Taxes and Transparent Privatization: Draft Law No. 4574 Analyzed

Draft law No. 4574 “On Amendments to the Tax Code of Ukraine (Regarding the Sale of State and Municipal Property Objects)” is designed to solve the problems of selling state or municipal property encumbered with tax lien and accumulated tax debt by state and municipal enterprises before their privatization.

The document significantly relates to other draft laws No. 4572, 4573, and 4575, which are designed to activate the process of transferring state-owned objects for privatization and lease. We have already analyzed the draft laws No. 4572 and No. 4573 earlier.

What do we have now?

According to the current provisions of the Tax Code of Ukraine (hereinafter referred to as the Tax Code), a taxpayer can alienate their property in tax lien only with the consent of the supervisory body, as and if the supervisory body has not provided a response on granting (non-granting) consent within ten days from the date of receipt of the relevant request from the taxpayer.

The sale of a taxpayer’s property in tax lien, depending on the type of such property (securities, objects of movable or immovable property, integral property complexes) is conducted at stock trading, stock exchanges, or auctions. At the same time, the sale of integral property complexes has its characteristics — its organization is conducted exclusively by the state privatization body within 60 calendar days from the date of receipt of the relevant submission of the supervisory body.

What is offered?

1. To supplement clause 92.1. of Article 92 of the Tax Code with a provision that clarifies the terms of sale of state and municipal property objects held in tax lien. The sale of such objects through privatization is proposed to be conducted without the consent of the supervisory body.
2. Clause 95.7. of Article 95 of the Tax Code stipulates that the sale of property held in tax lien is conducted only at electronic public bidding.
3. To make amendments to clause 95.9. of Article 95 of the Tax Code, which set a period (30 days) during which the supervisory body must apply to the privatization body with a submission for the sale of the property defined in this clause.
4. To write off the tax debt accumulated as of January 1, 2021, (including that established by court decisions and restructured) of state and municipal enterprises, joint-stock companies created in the process of corporatization (100% of shares/stakes owned by the state), in respect of which the privatization body decided to privatize them.

The proposed amendments to the Tax Code of Ukraine will help to step up the process of transferring state and municipal property objects for privatization that are under tax lien. However, there are doubts about the expediency of adopting certain parts of this draft law.

In Article 95 of the Tax Code, the second paragraph of clause 95.9 is proposed to set out in the following wording: “the supervisory body is obliged, within 30 days from the date of transfer of the single property complex of a state enterprise, a joint-stock company created in the process of corporatization, 100% of the shares (stakes) of which are in state ownership, as well as separate property (including buildings, structures, non-residential premises) of such enterprises to the tax lien, to send a submission on its sale to the state privatization body.”

However, the provision in this version does not give a clear understanding of when to send a corresponding submission, since the moment of transfer of property to the tax lien is not defined by law. Thus, according to Article 89 of the Tax Code, the right to tax lien emerges from the date of occurrence of the tax debt, is drawn up by an act of property inventory, and then registered in the relevant state register. Therefore, it is not clear from what date the deadline for sending a submission to the state privatization body by the supervisory body will begin — the emergence of the right to tax lien, an inventory of property, or registration of tax lien.

At the same time, it should be remembered: the sale of property in tax lien is possible only after the court makes a decision on granting permission to repay the entire amount of tax debt at the expense of the taxpayer’s property (Article 95, clause 95.3 of the Tax Code).

In addition, the purpose of tax lien is primarily to ensure that the taxpayer fulfills their duties, but from the content of the proposed article, it can be seen that the supervisory body must send a submission in any case, even if the payer has repaid the amount of tax debt.

As for writing off the tax debt, it will inevitably lead to a significant reduction in revenues to the state and local budgets. The expert opinion of the Ministry of Finance states that according to the State Tax Service, the tax debt of state-owned enterprises as of October 1, 2020, is UAH 14.7 bln, and that of municipal enterprises is UAH 3.7 bln. In addition, the tax debt of business entities from the public sector of the economy (state-owned enterprises, their associations, subsidiaries, and business entities, the state share in the authorized capital of which exceeds 50%), the list of which as of July 1, 2020, is posted on the website of the State Property Fund of Ukraine, as of October 1, 2020, amounts to UAH 18.7 bln.

At the same time, the draft law was not provided with a proper financial and economic justification, which contradicts the requirements of Article 27, part 1 of the Budget Code of Ukraine and Article 91, part 3 of the Rules of Procedure of the Verkhovna Rada of Ukraine.

The draft law does not define taxes and types of budgets for which tax debt should be written off, nor does it establish a specific list of enterprises that will be subject to the scope of the law, which may pose a threat of illegal participation in the write-off mechanism. At the same time, from the date of making a decision on privatization to the moment of actual privatization, a certain period of time will pass, during which the company will have time to accumulate a new amount of tax debt.

Recommendations

• The second paragraph of clause 95.9. of Article 95 of the Tax Code of Ukraine should read as follows: “The supervisory body is obliged to send a submission to the state privatization body on the sale of a single property complex of a state-owned enterprise, a joint-stock company created in the process of corporatization, 100% of the shares (stakes) of which are in state ownership, as well as separate property (including buildings, structures, non-residential premises) of such enterprises that are in tax lien, within 30 days from the date of entry into force of the court decision on granting permission to repay the amount of tax debt at the expense of the taxpayer’s property in tax lien.”
• Remove clause 25 of Section XX, subsection 10 “Transitional Provisions” of the Tax Code of Ukraine on writing off tax debt from the text of the draft law.

Conclusions

Draft law No. 4574 proposes amendments to the Tax Code of Ukraine and is designed to simplify the procedure for selling state and municipal property that is encumbered (in tax lien) and cannot be alienated without the appropriate consent of the supervisory body. This will contribute to the investment attractiveness of such objects, as well as competition and speeding up their privatization.

At the same time, the consequence of writing off the tax debt accumulated as of January 1, 2021, of state and municipal enterprises, joint-stock companies created in the process of corporatization (100% owned by the state), in respect of which the decision on privatization was made, will be a shortfall in payments to the budget.

Thus, although draft law No. 4574 really creates favorable conditions in the field of privatization of state and municipal property, this project needs to be finalized considering the above proposals.