You're reading: New tax rates arrive to reshuffle cash flows circulating in Ukraine

The Ukrainian parliament enacted big tax changes in a budget that emphasizes austerity.

The Verkhovna Rada
passed two bills, one
amending the Tax Code
and another one
changing the rate of payments to the social security fund
, on Dec. 28. Both are a part of a plan to have a budget with a fiscal deficit under $4 billion next year.

The number of taxes
was reduced from 22 to 9. Personal income tax grew from 17 percent to 20
percent for those who make more than $800 a month.

Companies that export grain, Ukraine’s major product,
will stop receiving the reimbursement of a value added tax, a 20-percent duty
that was previously transferred back to taxpayers if they sold their goods
abroad.

Traders who sell imported goods on the Ukrainian
market will have to pay additional 5-10 percent of tax, depending on what
sector they’re working in. This will cut the imports by $3.5 billion for
the industrial products, including agriculture, according to Valeriy
Pyatnitsky, an advisor to Prime Minister Arseniy Yatseyuk. Move is critical to
fix Ukraine’s poorly looking balance of payments.

However, this tax will stay effective only until
Jan. 1, 2016.

A previous increase of tax rates for extraction of
gas, up to 28-55 percent, and oil, 21-45 percent, is no longer temporary and is
seen as long-term policy. Companies that develop Ukrainian subsoil through so
called “production-sharing agreements”, a legal framework for large
development projects, will have to pay 70 percent in tax by the year’s end,
though the rate is expected to be cancelled in 2016.

Real estate tax base has also
been widened. 

Tax will be managed by the local authorities, reaching $1.5 per square meter. Yatsenyuk explained, it won’t be applied for apartments smaller
than 60 square meters and houses under 120 square meters. Olexiy Burlaka and
Ilona Sologub of Vox Ukraine, a group of economists, said
it would be more fair
if the tax was based on a market value of the
property rather than on its size.

Passive income, like interest on deposit accounts,
will be charged with a 20 percent rate, while dividends are taxed at 5
percent.

Those who are relatively better off, will have to pay
a fixed sum of $1,670 a year if they own an expensive car, under five years old
and with an engine over 3,000 cubic centimeters for gas or over 2,500 for
diesel.

Social security tax rate was reduced by 2.5 times – from
41 percent to 16.4 percent.

“Significantly reducing
the social security tax rate, we may not receive the expected amount of
revenues and have a gap,” said Yatsenyuk. “But we hope that Ukrainian
businesses will accept our joint position and begin to legalize and bring salaries
out of the shadow due to a significant and drastic reduction of social security
tax.”

“This is not a reform, but rather usual austerity measures,” wrote Volodymyr Kotenko,
partner at EY audit firm who provided policy suggestions to the Tax Agency, in
an op-ed
for Liga
, a news website. “This is exactly how they should be
positioned – unpleasant, but temporary measures until the real reform takes
place.”

Commenting on an increase of a personal income tax,
Kotenko called it a “forced measure” that won’t help legalize the
untaxed salaries.

Experts from Vox Ukraine say
that a sufficient adjustment period, up to a year, should have been included
between the adoption and implementation of the reform.

Kyiv Post staff
writer Olena Gordiienko can be reached at [email protected].