 8 - Interpretation: Using these assumptions, Ukraine should be able to complete a reasonable level of audit coverage of large taxpayers with 200 or so skilled auditors. Any change in assumptions regarding level of audit coverage and number and type of cases will affect staffing requirements. ### LTI audit activity, compromise arrangements, and desk audits - Compromise scheme (first semester of 2015): permitted certain taxpayers with outstanding tax liabilities or understated liabilities to pay five percent of those liabilities in full satisfaction of past obligations; taxpayers given until mid-April to take advantage. - Shift in LTI focus in first semester of 2015: reduced comprehensive audit activities and shifted focus to unscheduled audits. - Table 6—Large Taxpayer Inspectorate Audit Results (exact figures preserved) - Scheduled Audits 2014: Comprehensive 237 - Scheduled Audits 2015: Comprehensive 74 - Scheduled Audits 2014: Specialized 496 - Scheduled Audits 2015: Specialized 241 - Total assessment (including fines and charges) UAH’000 Scheduled 2014: 497,916 - Total assessment (including fines and charges) UAH’000 Scheduled 2015: 151,465 - Total assessment (including fines and charges) UAH’000 Unscheduled 2014: 425,634 - Total assessment (including fines and charges) UAH’000 Unscheduled 2015: 179,463 - Source: State Fiscal Service. - Proposed desk audit program: - Current cameral audits: mathematical and documentary verifications of return data. - Proposed: large taxpayers provide specific documents in electronic form; documentation reviewed at the desk using systems-based risk criteria; formal audit only if significant tax compliance risk identified. - Objective: significantly reduce time spent on documentary checks and reduce physical contacts with taxpayers by auditors. - Recommendation: review utility and benefits after a year of operation to determine whether significant additional compliance risks are identified and what audit results were achieved. - Legislative considerations: may be required to permit gathering of documents in electronic form and clarification when documents are transmitted electronically and required to be certified by the taxpayer. ### Administrative workloads, e-services, and data access proposals - Administrative demand on LTI (processing examples): - TCC requests: 13,000 in first six months of 2015; 12,600 in whole of 2014. - Requests for registration of accounting books: 24,700 in first half of 2015; 39,000 processed in 2014. - Strategy: focus on streamlining and building e-services to handle “low value” workloads efficiently. - Proposal: provide access to the SFS server for the government’s Tender Committee to check bidders’ tax payment status. - Concerns: taxpayer confidentiality and data security issues; would need careful consideration. - Exploring: common electronic format and procedures for other information requests. - Recommendation: LTI should assess whether many administrative tasks are critical to its mission; eliminate noncritical workloads where possible. - Legislative changes may be necessary to provide access to SFS database for the Tender Committee and to facilitate new electronic formats for processing information requests. ### High net wealth individuals (HNWI) - New structure: LTI Central Office includes a department for high net wealth individuals (HNWI). - Activity: LTI has undertaken research and started to develop criteria to identify HNWI; some HNWI identified but SFS data will be incomplete without external sources. - Push-back: proposals to access information on HNWIs’ bank accounts encountered significant resistance. - SFS compromise proposal: permission of other agencies (Prosecution Service, Security Services, and Internal Affairs Ministry) would need to be obtained to access bank account information; this proposal was rejected. - Legal changes recognized as needed: - Increase dramatically penalties for failure to file returns. - Extend the statute of limitations period for tax recovery and prosecutions. ### Tax Audit — audit coverage and trends - Audit coverage decline: - Approximately 600,000 legal entities. - Less than one percent (4,867) received a planned audit in 2014. - First semester 2015: 1,635 planned audits completed. - Unplanned audits (2014): 28,013; declined from 32,496 in 2013. - Table 7—Audit Results for 2014 and First Semester 2015—Nonlarge Taxpayers (exact figures preserved) - Legal entity taxpayers - Number of planned audits performed 2014: 4,867 - Number of planned audits performed First Semester 2015: 1,635 - Number of unplanned audits performed 2014: 28,013 - Number of unplanned audits performed First Semester 2015: 9,882 - Total assessment (including fines and charges) UAH’000 Planned 2014: 3,024,054 - Total assessment (including fines and charges) UAH’000 Planned First Semester 2015: 895,659 - Total assessment (including fines and charges) UAH’000 Unplanned 