For six months, tax reform has been a key economic topic. The Ministry of Finance has already presented its vision for tax changes. Today, deputies are scheduled to submit their bill to parliament. Its introduction was deliberately postponed until Monday to avoid accusations of populism. After all, the parliamentary reform appears much more lenient than the Ministry of Finance's proposal. Officials estimate that if the government bill is adopted, the budget will lose UAH 60 billion, while if the parliamentary version is adopted, the deficit will be UAH 200 billion. Let's compare these two documents.
All for twenty or even lower?
The government has decided to equalize four main taxes at 20%. Currently, the rate of the Unified Social Contribution, which companies pay when calculating employee salaries, ranges from 36,7% to 49,7%. For this reason, many prefer to pay salaries in cash. After all, to calculate UAH 1000 for an employee, at least UAH 367 goes to taxes. This is the best news.
As for the corporate income tax rate, it will increase by 2%, the VAT rate will remain unchanged, but the government wants to eliminate benefits for farmers. The 3,6% unified social tax (USC), which was previously paid by enterprise employees, is to be eliminated altogether.
The liberal parliamentary version also proposes abolishing the unified social contribution (USC) withheld from wages, while setting other tax rates even lower. The tax burden is expected to be calculated as follows:
tax on distributed profits - 15%,
VAT -15%,
Unified social contribution — 20%.
These tax reform provisions, which are revolutionary for business, are baffling economists. They are unsure whether the state will be able to fill the budget sufficiently to pay pensions and other social benefits.
The salary paradox
The government's bill seeks to reduce the tax burden on businesses but force employees to pay more. The government proposes setting the personal income tax rate at 20%. Currently, it ranges from 15% to 20%, depending on income level. However, only 2% of the wealthiest population pays the maximum rate.
The government also proposes introducing a non-taxable minimum equal to one minimum wage.
The parliamentary bill proposes reducing the personal income tax rate to 10%. This represents a reduction of at least half the tax rate.
Experts say that raising the rate to 20% will lead to shadow taxation, while reducing it will not be able to replenish the budget.
"I would leave the rate at 15%, but I would make it flat and predict a number of tax breaks for documented expenditures on energy conservation measures and the implementation of technologies aimed at using alternative energy sources," says economist Boris Kushniruk.
Two approaches to a single tax
The government proposes significantly reducing the number of legal entities using the simplified tax system. Businesses with a turnover of less than UAH 300 per year will remain in Group I. Groups II and II are being merged, capping their turnover at UAH 2 million.
According to the liberal model of tax reform, the single tax will look like this:
— The simplified tax system for Groups I and II entrepreneurs remains unchanged. This applies to turnover of up to UAH 1,5 million.
Group III will include entrepreneurs with a turnover of up to 5 million hryvnias. Currently, this group can have an annual turnover of up to 20 million hryvnias. Taxation will be assessed on an ascending scale:
2016 — 3% + VAT or 6% excluding VAT
2017 — 4% + VAT or 8% excluding VAT
2018 — 5% + VAT or 10% excluding VAT
— Group IV includes agricultural producers with an annual income of up to 100 million hryvnia.
At the same time, parliamentarians propose abolishing the simplified tax system for entrepreneurs engaged in the production and sale of leather and fur products, restaurateurs, hoteliers, and jewelers.
Drivers will have to fork out
However, on the issue of taxation of luxury cars, both the government and parliament were unanimous. Only owners of luxury cars will pay a transport tax of 25 hryvnias per year. The Cabinet of Ministers will compile a list of these vehicles.
Automotive market participants oppose this tax, arguing that a million hryvnia tax, amid the devaluation of the national currency, would make mid-range cars "premium." Furthermore, according to Oleh Nazarenko, head of the All-Ukrainian Association of Automobile Importers and Dealers (VAAID), different trim levels of the same car models may cost more or less than one million hryvnia, which would create confusion about whether the luxury tax is worth paying.
They will look for a compromise
Most experts are confident that the liberal tax reform proposed by the deputies will not be passed as is. For example, Sergei Fursa, a debt securities sales specialist at the investment company Dragon Capital, considers this proposal pure populism. He argues that the deputies want to increase the budget deficit and ask the IMF for funding, which the IMF will not agree to. Therefore, a compromise will have to be found. Other experts agree.
"A committee draft of the tax reform will be submitted to parliament," economist Andrei Blinov believes. "And then amendments will be made to it, aimed at reducing the fiscal deficit. I believe a compromise is possible, especially regarding changes to the VAT rate."
What else is offered?
Due to declining payroll tax revenues, the government plans to gradually increase excise taxes on alcohol and tobacco. The largest tax increase, a 50% hike, is planned for next year. After that, taxes will increase by 5-7% annually for the next five years.
Another idea for filling the budget is to revive the gambling industry in Ukraine. They hope to generate up to 5 billion hryvnias per year from it. Experts consider these estimates quite realistic.
The parliamentary committee, on the contrary, wants to increase the tax-exempt minimum for working pensioners to 10 hryvnias per month and also equalize it with first-degree relatives for siblings and grandchildren. This should reduce the tax burden on those who inherit.
IMF opposes
Remember the cartoon called "Baba Yaga Against"? The IMF is acting in a similar fashion. They've already stated that they might suspend Ukraine's financing program if the parliamentary committee on tax and customs policy submits to the Verkhovna Rada its tax reform bill, developed by members of parliament, experts, and business representatives. The fund later softened its statement and said they wouldn't object to tax cuts if they found "compensatory" budget revenues. In other words, if some taxes are lowered, others will have to be raised.
The foundation's experts evaluated two tax reform options and disapproved of both. According to the Ministry of Finance, the committee's bill could cost the budget UAH 200 billion in lost revenue, while the government's bill could cost more than UAH 60 billion.
Andrey Gatsenko, KP in Ukraine
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