Businesses cool to yet another tax-change plan

Just a year and a half after Ukraine brought into effect a new tax code hailed as a huge improvement, the State Tax Service is proposing a major makeover.

Once
again, the business community was not consulted in its development.

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

Close
to half the economy is still in the shadows. Rules are applied at the
discretion of tax inspectors. The latter also retain too much power.

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

Tax
collectors on July 12 presented their very radical concept of tax
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 under the current system.

Even
before the concept was unveiled, experts jumped all over at it. They
warn that the new tax system will cause severe shortages in budget
revenues by expecting businesses to instantaneously come out of the
shadows.

According
to some estimates, up to half of Ukraine’s economy remains hidden
underground. This means that some $150 billion could be unaccounted
for.

“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, head of
a small and medium business association and former activist of the
so-called Tax Maidan, a series of peaceful protests against the
previous tax reform. “It’s the slashing of the single social
payment to 18.6 percent.”

Currently,
this payment stands at 37.6 percent and is one of the main reasons
why many employers prefer to keep the bulk of wages in envelopes.

Prodan
says that even the reduction of VAT is not perceived as a positive
move. The latter 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 [extra payment] 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 in its preparation.

Gazizullin,
the economist, says that much of the tax authorities’ effort with the
reform is beyond the point anyway. He says surveys of businesses have
consistently showed that the principal 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 4 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
cancelation 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 once and for all. “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.

Businesses
suggested the following improvements to the proposed tax code:

Choose
between VAT or turnover tax to make sure they don’t clash;

Improve
tax administration;

Retain
a simplified tax system for small businesses that cannot afford a
staff of accountants and financial consultants;

The
new tax legislation has to be designed so that the tax authorities
themselves cannot break the rules;

The
system has to be designed well to remain viable in the long-term;

The
speed of introduction of the new tax reform
should not affect its quality;

Any
new initiatives by the tax authorities should stay in-line with
presidential declaration and not clash them. In other words, more
coordination between various branches of power is needed; and

The
reduction of the social tax to 18.6 percent from the current 37.6
percent is very welcome, but reform should generally be more about
the administration of taxes than their rates.