Ukraine’s tax service is ready to reduce the unified social security tax and promises to leave the income tax unchanged

Photo: PHL

The State Fiscal Service (SFS) proposes to reduce the unified social security tax (SST) and leave the tax rates on personal income tax (PIT) unchanged, according to Head of the SFS Ihor Bilous. This contradicts the reform previously announced by Premier Arseniy Yatsenyuk, which entails changes in the rates of both taxes. The SFS offers to reject a part of this initiative due to the dissatisfaction of entrepreneurs engaged in business.

One of two

Both the Cabinet and the SFS support reduction of the SST. The size of the SST (today it is paid by employers) is 37 – 50%, depending on the type of professional activity to which the rate of accident insurance is linked. But within the framework of the struggle against under-the-table salaries (according to the SFS 80% of Ukrainian companies practice such a method of settling accounts with their employees), the government proposed to substantially reduce wage contributions, which currently in Ukraine reach 55% compared to 36% in the EU. Based on the Concept of Tax Reform published by the Cabinet of Ministers in August, officials proposed two options for the reform of the SST. The first assumed a rate of 41% for the minimum wage (today the minimum wage is UAH 1,218) and 15% for higher amounts. The second suggested 37% and 17%, respectively. In the first case, the state budget would be short of UAH 46 bn, in the second case - UAH 48 bn.

Of the two scenarios, the Tax Service approved a revised version of the first variant of a differentiated rate. “For two minimum wages (UAH 2,436 – Capital) the SST shall be paid at the rate of 41% and for all amounts higher than two minimum wages, the SST rate shall be 15%,” said Bilous. The head of the service said that in the case of adoption of this proposal the estimated reduction in proceeds from the unified SST would be UAH 24 bn a year, excluding legalization of wages. The Pension Fund and the SFS reported that over the past year the tax has brought the budget proceeds of UAH 189 bn. Thus, the reform would deprive the state treasury of 13% of proceeds from the SST. Introduction of a progressive scale of taxation for incomes of individuals was supposed to partially compensate for the loss, but the proposal has become a stumbling block for the tax reform.

In the old fashion

As to the PIT, the opinions of the Tax Service and the government are divided. At present, the tax rate is 15% for amounts of up to 10 minimum wages (UAH 12,180) and 17% for amounts above this threshold. The government has offered to replace such a system with six variants of a progressive PIT scale. One of them envisages a four-level scale with rates of 10%, 15%, 20% and 25%. In other cases, the proposed scale consists of three levels with rates of 15%, 20% and 25%. The application of the lowest rate is proposed in different variations for incomes from UAH 1,218 to UAH 12,180 per month, while the highest rate is proposed for incomes higher than UAH 20,706 – 48,720.

At the same time, the SFS suggests preserving the existing rates of this tax. “There were many comments from business circles. We will not change the PIT,” said the head of the service. Even though formally the companies are only the tax agents and the tax is a burden on the population, the decision to raise the PIT rate may force business entities into the shadows. Until 2004 Ukraine had a progressive scale with rates ranging from 10% to 40%, but then the flat rate was introduced – at first 13%, since 2007 - 15%, and since 2011 – 15 – 17%. In such a manner, the low tax rate has been effective for ten years, but businesses are still paying wages under the table due to the high pressure on social funds, said Head of the Tax and Legal Department at Deloitte Viktoria Chornovol.

Yet, the main issue of the conflict is not so much about the rates as it is about the additional revenues to the state budget. The options proposed by the Cabinet would bring an additional amount of UAH 3.5 – 14.7 bn.

For comparison, in 2013 the revenues from the PIT amounted to UAH 58.9 bn. Business does not approve of this attempt to fill the budget. “Increasing the PIT is the easiest way to increase proceeds to the budget when businesses are losing money and there is no money to pay the tax. But this is a short-sighted and momentary decision. We need a comprehensive solution, including expansion of the tax base,” believes Chornovol.

At the same time, a partner at International Tax Associates B.V. Rustam Vakhitov says the change of the flat scale to a progressive one inherently increases the costs of employers and the effective load on taxpayers with high incomes. “In such circumstances, offering companies an incentive to legalize salaries would be more convenient and effective. For this reduction of the SST should be not only essential, but also permanent. At the moment, business owners are not confident that the SST rate will not be revised again,” said Vakhitov. Another incentive to get out of the shadows is not the carrot, but the stick, meaning strict control and appropriate penalties for paying under-the-table wages. Alas, the current tax reform does not provide for this.

The SFS offers to leave the state treasury without such additional infusions, as it found some compensators of losses, assures Bilous. The official did not go into details. The only way to compensate for the shortage of the SST, which will remain at the disposal of the government, is to bring salaries out of the shadows, says Executive Director at CASE Ukraine Dmytro Boyarchuk.