Editor’s Note: This story has been updated to include information about the passage of Ukraine’s 2019 budget.
Advocates for business are sounding the alarm after the Ukrainian government proposed a draft law increasing income taxation.
The bill, created by the Ministry of Social Policy, would eliminate the cap on the single social contribution, or SSC, a tax which helps pay for pensions. That, in turn, would lead to increased expenses for companies that pay their employees transparent and legal salaries, the advocates say.
Ironically, the plan was presented as a measure to combat Ukraine’s expansive shadow economy. But its opponents say it will have the opposite effect.
“It is scandalous that it would be bonafide taxpayers, paying wages openly without employing dodgy schemes, who would contribute (the) bulk of these additional revenues to the budget,” the 1,000-member European Business Association wrote in a statement explaining its position. “De facto, hiding behind the ‘fight with the grey salaries’ slogan, the authorities are introducing a selective taxation of bonafide taxpayers, who have nothing to do with the grey salaries.”
They aren’t the only ones against the bill. The American Chamber of Commerce, with more than 660 members, the Union of Ukrainian Entrepreneurs, and even the Ministry of Economic Development and Trade have all expressed opposition to the bill.
“This legislative initiative will lead to even greater shadowing of the salary fund, a decrease in investments, and, as a result, less money in the budget,” Economy Minister Stepan Kubiv said in an official letter.
Current legislation sets the SSC tax at 22 percent of salaries up to a level of Hr 55,800 ($2,009). Further income earned above that level is not subject to the SSC tax.
But the Social Policy Ministry proposes taxing salaries up to Hr 104,000 ($3,745) at the same 22 percent rate. Salaries above that level would also be taxed using a regressive scale – the higher the income level, the lower the taxation rate.
The ministry anticipates the new law could add an additional Hr 10 billion ($360 million) to the state budget. That, in turn, is viewed as a way to increase the country’s minuscule pensions.
Ex-Finance Minister Natalie Jaresko, who championed lower tax rates as part of a drive to reduce the shadow economy, also came out in opposition. The lower tax rates that came into effect during her tenure, from 2014 to 2016, needed to be coupled with better efforts to enforce compliance, she said.
“I obviously disagree with the increase. It was I who sought to reduce it,” Jaresko told the Kyiv Post. “That said, the reduction had to be paired with serious compliance efforts to pull the shadow economy out of the dark into the light. I’m not aware of that follow-up ever happening. Without serious compliance and movement out of the shadows, it is unaffordable to continue. I’d rather they enforce compliance than raise the rates.”
Business advocates also said the plan will not have the intended effect.
“When you tax easily accessible business with higher taxes, those that are in the shadows will continue to be in the shadows,” said Anna Derevyanko, executive director of the European Business Association.
“We should first remove everyone from the shadows, make everyone pay salaries officially, and employment should be official,” she added. “Moreover, we need to close the holes in the budget that pull money out or don’t allow (the budget) to receive the right amount of money.”
After that, if there are not enough funds, it will be reasonable to consider increasing payments into the system, Derevyanko says.
Andy Hunder, president of the American Chamber of Commerce, believes that it is critically important for Ukraine to get companies to “stop paying cash-in-envelope salaries and start paying through the system.”
His organization has been vocal about supporting cashless payments to prevent these tax avoidance schemes. He notes that the SSC was decreased from roughly 41 to 22 percent under Jaresko.
“It was a good incentive for employers to come out of the shadows and pay (their) salaries transparently,” Hunder said. That was an important development in a country where some estimates suggest 40 percent of the economy is in the shadows.
This new bill — set to be passed at a time when many companies have already submitted their budgets — is a move in the wrong direction, Hunder told the Kyiv Post. Faced with an unforeseen expense — increased SSC payments — he believes many companies will have to consider laying off employees, review salary increases, and reconsider bonuses. That is a blow to the predictability of business, he said.
For her part, Derevyanko says she agrees that pensions must be increased. But she believes this is the wrong way to do it.
On Nov. 14, her organization spoke with Social Policy Minister Andriy Reva.
“Reva also understands our arguments,” she said. “He hears from honest business. He understands that there is unfairness in this. But he’s limited in the instruments that allow him to close the deficit in the pension fund budget.”
In a meeting with representatives of the European Business Association on Nov. 20, Ukrainian President Petro Poroshenko called for business to find a compromise on this issue and support the draft law.
However, with the Verkhovna Rada scheduled to give the 2019 budget a second reading on Nov. 21 or 22, that may be a challenge, Hunder told the Kyiv Post on Nov. 21.
“I think the clock is ticking,” Hunder said. “It’s come up at the 11th hour. We go into the budget reading today… and the time is running out.”
In the early morning hours of Nov. 23, the Verkhovna Rada passed the 2019 budget. So far, however, the new SSC bill has not been registered in parliament.