2014: 4,016,218 - Total assessment (including fines and charges) UAH’000 Unplanned First Semester 2015: 1,567,501 - Individuals - Number of planned audits performed 2014: 3,455 - Number of planned audits performed First Semester 2015: 1,462 - Number of unplanned audits performed 2014: 34,948 - Number of unplanned audits performed First Semester 2015: 8,144 - Total assessment (including fines and charges) UAH’000 Planned 2014: 99,824 - Total assessment (including fines and charges) UAH’000 Planned First Semester 2015: 50,008 - Total assessment (including fines and charges) UAH’000 Unplanned 2014: 130,132 - Total assessment (including fines and charges) UAH’000 Unplanned First Semester 2015: 40,508 - Collected revenues UAH’000 Individuals Planned 2014: 86,185 - Collected revenues UAH’000 Individuals Planned First Semester 2015: 30,721 - Collected revenues UAH’000 Individuals Unplanned 2014: 47,160 - Collected revenues UAH’000 Individuals Unplanned First Semester 2015: 19,280 - Source: State Fiscal Service. ### Audit moratorium and constraints - Audit moratorium: implemented for the 2015 and 2016 years. - Principal effect: affects authority to undertake audits of small–medium taxpayers (turnovers less than UAH 20 million). - Exception: moratorium does not prevent audits of VAT, PIT, and USC withholding, and excises that such taxpayers may be required to pay. ### Risk assessment and planned audit targets - Current balance: 17 percent of audits are planned audits (initiated from SFS risk assessment model); 83 percent are unscheduled audits. - Composition of unplanned audits (2014): - Largest number involved VAT refund claims. - Thirty percent involve business liquidations. - About seven percent requested by the police. - Recommendation: set targets to increase planned audits; example target: planned audits in 2016 might be set at 25 percent, with incremental increases planned for later years. ### Audit adjustments, disputes, and collection impediments - Average assessed amounts (including fines and charges): - Legal entities scheduled audits 2014: approximately UAH 621,000 per audit. - Legal entities scheduled audits First Semester 2015: approximately UAH 547,000 per audit. - Legal entities unscheduled audits 2014: approximately UAH 143,000 per audit. - Legal entities unscheduled audits First Semester 2015: approximately UAH 158,000 per audit. - Disputes: - 65 percent of audit adjustments are disputed in the court system (according to the SFS audit head). - Article 56 of the Tax Code prevents the SFS from taking collection action on a disputed tax debt, undermining effectiveness of SFS audit operations. - Common practice: small-medium taxpayers liquidate a company while a tax dispute is before the court, making collection impossible if the case is concluded in favor of the SFS. ### Management of audit operations and corruption risks - Concern: SFS audit management seriously concerned about ability to manage audit operations across extensive network of rayon offices. - Rayon office issues: - Auditors connected into communities and supervised by rayon heads with close local links. - Rent-seeking and corrupt practices likely to be facilitated and go undetected due to community ties. - Insufficient close supervision of audit staff in rayons. - Reputational risk: significant numbers of unsupervised audit staff contribute to perception of SFS as a highly corrupted agency and audit operations as taxpayer harassment. - Management response: - Plan to move audit staff to the regional level to consolidate audit management, ensure audits undertaken on identified risks, strengthen supervision, and provide greater industry and technical specialization. - Many audit staff will remain in rayons but will report to and be supervised by audit managers at the regional level and will undertake only audit cases assigned at the regional level. ### Audit powers constraints - Current constraints on auditors: - Must rely on documentary evidence located in taxpayer’s records; such documents often fraudulently “re-constructed” when notice of audit is given. - Auditors cannot have access to a taxpayer’s bank information to identify unreported income and sales. - Auditors are not permitted to use “indirect” methods to determine a taxpayer’s income. - Impact: constraints limit ability to deliver effective audit program and distort audit operations, placing excessive documentary burdens on taxpayers. ### Value-Added Tax (VAT) administration and new e-system - FAD (2014) recommendations: partially implemented. - VAT registration threshold increased to UAH 1 million on January 1, 2015. - Rapid currency deterioration and inflation limit the effect of the increase. - Fast track deregistration procedure when fraud detected was not adopted. - Change in registration procedures from November 14, 2014 speeds up deregistration initiated by the taxpayer but not relevant for missing trader and