Ukraine is once again entertaining the idea of having a wealth and luxury tax, a year after a similar bill was shelved in parliament.
Pro-government members of parliament say it’s better to pass a flawed yet morally justified bill and tweak it later. Opposition lawmakers, however, are calling the bill populist, and say the government should focus on fighting poverty and not taxing the rich to replenish starved state coffers.
On Jan. 21, the Finance Ministry headed by Yuri Kolobov published proposed wealth and luxury tax legislation that would come into force in 2014. Last summer, lawmakers didn’t consider a similar bill registered in parliament. After the Cabinet of Ministers resigned in December following elections to parliament, the draft law was put off.
When the previous bill was being promoted by government, the then-head of the State Tax Service Oleksandr Klymenko, who today is the minister of revenues and duties, said the luxury tax could bring Hr 800 million-Hr 1 billion to the budget yearly for the Pension Fund.
Government officials this time around aren’t making such long-term financial projections. Meanwhile, the opposition is again unhappy with the reincarnated version.
If the current version of the bill is passed, it will affect citizens and non-citizen residents of Ukraine, individual entrepreneurs and corporate entities.
The tax will be imposed on owners of apartments that cost more than 1,000 times the minimum wage (Hr 1,147 monthly) and whose gross area exceeds 200 square meters. That would be roughly a $143,000 place. The same applies for houses priced at 2,500 times the minimum wage and which have a gross area exceeding 500 square meters. That would be houses valued at more than $358,000.
Owners of several pieces of property whose gross area exceeds 600 square meters will also have to pay the tax. The bill also says that the tax will be collected from non-residential buildings that cost more than 2,000 times the minimum wage and which have a gross area of more than 500 square meters. The tax rate is 0.5 percent of the assessed property value for both residential and nonresidential.
Also taxed will be passenger cars priced more than 450 times the minimum wage and motorcycles that cost more than 150 times the minimum wage, but only those that are less than five years old.
The draft law also mentions leisure and sports boats with powerful engines, as well as airplanes and helicopters. Chic accessories that cost more than 20 times the minimum wage, such as watches, mobile phones, firearms, furs and antiques, are also on the list. The tax rate for vehicles and boats is equivalent to 2 percent of the assessed value. For example, the owner of a new Lexus LS Sedan that costs Hr 1,200,000 ($150,000) would have to pay Hr 24,000 ($3,000) in annual tax.
Airplanes and helicopters will be taxed at 1 percent of their assessed value.
Buyers of small luxuries or pieces of art will have to pay 10 percent of their value if making the purchase in Ukraine or when arriving in the country.
Experts say there are pitfalls hidden in this part of the bill.
Volodymyr Zabudsky, senior lawyer at Alliance Ratushnyak and Partners, says it’s not uncommon for poor families or single pensioners to own large apartments that they inherited. He said the luxury tax will automatically apply to them even though they cannot afford to pay the tax.
And since the bill specifies which expensive goods classify as “non-luxury” and “luxury,” sellers could artificially understate the cost of a good and get the difference from selling an associated good or service.
Pro-presidential lawmaker Sergiy Tigipko, who as social policy minister heavily promoted the first version of the luxury law, is certain the nation needs such a tax. “To have the law is better than not to have it,” Tigipko told the Kyiv Post. “I keep saying that the moral factor is quite important. The nation must see that in these difficult times the rich share with those who are under more trying conditions.”
Tigipko assures that most of the pro-presidential Party of Regions faction will vote for the new version of the luxury law.
However, opposition lawmaker Mykola Katerynchuk, a co-author of an alternative tax code, calls the new luxury tax populist. “Introduction of this tax has nothing in common with fulfilling the national budget (or) fighting social justice,” Katerynchuk told the Kyiv Post. “Today the party of the rich is in power. So it struggles with the rich, that is to say, with itself.”
The deputy thinks luxury owners will still have ways of evading taxation. When purchasing antiques, for example, buyers can arrange for assessors to diminish the piece’s worth. So if the luxury tax won’t bring in much added revenue, it can deter possible investors. “The government must struggle not against luxury but against poverty, but that needs completely different mechanisms,” Katerynchuk says.
Kyiv Post staff writer Denis Rafalsky can be reached at [email protected]
