Fight for the new Ukrainian Tax Code

As a candidate for the Ukrainian presidency Viktor Yanukovych promised in fall-2009: I’ll push through with the new Tax Code; I will make Ukraine most attractive country for investments in Eastern Europe. Attempts to modernize tax system in Ukraine are made since mid-90s. Since adoption in 2001 of a “small tax code”, Ukrainian authorities under presidents Leonid Kuchma and Viktor Yushchenko were setting ambitious goals of settling tax system, but never succeeded.
Polish version:


Victor Yanykovych promised tax breaks for small businesses for 5 years, VAT down from 20% to 17% till the year 2011, corporate tax lowering from 25% to 19% in 2011 with the upcoming 1% lowering each year up to 16%.

He proposed an ambitious program and a timely one. According to the World Bank Paying Taxes-2010 rating, Ukraine is on 181 place among the countries in ease of paying taxes. Only Venezuela and Belorus are doing worse.

World bank

Who makes paying taxes easy and who does not

Easiest Rank Most difficult Rank
Maldives 1 Jamaica 174
Qatar 2 Mauritania 175
Hong Kong, China 3 Gambia, The 176
United Arab Emirates 4 Bolivia 177
Singapore 5 Uzbekistan 178
Ireland 6 Central African Republic 179
Saudi Arabia 7 Congo, Rep. 180
Oman 8 Ukraine 181
New Zealand 9 Venezuela, R.B 182
Kiribati 10 Belarus 183

Most of the CIS countries have adopted their tax codes. In Poland, Hungary, Slovakia, Turkey taxes are regulated without codes.

Ukrainian tax system has never been too good. Attempts to modernize it are made since mid-90s. Since adoption in 2001 of a “small tax code”, Ukrainian authorities under presidents Leonid Kuchma and Viktor Yushchenko were setting ambitious goals of settling tax system, but never succeeded.

MPs and big businesses supported by local think tanks and international experts were proposing their Tax Code drafts, but it was far from passing through the Verkhovna Rada, the parliament. In 2007 the Yanukovych Government preared a draft that basically compiled existing legislature with no major novelties. Parliamentary early elections and the Government change that followed the same year made a break in the Ukrainian Tax Code career.

What is to be done with the Ukrainian taxes is intensely debated in the view of new Tax Code adoption. Alla Sokolovska, Deputy-Director of Scientific-Research Financial Institute by the Finance Ministry believes that under 5% budget deficit mere lowering taxes in Ukraine would unbalance the system. She appealed to the experience of Central-European countries which in 2009-2010 did not only cut taxes, but slightly increased VAT level, so now it is on average is close to the Ukrainian 20%. She believes that before lowering taxes Government in Ukraine shall first cut expenditures.

Taxes in some countries around Ukraine

Country Corporate Personal Payroll tax VAT
Hungary 16% 18% – 36% 50,5% 25%
Poland 19% 18–32% 41,11% 22%, 7% (lowering taxation for some goods)
Romania 16% 16% 45,15% 19%, 9% (hotel services)
Russia 13–20% 13% 10–26% 0–18%(lowering tax for some goods, no VAT for small business (except of import)
Slovakia 19% 19% n/a 19%
Turkey 20% 15–35% 35–40% 18%
Ukraine 25% 15% ~ 40%, if salary exceeds 15 minimal wages (~ 13.000 UAH at the end of 2010 р.), 0% in the following period 0%/20%, some goods and services cancelled
Tax Code draft:
Ukraine 17% 15% lowering for some sorts of income and employees n/a2 0–20%3

Tax Code:

Two drafts, one ideology

In June this year the Ukrainian Government pushed through the parliament Tax Code draft in the first reading. This draft received heavy criticism for increasing administrative pressure on businesses and expanding powers of tax authorities and even poor codification. According to this draft law, tax officials received the right to invite individuals to tax authorities’ offices for investigation as well as questioning “any physical emtity”. By this, critics said, tax officers were turning into police offices breaking a number of the constitutional provisions.

On economy side a trend was set to lower tax burden for big businesses while de facto increasing it for small and medium ones. Although formally number of taxes was lowered, the payments for small businesses increased. System of small businesses set under president Kuchma in 1999 by his Decree was jeopardized by cutting the list of types of businesses that were allowed to work under this simplified system and in some cases triple increase in tax payments.

After parliamentarians proposed unprecedented 5000 amendments to the Code, the authorities took the same unprecedented in the history of Ukrainian parliamentarism step: after the frist reading in the Rada, the Code draft was sent to the All-Ukrainian discussion on it that shall end up after MPs return from summer vacations.

