Ukrainian Taxpayers Face Updated Audit Risk Criteria

Tax Audit Risk Categories Explained

According to ХВИЛЯ: Attorney Bohdan Yankiv has outlined the risk categories used for tax audits, as defined by Ukraine's Ministry of Finance Order No. 524, issued on June 2, 2015. Businesses are classified into three risk levels: high, medium, and low. This system allows tax authorities to conduct inspections based on specific indicators rather than a fixed schedule, improving their ability to spot potential violations.

Key Sections of the Order

The regulation comprises three main sections covering criteria for legal entities, individual entrepreneurs (sole proprietors), and individuals acting as tax agents. Among the low-risk indicators are:

• Delayed payment of the unified social contribution (USC) for oneself,
• Attempting to claim a value-added tax (VAT) refund,
• A large VAT tax credit amount.

There are nine medium-risk criteria, including:

• Lack of a cash register or bank account for a sole proprietor reporting income above 220 minimum wages;
• Processing and exporting timber worth over UAH 1 million;
• Transactions with suspicious counterparties exceeding 10% of total turnover.

High-risk criteria encompass:

• Declared expenses exceeding 75% of working capital;
• Evidence of undeclared employees;
• Suspiciously low income;
• Multiple court cases involving potential tax evasion.

For legal entities, risk indicators include:

• Filing amended returns that adjust tax by more than 30%;
• Reporting losses for two consecutive years or more;
• Payments to sole proprietors with flag 157 exceeding UAH 5 million.

Yankiv stresses the importance of timely reporting: 'Pay on time, submit reports on time, and your audit risk drops significantly.'

He adds, 'Who you pay and who pays you really matters.' In his view, 'Tax authorities don't visit you every three years or on a set schedule; they only show up when you cross certain red lines.' Therefore, strict compliance with tax laws and careful oversight of financial transactions can greatly reduce the likelihood of an audit.

This information is critical for entrepreneurs, as grasping these risk criteria can help them avoid unnecessary inspections and maintain business stability. Given the frequent changes in tax regulations, staying updated on current requirements and adhering to them is essential for minimizing risks and protecting the company's reputation.

As businesses navigate the updated audit risk criteria, it is crucial to stay informed about upcoming changes, such as new deadlines and penalties for individual entrepreneurs. These developments could significantly impact compliance and financial planning. For a deeper understanding of the implications for sole proprietors, explore our article on mass tax audits and their consequences.