You're reading: Lawmakers seek to entice employers with incentives for hiring

Judged the world’s third worst in 2012, Ukraine’s tax system has long way to go before moving out of the “nightmare” category.

A new labor law that took effect in January could ease the situation somewhat, although experts are wary about its effectiveness.

According to the law, employers will be reimbursed 50 to 100 percent of the unified social tax, a monthly contribution to the state Pension Fund worth from 36.7 to 49.7 percent of a worker’s wage, for creating new jobs for people unable to compete on the labor market. This category includes inexperienced youth, people older than 50 and disabled persons, as well as those directed to the company by employment authorities.

“Employers will benefit from giving jobs to such people. And this is the main argument for them,” Sergei Tigipko, deputy head of the Party of Regions and co-author of the law, said after the Verkhovna Rada passed the bill in July.

Although praised by the government, the law received an ambiguous welcome in Ukraine as experts are skeptical about the tax benefits prescribed by it.

“It won’t bring profound changes,” said Oleksandr Zholud, analyst at International Center for Policy Studies. “Employers won’t hire disabled and old people in order to get benefits as they’re limited in their right to fire those people according to our labor code, which remains the major reason for caution for them.”

The new law stipulates that the wage of a disabled employee should be no less than the average salary in the company, but it’s impossible to ensure the new workers will be up to par, Zholud added.

The new law was also criticized by the National Institute for Strategic Studies, a government think tank. In particular, the new law would replace direct government subsidies for hiring unemployed workers by the prospect of tax reimbursement – a weak incentive, the institute cautioned.

“The unified social tax reimbursement is much less than a subsidy, so there are no grounds to consider it better motivation for employers than subsidies. In fact, holding back subsidies is a way to save the budget money (linked to) unemployment,” reads an NISS analytical report. The new law also opens the doors to shady schemes since no distinct reimbursement mechanism has been developed and implemented so far, NISS experts warned.

At present, the costs of hiring a new worker by far exceed all the tax benefits provided by the state. Aside from unified social tax, employers have to pay 15 percent tax on the employee’s income every month, making official employment too expensive. As a result, a lot of employers have turned to other ways of employment in order to reduce taxes.

By far the most popular of these is employing people as private entrepreneurs, as it relieves employers from the unified social tax contribution and the 15 percent income tax.

“That’s why even the majority of disabled people are employed under the (private entrepreneur) contract, as it’s much cheaper than (to hire them as) staff,” Zholud said, adding that this removed any fiscal advantage over hiring regular workers.

Still, some experts believe the employment conditions prescribed by the new law are at least worth a try, judging by the hunger for tax benefits in Ukraine.

“Under the circumstances when there are not many tax benefits available for Ukrainian employers, it is definitely worth taking the opportunity of returning the part of the unified social tax prescribed by the new law,” said Oksana Lapii, manager at Ernst & Young Human Capital Group. “Bearing in mind the relatively high rates of tax in Ukraine, the economic effect can be quite material,” she added.

Kyiv Post staff writer Anastasia Forina can be reached at [email protected]