related frauds. - Risk-based off-site visitation program to control VAT register and deter VAT fraud: not introduced. - June 2014 VAT account proposal: mission recommendation to include a sunset clause was not accepted. - New e-system for VAT accounts: - Modified e-system developed and launched on July 1, 2015 after six months of testing (during which it was optional for taxpayers to apply). - Modification: for domestic VAT transactions, only amounts equal to net VAT payable, on the value added component, are to be deposited to the seller’s individual VAT accounts. - Contrast: former proposal required full VAT amount calculated on each transaction to be payable to the VAT account. - SFS belief: new e-system will deter VAT fraud. - Note: modifications addressed FAD concerns about ability of business to access working capital. *Source: IMF staff content from the supplied PDF chapter/section.* ### 108. Despite the modifications, the system adds burden to compliant taxpayers and it _cr1648 - 108. Despite the modifications, the system adds burden to compliant taxpayers and it ### e‑VAT system: burdens, design features, and implications - The system "adds burden to compliant taxpayers" and "it remains to be seen if it will bring the desired impact on VAT fraud." - Key operational design and constraints: - "All claims for VAT credit will be denied in the absence of the commensurate deposits in the VAT account." - Requirement for payment "within 14 days of the sale" — described as "a partial limitation on access to working capital compared to the standard VAT system with a monthly or quarterly filing and payment obligation." - Concession for voluntary compliance: "an amount equal to the 12-month average per month obligation may be under-remitted compared to the amounts of VAT payable on the invoice value." - Reliance on accurate identification of parties "through use of an identifier on the invoice." - Where a supplier defaults on depositing to the VAT account, "there is no alternative to a reliance on court-based dispute resolution before the purchaser can claim the amounts of input VAT." - Recommendation/observation: - "If authorities are certain that the new e-system of VAT accounts will effectively deter VAT fraud, other preceding and disproportionate measures that were introduced with the same reasoning, should be removed." ### VAT refund arrears: magnitude, drivers, and authorities’ measures - Definitions and magnitude: - "VAT refund arrears are defined as those being more than 74 days old." - "As of July 1, 2015 the amount of VAT refund arrears reached UAH 7.075 billion." - By July 1, 2015 "the stock of nonrefunded VAT claims was UAH 21.913 billion." - Opening stock at the beginning of the year: "UAH 13.499 billion." - Growth in stock by July 1, 2015: "This is growth of UAH 8,413 billion from an opening stock of UAH 13.499 billion in the beginning of the year." (text as provided) - VAT refund arrears "exceeds by UAH 1.305 billion, the peak value for 2014." - Claims versus refunds (first half of 2015): - "New VAT refund claims submitted during the first half of 2015 total UAH 35.867 billion." - Compared to January–July 2014: increase of "43 percent—or growth of UAH 10.724 billion" (January–July 2014 claims: "UAH 25.143 billion"). - "The total amount of VAT refunds paid during the current year to July 1, 2015 was UAH 26.701 billion." - Compared to January–July 1, 2014 refunds paid: increase of "31 percent representing UAH 6.346 billion in additional refunds paid" (January–July 1, 2014 refunds: "UAH 20.355 billion"). - Contributing factors to rapid growth in 2015: - "Legislative change in the beginning of 2015, which allowed VAT refunds claims to be submitted one month earlier compared to the rules applicable in 2014. This change had a one-time, bring forward, effect..." - "The rapid depreciation in the exchange rate in 2015 flowing through to immediate increases in costs of (imported) raw materials." - Budget constraints: "average amounts of monthly refund claims are around UAH 6 billion per month, the budget allocated funds for payment of refunds are, according to the SFS, limited to UAH 5 billion (the mission has not verified these figures)." - Anticipation of e‑VAT restrictions led taxpayers to "brought forward claims for unused VAT credit to be cleared up before the start of the VAT electronic administration system on July 1, 2015." - Measures adopted by authorities: - In March 2015 rules for automatic VAT refund were changed so that "the ratio of the automatic refunds has increased from around half to two thirds of total amount of refunds" and "the criterion for minimal wage was abolished." - New criterion adopted: taxpayer must have "fixed assets exceeding three times the value of VAT requested for refund." - Authorities "also plan to use the forthcoming budget revenue to overcome the VAT refund arrears and lower them down to the level of