Tax authorities report large-scale tax evasion schemes: what is known about “business fragmentation” in retail chains
3 February 20:43
The State Tax Service reported that it had identified 10 well-known retail chains which, according to the agency’s estimates, may have evaded paying at least 1 billion hryvnia in taxes,"Komersant Ukrainian" reports.
According to the State Tax Service, these are chains operating in the retail sectors of home appliances and electronics, clothing and footwear, and grocery retail.
To carry out the schemes, the tax service claims, the companies enlisted more than 800 individual entrepreneurs.
What is the essence of the suspected scheme
The State Tax Service states that retail chains used so-called “business fragmentation” —the artificial division of a large or medium-sized company into dozens or hundreds of individual entrepreneurs who formally operate under the simplified tax system.
The tax authorities emphasize that this practice:
- has no business purpose;
- is used exclusively to minimize tax liabilities;
- allows companies to remain within the income limits set for the simplified system and avoid paying taxes in full.
Why this issue has resurfaced
The tax authority is stepping up its focus on business fragmentation schemes against the backdrop of:
- the growing role of tax revenues in financing the budget during the war;
- a review of approaches to the application of the simplified tax system;
- demands for tax fairness between small and large businesses.
The agency notes that the use of sole proprietorships in large retail chains distorts the very idea of the simplified system, which was created to support small businesses.
Although the names of the retail chains have not yet been disclosed, if violations are proven, the companies may face:
- additional tax assessments;
- fines and penalties;
- criminal liability if intentional tax evasion on a particularly large scale is established.
Previous Cases
Previously, tax and law enforcement authorities reported uncovering a business fragmentation scheme in the food retail sector in Zakarpattia, involving tax evasion on an exceptionally large scale.
