The Cabinet did not take into account the remarks of businesses and the coalition regarding the blueprint for tax reform

Photo: Eugeny Musienko

Yesterday, the Cabinet introduced a bill on amendments to the Tax Code to the Verkhovna Rada. Several dozen bills containing amendments to tax and customs legislation were registered together with it. The government should fill the budget on the basis of these bills.

Better safe than sorry

The bill contains many new provisions in terms of taxation of incomes. In 2015, the Cabinet plans to extend the validity of the military tax and introduce a levy on purchases of foreign currency for individuals in the amount of 2% of the transaction amount. The government estimates that implementation of the proposed provisions will bring an extra UAH 40 bn in budget revenues.

Despite the criticism of MPs, the Cabinet has left in the bill the new approach to taxation of high salaries – tax of 15% on incomes up to 10 minimum wages (UAH 12,200 per month) and 20% on incomes exceeding 10 minimum wages, starting with the excess amount.

There is a proposal to introduce voluntary “zero” declaration of income and property for wealthy Ukrainians. In particular, this applies to everything that is acquired illegally. Declaration is being introduced to form an “incoming” balance for the subsequent control of expenditures. “In the future, incomes and sources of income should be compared,” reads a memorandum to the draft. Those who do not submit a declaration will be credited with the value of assets in the amount of UAH 200,000 by default.

It is interesting that with the help of declaration the government plans to attract people’s money to banks. Having declared more than UAH 200,000 of cash the money should to be placed on an account in a financial institution by the date of filing of the declaration and remain there for at least one year. At the same time, Ukrainians wanting to withdraw the money before the end of the deposit term will have to pay an additional 3% of the amount withdrawn. Those who do not want to hold their money in banks will also have to pay 3% of the amount withdrawn.

After total declaration of incomes, the fiscal services will take control over Ukrainians’ incomes and expenses.

The Cabinet left in the draft the radical provision empowering tax inspectors to keep record of the difference between incomes and expenses of citizens. Expert at the Package of Resuscitation Reforms project Ilya Neskhodovskiy says if such a law is adopted the head of the tax authority will be granted extensive powers to apply so-called indirect methods of control. “Citizens will have to keep receipts to confirm that their purchases and possessions were bought for specific amounts. I am afraid this will drive the entire economy into the shadows. Though today almost 60% of business entities work illegally, after adoption of the law their number could increase to 80%,” said Neskhodovskiy.

Rejection of criticism

In order to fill the budget the Cabinet proposes to increase rental rates for the use of natural resources, impose a special tax on expensive cars in the amount of UAH 25,000 per year and introduce a system of electronic administration of VAT. The latter proposal is one of the most controversial: it has been criticized by both business associations and MPs. Despite MPs’ intention to abolish this provision, the Cabinet nevertheless left it in its bill, specifying that the system will operate in a test mode starting April 1 of next year.

Before introduction of these documents to the parliament, Premier Arseniy Yatsenyuk acknowledged that not all the comments from MPs and business owners were included in the blueprints for government reforms. Nevertheless, he admitted that it would be possible to settle the disputed issues in the process of their finalization in committees. In the meantime, members of parliament are confused and puzzled by the proposals of the Cabinet. “The preliminary analysis of the documents shows that many of the proposals that have already been agreed to were not heard by the government,” said Chairman of the Samopomich faction Oleh Berezyuk.

Over the last few weeks the Committee on Taxation and Customs Policy has been literally besieging the Ministry of Finance with its comments on the draft. However as member of the committee Oksana Prodan (Petro Poroshenko Bloc) noted, most of the negative points that were found in the draft prior to its approval by the Cabinet and negotiations with the MPs remained unchanged. Among the few exceptions – the provision on the introduction of cash registers on open-air markets – was deleted. “The rest on installation of cash registers (except on markets – Capital), prohibition of inclusion of single tax payers with gross expenditures, a 30% tax on expenditures that exceed incomes and the powers of tax authorities remained in the draft,” confirmed Prodan.

A spoonful of honey

Among other know-how proposed by the Cabinet is the reform of the simplified taxation system. The number of groups of single tax payers will be reduced from six to four. Also, farmers paying the flat agricultural tax will lose their special status. This tax will be added to the fourth group of single tax payers.

At the same time, the state made a few steps towards small businesses. The current maximum amount of income allowing entrepreneurs to work based on a simplified system will be preserved. Today, its maximum amount is UAH 20 mn per year. Also, for the first group of single tax payers, to which the lowest single tax rate applies, the maximum income threshold will be doubled to UAH 300,000. At the same time, tax rates will be cut in half for single taxpayers.