the beginning of 2015." ### Advance payments of Corporate Income Tax (CIT) - Stock and scale: - "At end-June 2015, the amount of advance CIT payments was UAH 21.8 billion, which was equal to 54.2 percent of CIT revenue in 2014." - Origins and accumulation: - Monthly CIT advance payments system introduced commencing in 2013 for businesses with annual turnover higher than "UAH 10 Million." - Monthly payments based on "tax payable on the previous year’s income." - Economic downturn in 2013 and increased corporate losses led to rapid accumulation of prepaid CIT on a separate Treasury account. - Excess CIT quarterly payments made prior to 2013 "could not be used to offset advanced payments in 2013 (and later years). Nor were such excess CIT amounts refunded due to a lack of funds available in the budget." - Those excess payments prior to 2013 are included in the accumulated balance of "UAH 21.8 billion." - Measures and projections: - On July 20, 2015, "an order, combining advanced payments accounts with accounts of CIT liabilities, was issued by the Minister of Finance" to allow automatic offsetting on a single account. - The SFS estimates that by the end of 2015 offsetting arrangements will slow growth; arrangement envisages that "UAH 4.4 billion will be offset against monthly CIT installment payments due" for July–December 2015. - Projection: "By end 2015, SFS officials acknowledge that the amount of CIT advance payments will have reached UAH 33.2 billion, with a net amount of UAH 11.4 billion in CIT installment payments added to the June 2015 stock of UAH 21.8 billion." - The report notes uncertainty: "It remains unknown what amount of CIT advanced payments will be credited against 2015 liabilities." - Table 8: Monthly offsetting July–December 2015 (values as presented) - July — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "942.1"; Net Advanced CIT Payments: "1,688.3" - August — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "959.1"; Net Advanced CIT Payments: "1,671.3" - September — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "804.6"; Net Advanced CIT Payments: "1,825.9" - October — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "664.7"; Net Advanced CIT Payments: "1,965.8" - November — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "577.5"; Net Advanced CIT Payments: "2,052.9" - December — Accrued Advanced CIT Payments: "2,630.4"; Amount of Offset CIT Credit: "463.1"; Net Advanced CIT Payments: "2,167.3" - End of 2015 — Amount of Offset CIT Credit: "4,411.1"; Net Advanced CIT Payments: "11,371.4" ### Reforming tax dispute resolution: stock, problems, and reform priorities - Stock and outcomes: - "The number of unresolved disputes remains unacceptably high—at more than 75,000 with a value of around UAH 180 billion (for internal and judicial appeals)." - Disparity of outcome between internal administrative procedure and judicial system: "The SFS wins an overwhelming majority of internal appeals while success in the Courts is split about evenly between business and the SFS, though business wins more in money terms." - "With the total taxes in dispute presently exceeding UAH 185 billion and SFS expecting to win cases involving at least 30 percent of that sum..." - Drivers of appeals and payment behavior: - "Automatic waivers of tax where assessments are disputed continue to drive the number of appeals." - Business practice: disputing assessments "in order to postpone payment of tax" and sometimes to "gain time to divest themselves of assets so that there is nothing with which to pay taxes when an appeal is eventually lost." - The 2014 FAD report recommended requiring disputed tax to be paid in full or in part before appeals are determined; no material progress has been made on developing an up-front payment requirement. - SFS lawyers favor "some sort of lien or guarantee when an appeal is made" but legislative progress has been slow. - Internal appeals reform plans and recommendations: - SFS plans to introduce "a single level system managed in head office" with a "central unit which will be staffed by appeals specialists" and "report directly to the Chairman." - Expected impact: reduce the timeframe for individual administrative appeals by "80 to 90 days." - Mission recommendation: "The timescale for starting the new internal process should be brought forward" and "parliament should be asked to pass the relevant tax legislation as soon as possible." Plan for the new tax appeals approach to start "around three months after the legislation is passed." - Operational transparency and credibility measures advised: - Publish written processes for the new unit for consultation as soon as possible. - Include "a small number of private sector lawyers and, possibly, officials from tax administrations in other countries" to build capacity and credibility. - Establish "a joint SFS/business/tax adviser forum ... to focus on the operation