Experts: Tax changes have clear flaws
Ukraine is trying to create a simpler and fairer tax system that also encourages people to pay their share rather than evade taxes. But recent changes still fall short of the goal, according to some critics.
When the government announced a decrease in the number of taxes from 22 to 11 on Dec. 28, Ukrainians expected more than a simple readjustment of the system.
But they were not ready for the 298 percent increase, or Hr 28.1 billion ($1.2 billion), that income taxes would have to contribute to the state’s budget in comparison to 2014, says Roman Blazhko, legal expert at Lavrynovych&Partners.
Some experts see the increase in the personal incomee tax as a drawback. Aside from income taxes, others view cuts in the unified social tax (made to the state pension fund) as creating more favorable conditions for the transparent and legal payment of salaries that had once been paid in envelopes filled with untaxed cash.
However, due to the unfortunate timing of the amendments – in the midst of an economic crisis – business might not fully benefit from the opportunity, says Helen Volska, managing partner at EBS law firm.Tetyana Matsiuk of Vasil Kisil & Partners believes the increase in personal income tax and the abolishment of exemptions for tech companies runs doesn’t help create the stability needed in a tax system.
She believes that Ukraine needs to increase the accountability of tax authorities. “In some European countries tax authorities are obliged to pay a court fee of up to 20,000 euros if they lose a case,” Matsiuk says.
In other areas, under a recently introduced law on tax compromise, those owing value-added tax and corporate income tax have a chance to atone. Those who evaded paying taxes from April 1, 2011, until April 1, 2014, are eligible for amnesty if they pay 5 percent of their estimated tax liabilities.
Julian Ries of Gide Loyrette Nouel believes the tax amnesty is a good idea. “According to some estimates 40 or 50 percent of the economy are somewhere in the shadow,” he says. “A tax compromise is the first step to bring the economy back into the light and the next step may be to legalize capital on foreign accounts.
”According to new estimates, as of March 2, more than 1,351 taxpayers expressed their intent to apply for amnesty. In total, the budget has already received Hr 76.8 million from them. Meanwhile, Oleksandr Maydanyk of Egorov Puginsky Afanasiev & Partners warns that if tax authorities commence criminal prosecutions against taxpayers who are applying for amnesty, nobody will ever use this procedure in the future. Other tax changes are meant to encourage Ukrainians to buy domestic products.
As of Feb. 26, the Cabinet of Ministers of Ukraine has levied additional surcharges on imported goods in amounts of 5 or 10 percent, depending on the type of product.
Tetiana Stretovych of Baker Tilly believes that the list of exemptions for the surcharges is not comprehensive. “In view of rapid inflation, any additional tax pressure can undermine the supply of goods and cause long-forgotten deficiencies,” she says. Experts believe that a negative reaction from businesses is inevitable.
“Given the downturn in imports, the implementation of an additional import surcharge will hurt business,” Baker Tilly’s Stretovych says. “Some importers are already considering alternative ways to retrench expenditure for the purchase of goods, including a partial transfer of manufacturing to Ukraine. It is also expected that a part of import transactions will go into the shadows, as it is the most cost-effective way.”
Vladyslav Mieshkov, chief executive officer of Kinnarps, a Swedish furniture maker operating in Ukraine, is not happy with the new import tax. “It used to be equal to zero and we were moving closer to Europe,” Mieshkov says.
He also complains that the new tax system has created greater holdups at the border with customs officials. One of Kinnarps’s trucks was delayed for two days, causing late deliveries to customers.