Paying taxes has been easier for businesses, but this luxury will not last for long

Photo: Eugeniy Musienko

Over the last year Ukraine rose from 164^th to 108^th place in the Paying Taxes 2015 ranking. The ranking, reflecting the size of the tax and administrative burden on medium-sized companies in various countries around the world, is compiled by the World Bank and PwC and is part of the Doing Business classification. Due to the rapid shot upwards in the tax tables of rankings Ukraine has risen in Doing Business 2015 by 16 positions to 96^th place among 189 countries.

Virtual reality

Ukraine demonstrated improvements in all three components of taxation – the number of tax payments, time to comply and the total tax rate. However, the reduction in the number of payments was only formal. This was mainly due to the transition of the main part of taxpayers to electronic filing of statements for a unified social tax, says Manager of the Tax and Legal Services Department at PwC Ukraine Oleksandr Buryak.

The transition from paper to electronic statements occurred after the Ministry of Revenue and Duties, headed at that time by Oleksandr Klymenko, started administering the unified social tax instead of the Pension Fund on October 1, 2013. As a result, by the end of the year the number of taxpayers filing accounts online grew to 77% against last October’s 38%. And in the first 6 months of this year the figure already increased to 90%. “Under the terms of definition of the indicator, if the bulk of taxpayers delivers reports and pays taxes or fees via electronic forms of communication, the performance of stand-alone tax will be equal to one, even if the actual number of payments is higher,” explains Buryak. Furthermore, the transition to online services reduced the time of filling out tax returns from 390 to 350 hours per year.

Also, due to a decrease in the rate of the income tax from 21% in 2012 to 19% in 2013 the total tax rate decreased from 54.9% to 52.9%. Such “relief” was envisaged in the Tax Code adopted back in 2010. If the truth be told, initially officials planned the reduction to 16% for 2014, but the International Monetary Fund advised not to hurry, keeping in mind the persistent problems with filling the coffers of the national treasury. Also, the indicator improved due to the fact that the Ministry of Revenue and Duties allowed companies to take into account the losses of the previous period in making current tax payments.

Restricted maneuvers

Nevertheless, Ukraine’s success in the current ranking downgrades the possibility of its progress in the future. Today, the reduction of the number of payments – the most popular source of improvement in the ranking – is virtually exhausted. “This indicator reached its lowest level. Now, the study takes into account five taxes – income tax, VAT, UST, land tax and environment tax. And each of them is levied in the lowest value – one payment per year,” said Buryak. This means that further improvement is possible only by eliminating one of the five taxes or reduction of their tax base.

The decrease of the income tax rate from 19% to 18% does not allow for expectations of a serious upward movement, according to Buryak. “Even if the total tax rate is reduced by 1%, to 51.9%, it is unlikely to allow Ukraine to move forward on this indicator,” he said. The same indicator in Europe and Central Asia is 34.9%, and in OECD countries – 41.3%.

However, the Ministry of Finance and the SFS propose reducing the rate of the UST, though for the time being it is unknown to what extent it will be lowered. The current concept of reform provides for reduction of the rate to 15%, but the draft coalition agreement mentioned 18%.

Time is money

The time it takes to fill out reports and prepare payment documents may increase once again in the future rankings. In 2014 nothing was done to simplify the tax declaration, though additional tasks were added, notes Buryak. For example, administration of the military tax, which increased the time of preparation of salary statements, was tacked on.

Admittedly, introduction of electronic administration of the VAT in 2015 may deal a serious blow to the time spent by business entities on resolving tax issues. The corresponding law was adopted in late July and shall take force on January 1, 2015. Unfortunately, the document is far from perfect. “Without a proper assessment of all possible risks and the solution of many problematic issues such an innovation may lead to unpredictable consequences, both for business entities and Ukraine’s economy in general,” reads the letter of the European Business Association sent to the leadership of the country. Accounting procedure of the negative value of VAT accrued for past periods needs finalization, said partner at PTS Consulting Oleksandr Shemyatkin.

Officials should also improve accounting procedure of the amounts for compensation for future periods, credited against reducing VAT liabilities that were declared prior to January 2015, says the letter from the EBA. The issue of VAT refunds, to which the system of automatic compensation does not apply, remains unresolved as well.

For this reason, the EBA, the Federation of Employers of Ukraine, the Confederation of Builders of Ukraine, the Ukrainian Internet Association and many other NGOs have already sent a proposal to the president and the premier for postponing or canceling the introduction of electronic administration of the VAT. However, the Finance Ministry, according to Deputy Finance Minister Denys Fudashkin, insists on implementation of such an initiative starting January 1. As a result, in the Paying Taxes 2017 ranking Ukraine may slide down to last year’s figures or even lower in terms of time needed for preparing, filing and paying taxes.