of the unit in its first two years." - Anti-corruption oversight: "The head of anti-corruption in the SFS should be fully consulted about the method of operation of the new unit." - Settlement culture: promote oversight mechanisms that allow settlement approval by a senior manager "without investigative involvement." - Assuring quality of assessments: - Observed weaknesses: "the quantum of assessments is not always fully justified and assessments are not always supported by good evidence." - Supported measure: "certificate of audit completion being signed off by a lawyer." - A 500 page methodological guidance manual has been prepared by the legal function; it is "well indexed" and "relevant sections can be taken out for use when needed." The mission notes that "the HQ head of audit knew nothing about the guidance." *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1648.pdf* ### 131. The SFS has prepared draft legislation to allow for appeals to be settled by ### _cr1648 - 131. The SFS has prepared draft legislation to allow for appeals to be settled by ### Appeals and mediation - The SFS has prepared draft legislation to allow for appeals to be settled by mediation. - The mission recognizes mediation as a useful dispute resolution tool and agrees that it should be trialed in Ukraine. - Recommendation: Trials of mediation should take place within the new appeals unit. - Recommendation: Implement a new system of internal dispute resolution through a special unit reporting direct to the chairman of the SFS by March 31, 2016. - Recommendation: Require a minimum payment or guarantee equal to a share of tax in dispute before tax appeals at first instance or court-based appeals are accepted. ### Unified Social Contributions (USC) compliance — contributor register and filing - SFS actions and register status: - Introduced new procedures for registration and de-registration for USC obligations since mid-2014. - Completed a major stock-take of USC contributors and removed defunct contributors. - Current number of registered USC contributors is approximately 3.12 million. - In 2014, approximately 404,000 natural persons and 250 liquidated entities were removed from the register. - Filing and reporting issues: - Compliance with expected monthly and annual filing obligations is consistently high across USC contributor categories, but reported USC liabilities in those returns are seriously understated. - Reporting on USC and PIT withholding requires completion of two separate returns and payments; consolidation into a single return and payment has been under consideration but discussions are stalled. - Harmonization: - Harmonization of the bases for USC and PIT should facilitate compliance, particularly by employers; bases are not significantly dissimilar. - Key compliance constraints and behavior: - Average burden of USC is 39 percent and 13.4 percent for PIT. - The combined burden of USC and PIT is widely recognized as excessive. - Under-reporting of salary payments is widespread: 57 percent of companies report salary payments to all employees at a level less than two times the minimum monthly salary level of UAH 1218. - SFS auditors are legally constrained: auditors cannot examine beyond formal labor contract documentation to determine actual salary entitlements. - SFS auditors have no legal authority to use “indirect methods” to determine real remuneration; cash payments and fringe benefits topping up contract salaries go unreported. - SFS auditors work with labor inspectors in the Ministry of Social Policy, but labor inspectors’ sanctions are limited; main sanction is a penalty equal to 30 minimum salaries for failing to notify SFS of a new worker. - SFS does not have a separate program of USC and PIT withholding audits; much USC audit work arises from information about unregistered workers and is treated as unscheduled/unplanned audits. - Significant audit staff that could work on PIT/USC compliance are assigned to other priority work, including special inspections under the Government’s “lustration” program: approximately 3,100 of these inspections are either in progress or scheduled; there are 80,000 government employees potentially subject to the lustration program. ### Recommendations (selected, as in source) - Large taxpayers - Revise the large taxpayer definition so that around 60 percent of tax revenues are within the catchment from January 1, 2017. - Review the proposed new program of desk audits after one year to assess its utility and effectiveness. - Review the need to undertake “administrative functions” that have marginal (if any) value in supporting LTI compliance objectives. - Tax audit - Rebalance the audit program to increase the number of planned audits to a 25 percent target in 2016 with incremental increases in the target in later years. - Proceed with plans to move audit staff from rayons to the regional level and exercise