State Fiscal Service and Finance Ministry presented the final version of tax reform

Photo: Eugeny Musienko

Yesterday, the State Fiscal Service (SFS) reported on the package of tax initiatives drafted in cooperation with the Finance Ministry. The most fundamental change is the reduction of the rates of the unified social tax envisaged in the blueprint for the reform. The Cabinet of Ministers has two scenarios under which the unified social tax could be lowered to 37% or 41% of the minimum wage. All earnings above the minimum wage will be taxed at the rate of 19% and 15%, respectively. Such a reduction will cut annual proceeds to the state budget by UAH 45.5 bn or UAH 47.9 bn. “Along with this, the new law will provide for an increase in an employer’s liability for non-legalization of labor relations and tax evasion,” said Director of the Department for Coordination of Tax Legislation and Methodology at the SFS Nelya Pryvalova.

Grow big

Officials are also considering the introduction of a progressive scale of personal income tax (PIT), though this applies exclusively to passive incomes, specifically interest, royalties and investment taxes, specified Pryvalova. “The rates of the payroll tax will remain unchanged – 15% or 17%,” said the official. Passive dividend incomes will be taxed at 5%, as it is now. It is proposed that for other passive incomes in the amount of UAH 500,000 – 1,000,000, the tax rate will be 20% and for those above UAH 1 nm – 25%.

SFS Chairman Ihor Bilous said the project was balanced, although he admitted that some adjustments will be made in the document. Meanwhile, the fate of tax reform will be known upon signing and publication of the coalition agreement. Several days ago the working group representing the three political parties agreed on the basic principles of the new tax system, according to MP Oksana Prodan. According to her information, it is likely that the coalition agreement will include tax cuts, reduction of the unified social tax rate and a combination with the income tax, as it was proposed in the version of the SFS. That aside, Prodan did not specify the spread of the rates.

Tax amnesty for incomes of citizens and businesses, which has been planned by the government for several years, could be another issue in the reform. This refers to the one-time voluntary declaration of income. In addition to that, Prodan says the coalition agreement may provide for a period of two years for a gradual increase of the excise duty on non-filter cigarettes to the rate of filter cigarettes. Officials also considered the option of introducing electronic excise labels instead of paper stamps.

These plans largely differ from those developments currently at the disposal of the Cabinet of Ministers. For example, as Bilous noted yesterday, next year excise duties for tobacco and alcohol companies should not be raised. Legally, such an initiative has not been formalized yet, but verbal agreements with companies have already been made.

Reform with a history

Over the past six months government officials have studied several versions of fiscal reform, though none of them found the definitive support of representatives of business or the Cabinet. At first, they criticized the revision of the reform drafted by the Ministry of Economic Development and Trade. The agency, headed at that time by Pavlo Sheremeta, initiated the differentiation of rates of the value added tax to 7% for settlement of accounts between payers and up to 17% for settlements of accounts among tax dodgers. In addition, reducing the unified social tax from 36.76–49.7% to 18% was proposed. The Finance Ministry predictably objected such changes fearing a dramatic reduction in proceeds to the state budget.

The Finance Ministry and the SFS proposed a less radical blueprint for reform. To this day it has a higher priority for the SFS. Yesterday, Pryvalova reminded that among other things the reform suggests reduction of the number of taxes from 22 to 9.

Although, generally speaking, officials may not abolish the taxes, but combine some of them. For example, they want to combine the land tax and the property tax. The notion of rent payment will include payment for the use of natural resources, the fee for the use of radio frequency resources and the fee for special use of water. Excise duties may include a fee for the first registration of vehicles, the environmental tax and a special surcharge for electricity, according to the concept. However, this version of the reform is not final. The new MPs and, quite possible, the new chiefs of the SFS and the Finance Ministry will decide on the final outcome for businesses and citizens.