Could you please analyze the draft tax changes prepared by Ukraine's Finance Ministry?
I would like to make some comments on the tax changes proposed by the Ministry of Finance of Ukraine.
Flat rates for all taxes is a populist ideology. While introducing the simplification of administration, it would increase the tax burden from income tax (advance payments that will remain will be taxed at a 20% rate, non-residents' income earned in Ukraine will be taxed at 20%, insurance at 20%, freight at 20% and there will be a 0% tax rate for small businesses).
VAT with the current system of electronic administration suggests a higher tax burden due to the depletion of monetary assets, criminal intrusion into tax administration (manual adjustment of the system) and the preservation of a corrupt system, which continues to work with the so-called "tax pits."
The most corrupt tax in the current year has become even more corrupt, as it has fully been switched to manually-regulated rails. Problems of refunds from the budget have only become acuter and they are being handled in the same, manual mode. Raising the threshold for compulsory registration of VAT payers does not always work, because those entities that work with VAT payers and want to keep their customer base still need to be registered as VAT payers, though on a voluntarily basis.
Eliminating special rates for pharmaceutical companies (7%) and the special tax regime for agricultural enterprises has led to an increase in the tax burden on domestic producers. The lack of a state program on the development of priority sectors of economy of Ukraine, including agriculture, the lack of a program for small business development are proof of the state's inability or unwillingness to engage in strategies of economic development of Ukraine, but without this, there could not be any tax reform. All proposals to reform the tax system relating to the characteristics of particular branches of economy, without defining the priority areas of economic development, without finding other compensators or financial support of top-priority or vulnerable sectors, are unprofessional and harmful to our state.
Reducing the number of categories of single taxpayers and lowering the ceiling limit for revenue for the second and third categories of taxpayers, stricter criteria for narrowing taxpayers who could use the simplified taxation system (namely legal entities belonging to the third category), which concerns taxpayers whose income exceeds UAH 2 million, creates grounds for destroying small businesses or their mass departure to the shadows if no measures to substantially improve the business conditions are not proposed, and a flat tax rate here is not the way out.
Introducing cash registers for the second category of taxpayers with income of up to UAH 2 million from 01.01.2016, with the need to install cash registers as early as this year if their revenue exceeds UAH 1 million (under the current laws) is an attempt to mislead small businesses and is not an essential benefit for businesses, except for those whose income is less than UAH 1 million.
The introduction of a different taxation model for the taxpayers belonging to the second category (income "minus" the estimated cost at the level of 80% of revenue) with the use of a 20% rate on income tax and a 20% rate on single social security tax will mean that the taxpayers with revenue exceeding UAH 300,000 will be virtually transferred to the general taxation system. And rather than bettering the general taxation system, which is not adapted to tax accounting of private entrepreneurs and significantly limits the composition of expenditure, the Finance Ministry is set to unsuccessfully "improve" the simplified taxation system.
The reform of the simplified taxation system is only aimed at its destruction, and does not solve the problems of small businesses, only exacerbate such problems. The reform will not contribute to withdrawing small businesses out of the shadows, which is the biggest drawback of the proposed model.
Regulations related to individual income tax and single social security tax suggest a slight reduction in the burden on the payroll fund and its shift from workers to employers. This model will not solve the problem of shadow incomes, but insignificantly lower businesses' expenses and some taxpayers may come out from the shadows. However, there will be no dramatic change in the situation with the shadow economy. Given many taxpayers have previously preferred work in the shadows, the withdrawal of a very small share of them from the shadows due to lesser load on the payroll fund will not have a desired effect. Proposing a substantial reduction of the burden on the payroll fund (at a general rate of individual income tax and single social security tax of 20%) from 2018 is a mere declaration that can never be realized, because the model offered by the Ministry of Finance as of January 1, 2016, does not improve the environment for doing business and will not create grounds for economic growth, therefore finding compensators of reducing rates of individual income tax and single social security tax to 20% will remain as urgent in 2018 as this year.
Property tax and tax on vehicles: more tax burden will be shifted onto citizens. An increase in rates of real estate tax will cause a significant impact on vulnerable and low-income citizens. Instead of a declared radical reduction in the burden carried by the most vulnerable citizens, these groups will see an increase in prices (due to another increase in excise rates on tobacco and alcoholic beverages, beer and wine) and a rise in tax rates on real estate. In view of other changes, including the virtual elimination of the simplified taxation system, the same citizens will face higher prices for other groups of goods and services.
Tax reform without a radical reform of the State Fiscal Service of Ukraine without judicial reform is another fake. The reform should start with the change of the philosophy of the relationship between taxpayers and the regulatory authorities to establish individual responsibility of officials, with high-profile court hearings on the activities of the incumbent and former heads of the State Fiscal Service of Ukraine, which did not and do not prevent gross violations of the current tax legislation and violation of constitutional rights of citizens who pay taxes.
The effectiveness of the reform depends on whether the system of deposits at value-added tax accounts has been cancelled or not, and on the future of the simplified taxation system along with a radical reduction in the burden on the payroll fund. Only by introducing economic incentives for the voluntary pull back of businesses from the shadows will ensure the growth of trust in the government and boost in business activity and invigoration on the domestic market. It will be impossible to restore the economy of Ukraine and find economic compensators to reduce the burden on wages at the expense of significant legalization of business without such measures.