closer supervision and control over auditors who remain in those rayon offices. - Undertake a detailed review of the Tax Code to identify legislative changes to strengthen audit and enforcement powers and seek government and parliamentary approval of a package of legislative changes. - Value-added tax - Introduce tax administration initiated fast track deregistration procedure to support deterrence of VAT fraud. - Review the tax code to remove distortionary anti-fraud requirements such as those under Article 188.1. - Corporate income tax - Develop a medium-term solution to the continuing accumulation of advance CIT payments. - Tax disputes - Require a minimum payment or guarantee equal to a share of tax in dispute before tax appeals at first instance or court-based appeals are accepted. - Implement a new system of internal dispute resolution through a special unit reporting direct to the chairman of the SFS by March 31, 2016. - Unified social contributions - Harmonize the bases for USC and personal income tax and provide a single filing and payment for business from January 1, 2017. - Remove legal obstacles that prevent SFS auditors from determining the correct level of remuneration (including cash payments, fringe benefits, etc.) paid to employees for purposes of USC/PIT withholding calculation and assessment. - Establish a separate audit program for USC/PIT liabilities and assign appropriate staff resources. ### Fiscal Affairs Department (FAD) technical assistance and capacity support - FAD support in 2014/15 included TA in: - Preparing for SFS reform—four short-term expert (STX) visits (Hartnett). - Improving management of large taxpayers—three STX visits (Teed). - Collection of tax arrears and improving disputes resolution—one STX visit (Collins). - A headquarters revenue administration diagnostic mission in 2014 and a mission on taxation of natural resources in June 2015. - FAD revenue administration TA activities are financed by the Canadian DFADT. - Donor coordination: - EC, the U.S. Treasury, and the World Bank are already active in supporting SFS; other donors include GIZ and the government of Netherlands. Donor support should be well coordinated to avoid overlap and utilize resources fully. - Critical TA areas identified: - Managing SFS institutional reform. - Building anti-corruption processes and staff integrity mechanisms. - Strengthening LTI. - Revamping tax audit. - Reforming SFS headquarters. - Reviewing business processes. - Reforming SFS structure and streamlining local offices. - Managing HR during reforms. - Strengthening customs. - Establishing HNWI unit. - Strengthening compliance management. - Harmonizing USC base with PIT. - Strengthening compliance with payroll taxes. - Strategies for compliance management and the informal economy. - Improving disputes resolution. - Planned FAD mobilization and TA schedule (selected items preserved as in source): - The FAD will mobilize a resident advisor to support SFS in managing institutional reforms; the advisor will be installed in September 2015, preliminarily for one year (September 2015–August 2016 (possible extension)). - Large taxpayer management STX visits: 1 X 14 days in October 2015; 1 X 14 days in December 2015. - Payroll tax compliance STX visits: 1 X 14 days in October 2015; 1 X 14 days in February 2016. - HQ Structure STX visits: 1 X 14 days in November 2015; 1 X 14 days in March 2016. - Dispute resolution STX visits: 1 X 14 days in November/December 2015; 1 X 14 days in March/April 2016. - General review staff visit: 4 X 5 days quarterly, starting in September 2015. - Follow up Headquarters mission: May/June 2016. - A customs diagnostics mission is planned during September 2015 to identify urgent operational improvements in Ukraine customs. *Source: IMF staff report content as provided in the supplied document excerpt.* ### Appendix 3. Developing a Systematic Approach to Integrity ### Appendix 3. Developing a Systematic Approach to Integrity ### Elements of an integrity strategy - Leadership and commitment - There needs to be a firm commitment at the highest political level to the achievement of the highest level of integrity. This political commitment will drive the full engagement of senior management and staff. - There should be clearly defined supervision, decision-making structures and obligations and staff at all levels should be made accountable for their own actions. - Regulatory framework - Complex regulations, procedures and administrative guidelines allow corrupt practices to develop and flourish. - The extent to which the law permits the exercise of discretion by officials should be brought to the absolute minimum needed for the proper administration of the law. - Where discretion needs to be exercised, it should be fettered by appropriate rules and oversight. - Transparency - Increased accountability and maintaining an open and honest relationship with all