Weekly analytics for 20 — 26 December

Ukraine’s rough path through combatting bribery to OECD membership

Event

On December 6, the Cabinet of Ministers of Ukraine submitted to the Parliament a draft law “On amendments to the Tax Code of Ukraine regarding taking into account the provisions of the Recommendations of the Council of the Organization for Economic Cooperation and Development on tax measures for further combating bribery of foreign public officials in international business transactions”. According to the explanatory note to the draft law, it was developed in close cooperation with the Organization for Economic Cooperation and Development (OECD) and is aimed at implementing the OECD Council’s Recommendation on Tax Measures for Further Combating Bribery of Foreign Public Officials in International Business Transactions.

The OECD Council’s Recommendation emphasizes the importance of adopting legislation that directly denies the deductibility of unlawful benefits to foreign public officials in international business transactions and calls for the on-going self-review of the effectiveness of the frameworks and practices for disallowing such tax deductibility. At the same time, denial of tax deductibility is not contingent on the opening of an investigation by the law enforcement authorities or of court proceedings. 

The Draft Law provides for amendments to Section I “General Provisions”, Section II “Administration of Taxes, Duties, and Payments”, Section III “Corporate Income Tax”, and Section IV “Personal Income Tax” of the Tax Code (TC). These amendments, in particular, provide for an increase in financial result by the amount of expenses in respect of which:

– there are grounds to believe that there are circumstances (facts) that may indicate the provision of an unlawful benefit;

– the taxpayer has received information from the controlling authority about the circumstances (facts) identified during the audit that may indicate the provision of an unlawful benefit;

– a court’s guilty verdict establishes that such expenses were made with the purpose of providing the taxpayer with an unlawful benefit.

CPLR’s assessment 

Ukraine’s acquisition of membership in the OECD is, undoubtedly, the right choice. In addition, participation in the work of the OECD’s Working Group on combating bribery in international business transactions and implementation of its acts is one of the conditions for the launch of accession negotiations. Amendments to legislation to bring it in line with the provisions of the OECD Council’s Recommendations are also envisioned by subparagraph 2.4.4.1.9 of Annex 2 to the State Anti-Corruption Program for 2023-2025 approved by the Resolution of the Cabinet of Ministers of Ukraine № 220 of March 4, 2023. However, it is worth focusing on certain controversial provisions of the draft law.

First, these have to do with legal clarity as one of the requirements for the quality of laws. This problem relates to the concept of “circumstances (facts) that may indicate the provision of an unlawful benefit to a foreign public official”. It serves as a decisive grounds for conducting an audit of taxpayers, bringing the issue on initiating criminal proceedings against a taxpayer before the National Anti-Corruption Bureau of Ukraine (NABU), and adjusting a taxpayer’s financial performance by the fiscal authority, which also includes the imposition of penalties on a taxpayer. Nevertheless, the draft law does not contain a list of such circumstances (facts), leaving it to be subsequently determined by the NABU. Therefore, none of the participants in the legislative process currently knows what these circumstances (facts) are, and therefore there is no way to clarify them if need be.

Secondly, the draft law provides for the introduction of a rule according to which an increase in the financial result by the amount of expenses based on the results of a business transaction and, accordingly, the imposition of a fine on a taxpayer in case of providing an unlawful benefit are possible in two cases: 1) based on a court verdict that has entered into force, in which a court found that a business transaction was carried out with the aim of providing an undue benefit to a foreign public official by a taxpayer or any persons acting on his/her behalf and/or in his/her interests; or 2) if the controlling authority identifies circumstances (facts) that may indicate that an undue benefit was provided to a foreign official during the audit (part 140.21 of article 140 of the draft Law). The latter situation contains risks of violating the constitutional principle of the presumption of innocence, as it envisions bringing a person to legal responsibility in the absence of a court verdict, based simply on assumptions. Furthermore, it would be necessary to amend article 374 of the CPC of Ukraine, which defines the substance of a court verdict, with regards to a court’s finding of a fact that a business transaction was carried out with the purpose of providing an unlawful benefit. Otherwise, the courts may not focus their attention on this, which would complicate subsequent enforcement of court verdicts for purposes of this draft law.

Thirdly, the draft law (part 111.6 of Article 111) contains a substantively proper provision in content: the fact that the controlling authority detects the reduction of tax liabilities by providing an unlawful benefit to a foreign public official is not a ground for notifying a person of suspicion of committing a criminal offense. However, this provision is erroneous in form, as it is aimed at regulating criminal procedure relations which, according to part 3 of Article 1 of the CPC of Ukraine, are to be be carried out by amending that Code.

Finally, another problem that could be addressed by this draft law is the expansion of the range of social relations that fall under its scope. As a reminder, the draft’s provisions only concern the cases of providing an unlawful benefit to foreign public officials, the list of which is set out in part 4 of Article 18 of the Criminal Code of Ukraine. However, a similar provision should also apply to the reduction of the financial result in cases where taxpayers provide an unlawful benefit to Ukrainian public officials. This would help prevent corruption at the national level.