The business fragmentation scheme allows large companies to avoid paying taxes in full by using an “army” of individual entrepreneurs under one roof. Experts believe that in order to bring the economy out of the shadows, it is necessary to reboot the tax service, make changes to the legislation and introduce incentives for consumers.
The “army” of individual entrepreneurs under the roof of one company is a scheme through which Ukraine loses billions of hryvnias in taxes. The law does not directly punish business fragmentation, so companies have a fairly wide field for abuse. We will tell you how the state fights tax evasion and what risks the participants in the scheme face – below.
What allows large businesses to avoid paying taxes in full?
Business fragmentation schemes work due to the ability of individual entrepreneurs not to show their entire turnover, as well as due to the lack of tools in the tax service to hold them accountable. If violations are detected, small participants in the scheme may be hit, who are responsible for a business that they themselves do not run. This was reported by economist Oleg Getman and tax consultant Mykhailo Smokovich in comments to Channel 24.
Schemes of splitting large businesses are especially common in retail trade and public catering. They become noticeable to the consumer when a supermarket or restaurant issues several payment receipts.
Note! Businesses use the splitting scheme to avoid paying taxes in full by dividing their activities into legal entities or individual entrepreneurs on a simplified system.
Oleg Getman, Economist, Coordinator of Expert Groups of the Economic Expert Platform
All these splitting schemes in restaurant and retail chains are based on the fact that they are not simply split into individual entrepreneurs, but also individual entrepreneurs do not issue the vast majority of fiscal receipts. That is, they do not show their turnover and thanks to this they can continue to exist as individual entrepreneurs. If you force them to show all turnover, the splitting scheme becomes almost uninteresting. Because the limits will expire in a month or a few weeks. Too many of them will have to be changed, so it will be more profitable to switch to a general system.
Economist Oleg Getman says that the fight against this and other schemes of shadow business in Ukraine depends on rebooting the tax service. To do this, bill No. 9243 must be passed, but its consideration is being postponed.
Without a high-quality tax service and the Bureau of Economic Security, nothing will work at all. The bill must be passed to completely reboot the tax service. When the internationals come, they will elect a new leadership, then reboot all the personnel, re-certify by the integrity commission and ethics commissions, all the scoundrels will go on vacation, and quality people will remain and recruit such specialists to the tax service,
says the expert.
Tax consultant Mykhailo Smokovich believes that the tax service today does not have enough resources to expose schemes, so it should receive more opportunities to hold businesses accountable.
Mykhailo Smokovich, Accountant, Tax Consultant
The tax office should detect such cases, but its tools are limited. If detected, it can treat this as a business fragmentation and try to collect all these individual entrepreneurs together in the acts. And the entire turnover that went through this store should be taxed not under the simplified system, as the company did, but under the general system. But here it is very difficult for the tax office to put everything together, detect and hold the company itself accountable.
What is the state doing to combat the business fragmentation scheme?
According to economist Oleg Getman, the state’s greatest achievement in the fight against tax evasion over the past year is the adopted law on the reboot of the BEB.
Pay attention! A new head has been elected for the Bureau, and international experts in the competition commission played a decisive role in this. Currently, they are working on launching personnel recertification and selecting new employees.
In 2024, the National Bank created recommendations for identifying tax evasion schemes. Banks and financial institutions were informed about the mechanisms of business fragmentation and urged to report financial transactions with signs of abuse to the State Financial Monitoring Service. In addition to the above, the authorities also took operational measures, says Oleg Getman.
The head of the tax committee went to various chains, restaurants, collected checks and then wrote about it to the tax office, and the latter really took measures. In such a manual mode, at least several large grocery and restaurant chains were scared. Several of them switched to a common system instead of fragmentation, but all the others were not scared. A whole series of measures are needed to stop this fragmentation scheme,
the expert emphasizes.
Despite the lack of legal liability for this scheme, there are still risks for its participants. Tax consultant Mykhailo Smokovich says that for individual entrepreneurs the biggest danger is that the responsibility for the company’s mistakes will fall on the entrepreneur.
Not paying taxes or paying too little, making a mistake and then the entrepreneur himself will be responsible for it. And the fines will not be charged for the fault of the person, because he did not conduct this business activity, but the responsibility will lie with him. Therefore
Entrepreneurs who agree to participate in such a system of work for a fixed fee run the risk that the tax authorities will ask for violations of them,
– the expert concluded.
What should the state do to stop business fragmentation schemes?
Ukraine needs changes to the legislation and the tax code to more effectively combat schemes to minimize taxation, says expert Mykhailo Smokovich. The financial monitoring service operates in this area, but its work is aimed at exposing existing abuses. Efforts should also be made to reduce the possibilities of tax evasion.
Financial monitoring monitors groups of related companies through joint accountants, counterparties and transactions. It mostly already has data, but financial monitoring is not enough here. It is necessary to make fundamental changes to the legislation and the tax code so that there is no possibility of working like this and there is greater responsibility. So that the tax office could not only detect this system, but also quickly and legally prove its illegality and bring it to justice,
– says the tax consultant.
As an example of stimulating transparent business work, Mykhailo Smokovich cites the Action. City. Having created a legal and tax space for IT companies, the state offered favorable conditions for legal work in this area. This removed the need to register individual entrepreneurs and reduced opportunities for abuse.
Economist Oleg Getman believes that it is possible to reduce the interest of big business in the splitting scheme by forcing individual entrepreneurs and LLCs to issue all fiscal checks, and not just 10%. For this, there are a number of mechanisms that involve attracting consumers and are used in the world:
a “lottery” of fiscal checks, among the participants of which prizes are regularly drawn according to the details of the checks;
cashback for the consumer for sending applications to the tax office when a non-fiscal check is detected;
a percentage return on all purchases at the end of the year, if all checks are registered by the buyer in a special database.
According to the economist, the state should launch at least one or two types of such incentives in order to more effectively combat shadow business.
Note! The State Tax Service has developed a bill on check draws with a description of the concept and procedure for conducting lotteries. If it is adopted, the Government and the Ministry of Finance will detail the mechanism for implementing the program.
Another tool in the fight against tax evasion may be a change in the approach to determining key performance indicators (KPIs) of the Bureau of Economic Security, Customs and Tax.
Oleg Getman says that the analytical centers of the Economic Expert Platform, together with deputies, have prepared two draft laws on updating the performance indicators for these bodies.
If now the main KPI is to implement a plan that creates pressure on business, squeezing white tax from it, etc., then our KPIs just remove any plans. They are aimed at the Tax Gap – tax gaps, lost taxes and the level of the shadow economy. That is, the worse these bodies work, the larger the shadow economy, the better – the smaller it is. This is our main KPI,
– emphasizes the economist.
At the same time, it is worth improving services to improve the interaction of business with the BEB, tax and customs.
The European Business Association has expressed its interest in de-shadowing the retail market of Ukraine, which has appealed to the state regarding the problem of business fragmentation. The member companies of the Association have emphasized that this scheme leads to significant losses of tax revenues and creates unequal conditions in the market.
To solve this problem, business proposed:
prohibit the use of the simplified taxation system to break up large groups of companies;
introduce fines for abuse of the simplified system;
grant banks the authority to identify related groups of individual entrepreneurs and regularly inform regulatory authorities about risky transactions.
Pay attention! The head of the parliamentary committee on finance, Danylo Getmantsev, in an interview with Interfax-Ukraine, said that the single tax system in Ukraine needs to be reformed according to the Polish model. It is planned to be implemented after the end of the full-scale war. The essence of the reform is to make it impossible for large businesses to use the single tax system.