clients and stakeholders is crucial to maintaining public trust and confidence. - There should be a capacity for judicial review of tax decisions made. - Client service charters can demonstrate a revenue administration’s commitment to providing quality service. - Automation - Electronic service delivery of all revenue administration functions limits the opportunities for corruption to occur, or if they do happen, to remain undetected. - At the same time, the security of the automated system will need to be guaranteed to prevent attack from the inside or the outside. - Reform and modernization - Integrity and anti-corruption efforts should be a key component of any reform and modernization program. - The broader reform program will be fundamental to the success of any integrity strategy as reform targets improved efficiency, effectiveness and responsiveness. - Audit and investigation - Any integrity strategy needs strong and specific tools to identify and to deal with corrupt behavior. - Internal and external audits review systems and processes, focusing on those deemed to be more vulnerable to corruption. - Random checks of specific operations can also be built in as a means to ensure ethical officer behavior. - There should also be mechanisms in place to encourage or even require staff to report corrupt practices. - Code of conduct - A code of conduct specifically tailored to the challenges of maintaining an ethical revenue administration is an important component of an integrity strategy. - Such a code sets out the standards of behavior and conduct demanded of employees to ensure that the integrity of the organization and its good reputation are maintained. - The code should also provide a guide for resolving the thornier issues related to ethics that can emerge. - Finally, the code should make absolutely clear what penalties are the consequence of corrupt behavior and these penalties should be a true disincentive. - Human resource management - Managing the personal integrity of staff can be the most challenging aspect of the integrity strategy. - Expectations should be clear that a high level of work performance and personal integrity is expected but this can only flourish if the work environment is fair and recognizes the contribution of its employees. - Reform of systems and procedures alone without the commitment of staff will not deliver the needed improvements in integrity. - There are several areas of HR management that should be covered in an integrity strategy: (1) remuneration and conditions of work; (2) recruitment, selection, and promotion; (3) deployment, rotation, and relocation; (4) training and professional development; and (5) performance management and appraisal. - Morale and organizational culture - The integrity strategy needs to be predicated on the existing organizational culture, cognizant of any need for change to achieve real and sustained improvement. - Staff and staff associations need to be actively involved if real change is to be effected. - This is perhaps one of the most difficult parts of the integrity strategy as it involves influencing and sometimes changing individual attitudes and behaviors. - Relationship with the private sector - Client groups can play a central role in controlling or eliminating corruption and this should not be underestimated. - Most forms of corruption in tax administration involve external partners and these partners need to be actively engaged and supportive of any integrity strategy. - Client surveys, liaison committees and a comprehensive communications strategy should all be elements of this component of the strategy. ### Illustrative integrity actions - High level commitment - establishment of a broad national program for anti-corruption, within which the integrity approach is developed - cooperative agreements on integrity issues between national agencies (e.g., revenue administration and police organizations) - multi country (regional or worldwide) declarations on integrity (e.g., Customs Arusha Declaration 1993) - publication of high level integrity action plans - establishing “integrity and ethical behavior” as a competency requirement for senior management - Regulatory framework - review and simplification of revenue codes and statutes - adoption of international agreements (e.g., Kyoto convention on customs procedures- based on principles and standards) - introduction of e-commerce - acceptance of risk-based principles and management - development of plain language initiatives, especially in tax forms and guides - Transparency - online access to legislation, regulations and interpretations - publicly available fact sheets and other guidelines - publication of performance standards and performance information - establishment of complaints hotlines for public and employees - establishment of customer help desks and service centers - Automation - introducing processes to increase