Business fragmentation in retail: analysis of practices, economic consequences, and economic-legal counteraction mechanisms

Abstract

This article provides a comprehensive analysis of business fragmentation practices among retailers in Ukraine as a tool for reducing the tax burden. The study identifies the economic and legal consequences of such practices and offers recommendations for improving tax policy. Particular emphasis is placed on the necessity of incorporating a clear definition of «business fragmentation for the purpose of tax evasion» into the Tax Code of Ukraine and establishing criteria to distinguish legitimate activities from artificial business splitting. It is noted that the monitoring of financial transactions by banking institutions, which may indicate artificial business division, increases the likelihood of detecting tax evasion schemes prior to the intervention of the State Tax Service or the Bureau of Economic Security. The implementation of legal mechanisms to counter tax evasion is considered in light of international experience. Specifically, it is deemed expedient to restrict the use of the simplified taxation system for large retail chains, introduce a "substance and purpose" test to determine the actual economic logic of a business, and implement a revenue consolidation mechanism for cases where multiple individual entrepreneurs effectively operate as a single business entity. To prevent the artificial fragmentation of entrepreneurial activity, the author underscores the need for introducing flexible forms of taxation. To this end, it is proposed to transition from a fixed Value Added Tax rate to differentiated rates, consistent with the practice in most EU countries. A vital factor for the de-shadowing of the Ukrainian economy, including the elimination of business fragmentation practices, is identified as raising the tax-free allowance to the level of the actual (real) subsistence minimum.