You're reading: Businesses cool to yet another tax-change plan

Less than two years after Ukraine adopted a tax code hailed as a huge improvement, President Viktor Yanukovych is proposing a major makeover.

Once again, the business community is complaining that it was not consulted.

So far, howver, the mood among businesses is mixed. Some see talk of another major tax overhaul as official acknowledgment that the current system isn’t working.

Almost half the economy is still in the shadows. Rules are applied at the discretion of tax inspectors, who retain too much power.

On the other hand, the newer version fails to impress.

Tax collectors on July 12 presented their radical concept of reform, which would constitute a revolution, rather than an evolution, of the system.

The payroll tax will be reduced by nearly half. The value-added tax rate will be slashed by even more. Most privileges will be canceled.

So far, so good.

But it fails to address some of the biggest problems that still plague businesses.

Even before the concept was unveiled, experts jumped all over at it. They warn that the new tax system will cause bring less revenue with its unrealistic expectation that businesses instantaneously come out of the shadows.

The underground economy may account for $150 billion a year in ecnoomic activity.

“I was very surprised when I saw this document,” says Ildar Gazizullin, an economist at the Kyiv-based think tank International Centre for Policy Studies. “This is a strange spontaneous act on behalf of the tax service. The President’s office should react to it sharply and negatively.”

There is only one piece of good news in there, says Oksana Prodan, who heads a business association and is a former activist of the so-called Tax Maidan, a series of peaceful protests against the previous tax changes. She said the move to slash the single social payment (akin to the Western payroll tax) to 18.6 percent from 37.6 percent is a big plus.

The burdensome current rate is one of the main reasons why many employers don’t hire employees officially and don’t disclose 100 percent of salaries.

Prodan says that even the reduction of the value-added tax is not perceived as a positive move. It will be cut from 20 to 7 and 12 percent for domestic products and imports, respectively.

But the new concept suggests a turnover tax rate of 2.5 percent on top of the VAT. Add the profit tax on top, and you get a clumsy and expensive system that does not exist anywhere else in the world, says Prodan.

Achil Pekar, a grain trader from Dubno in western Ukraine, explained on his Facebook page how the turnover tax will affect him. “I make $10 per ton of rapeseed. So, this 2.5 percent of turnover tax translates into $8 for me. And then, you pay VAT, profit tax and others,” he wrote.

Then, there is the problem with the proposed 3 percent pension tax on hard currency purchases. Basically, it will become an additional tax on all imports, which will drive prices up, said experts.

Also, this indirect import tax and the two different rates proposed for VAT will get Ukraine in trouble with the World Trade Organization. Such tax discrimination is not allowed under WTO rules.

Anna Derevyanko, director of the European Business Association, says that the WTO would mirror the move by introducing some sort of sanctions against Ukrainian-made goods.

Furthermore, what surprised business groups is that once again the new tax concept was created without their inclusion or a public debate.

Prodan says her tax experts were invited to attend the July 12 presentation, but not included during the preparation stage.

Gazizullin, the economist, says that much of the tax authorities’ effort misses the main problem. He says surveys have consistently shown that the principle problem in Ukraine is not the taxes themselves, but their administration.

“The rates usually rank as number two, three or four in priority,” he says. “If you ask any business whether they would prefer to have their VAT refunds without delays, or to have their profit tax reduced, the answer is obviously [the former].”

Another big issue is that the new tax concept suggests abolishing the simplified tax system, which is currently used by about four million self-employed people and small business owners.

The actual presentation file distributed among business associations before the ideas were made public contains a question mark opposite the phrase “simplified taxation system.”

Prodan says it’s clear it will cease to exist because the concept suggests cancellation of all so-called “special regimes.”

It was this issue that sparked mass protests in 2010 when tax authorities cancelled the simplified system before succumbing to publish pressure and reinstated it.

However, EBA’s Derevyanko points out that the concept says privileges will be reduced, not canceled. “So, we can conclude that there will remain a certain level of favoritism,” she says.

Gazizullin says some things in the new concept are good: for example, an understanding that taxes should be higher for mining of natural resources.

“The good thing about the new concept is that the tax authorities recognize that there are plenty of problems with the current system,” adds Derevyanko.

Kyiv Post editor Katya Gorchinskaya can be reached at [email protected].