transparency - establishing processes to minimize taxpayer contact, except in the service function - implementing automated and electronic payment systems - establishing computerized audit selection programs - Reform and modernization - including integrity strategy as an element of reform initiatives - establishing integrity governance within reform plans - consideration of whistle–blowing programs, including legislation - instituting a specific response to accountability for integrity (establishing internal affairs divisions. clarifying HR responsibilities, making integrity an overall management responsibility, undertaking perception surveys) - Internal audit - establishing a specific focus for integrity issues in internal audit projects - developing investigative capacity for integrity-related investigations (not necessarily to be done by internal audit) - ensuring adequate internal control systems - carrying out both random and planned audits and inspections - Human resources management - developing linkages between performance and incentive pay and integrity - inculcating integrity as a component of recruitment, selection, promotion and appraisal - conducting internal staff satisfaction surveys - establishing integrity counselors in the field - developing integrity-related data collection including such items as alleged incidents or cases of corruption (status of investigation, if any, type of potential infraction, outcome of investigation, sanctions imposed (if any), appeal or redress, location, etc.) - developing tools to analyze integrity data on a monthly or quarterly basis to evaluate the application of integrity policy and to determine changes in policy or emphasis if required - developing appropriate training for integrity - ensuring training in other areas includes an integrity component - Relationships with the private sector - establishing national consultation committees on integrity-related issues - developing specific protocols with high-risk sectors or corporations (e.g., those involved in excisable goods) *Appendix 3. Developing a Systematic Approach to Integrity* ### Appendix 5. E-System for Value-Added Tax Accounts ### Appendix 5. E-System for Value-Added Tax Accounts ### System overview - Each VAT taxpayer has an individual treasury account on which they have to deposit an amount of monies calculated as a result of their transactions reported on VAT invoices and by applying a legally determined formula. - The system is designed to disallow crediting VAT from false invoices on which VAT was not paid by the suppliers. - The authorities hope that this will stop VAT leakages created by missing trader fraud. ### Obligations and timing - Each VAT taxpayer is obliged to register its VAT taxable sales by entering into the e-system VAT invoices within 15 days after payment or shipment, whichever occurs first. - Taxpayers have to deposit funds in the amount equal to the VAT on sales that were offset by VAT credits reported to the system by suppliers or customs and corrected by the formula. - Taxpayers should also submit their monthly VAT returns. - Treasury accounts will be swept at the VAT payment deadline to clear reported tax obligations. ### Formula mechanics and invoice acceptance - The formula determines a limit for the tax amount on a VAT invoice (that a supplier enters to the system). - If the VAT value on the invoice exceeds the formula-based limit, the supplier of goods and services should deposit additional funds on the VAT account to ensure acceptance of the invoice by the system. - The deposit can be offset only by credits that were reported and paid to the system by suppliers. ### Taxpayer burden and mitigation - The system will bring additional burden to taxpayers: enhanced reporting requirements for input of VAT invoices to the system and bringing forward their VAT payments, which will affect their working capital. - To ease the burden on regular VAT payers, an “overdraft” was designed as a part of the formula to determine final amount of required deposit. - Overdraft—an element in the formula that allows taxpayers that had stable payments during the year reduce amount of their monthly deposit to VAT account by amount equal to 1/12 of their VAT payment during previous year. - VAT refund criteria were eased—a VAT refund request can now be submitted after expiration of one month from the filing deadline instead of two months. ### VAT Invoice Control Formula - + ∑ VAT Invoice on Sales - + ∑ VAT Paid to Customs - + ∑ VAT Account - - ∑ VAT Invoice on Supply - - ∑ VAT Refund Claim - - ∑ (VAT Supply Amount—VAT Supply Invoice Amount) - + ∑ Negative VAT Values - + ∑ VAT Overpayments up to July 1, 2015 - + ∑ Overdraft (average VAT paid during preceding 12 months) - = ∑ lowest value for VAT invoice acceptance *Source: Appendix 5. E-System for Value-Added Tax Accounts* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1648.pdf_