In the meantime Government continues to work on the Tax Code. The updated version of it was published on August 3, 2010, yet not without scandal. Deputy-Prime Minister and the chief of Governmental Committee on Economic Reforms Serhiy Tihipko was overplayed in a political game. According to his Deputy-Chairman in Sylna Ukraina party Oleksandra Kuzhel, ex-Chairman of the State Committee for Regulatory Policy and Entrepreneurship, the published draft was not read according to the proper Governmental procedures bypassing Tihipko. His another Deputy in the party Kost’ Bondarenko claimed that Yanukovych’s Party of Regions policies lead to expanding tax authorities powers and turning them into modernized Gestapo. Experts assume that Tihipko meant to use Tax Code as a PR tool on the eve of this October local elections. His newly formed party needs a potent driving mechanism which could have been provided by promoting the Tax Code. But Party of Regions also needs potent mechanisms, so First Deputy-Prime Minister Andriy Klyuev along with the Prime Minister, former Tax Administration Chairman Mykola Azarov, were happy to overtake initiative.

Regardless of the hassle in the Government, it is the document published on the beginning of September has most chances to be adopted in the parliament. It is been toured around Ukraine for public discussions. The call centre is opened to receive business proposals.

The Government swept out 5000 earlier proposed amendments and worked through 300. As a result, the draft is deprived some of its most outrageous features as the right to tax authorities to search private apartments of businessman or make enquiries with enterprise personnel. However, as independent attorney at law Yuri Bauman says, the document is in trend to increase powers of tax and custom authorities by cost of tax payers. The draft proposes indirect methods of control: economic analysis, observation, control over incomes and expenditures of the tax payers. The right to initiate such indirect methods of control belongs to the chief of local tax authority. To avoid tax officers’ subjectivism and corruption, Bauman believes such decisions shall be in competence of the courts.

General line of the draft is preserved in its second version: big businesses will slightly improve their condition while small ones shall expect worsening ones. The number of state and local taxes is reduced twice. But this is achieved predominantly due to omission of minor taxes which do not make major difference to tax payers like taxes for owners of the dogs. Major problems in tax administration are not going to be resolved. This along with more active search by the tax administration of a wider tax base might lead many businesses in Ukraine to shadow. Ultimately, a very much desired goal of increasing public income will be put under jeopardy.

VAT game

The big game is played around VAT in Ukraine. President Yanukovych demanded improvements in administering this 20% tax. VAT reimbursement is traditionally considered in Ukraine as easy way of making money. It is one of the most lucrative businesses along with operations with natural gas. Groups that regulate VAT reimbursement can initiate a number of fake enterprises to reimburse VAT ultimately to themselves. Volume of this market, as Ekonomichna Pravda web-site estimates, can reach a billion USD per year.

Within the last years discussion arise about how to improve VAT administration. Moreover, some economists close to the former Prime-Minister Tymoshenko assumed possibility to cancel this corrupt tax. As sources report, Tymoshenko at some point was contemplating getting rid of VAT in favor of tax on turnover. Yet this idea was never profoundly discussed and it is Yanukovych and Azarov are currently resolving VAT problem.

Part of this problem is a huge Governmental debt on VAT. In July, according to State Tax Administration Chairman Oleksandr Papaika it was at 25-26 billion UAH (some 3 billion USD). Independent experts belive that this debt can be 10 billion bigger.

If VAT is not cancelled, which is unlikely due to the facts that it is an efficient tax for the budget and that it is practiced in the EU, the way to break corrupt schemes is to make it reimbursement automatic. Presently some 1/3 of the reimbursed amounts of money shall be returned to the responsible tax person as a bribe for promoting the case of this or that enterprise in the line for limited public financial resources to be reimbursed as VAT. If the outdated system of VAT compensation will be preserved, some consessions to economically potent class in Ukraine as non-introduction of real-estate tax or 5% tax on deposits will look as fiscal bodies payment for opportunity to earn on public finances.

* * *

However, the updated draft of the Tax Code can be worked on by the Rada only in September. Iryna Akimova, Deputy-Chief of the Yanukovych Administration, said Ukrainski Novyny news agency last Wednesday that she expects Code adoprion in Autumn. Davyd Zhvania, MP, currently member of the pro-Yanukovych coalition, assumed that the Tax Code might be adopted by the parliament on the eve of budget-2011 or simultaneously with the budget, which is due by the end of the year.

Perhaps, this is sufficient time to discuss the draft with all interested parties and find compromise. Compromise will be anyway needed. Ukrainian small business has proved many times its capacity to stand for its interests. On the other hand, there are struggling interest groups on the top of the Ukrainian business, particularly, around Yanukovych. It might well be that the way to compromise on Tax Code will be too difficult to make it. And it may be that the final decision, as it happened previously, will be postponed. May be – even further than beginning of the next year. Postponing problems resolution – it is so comfortable, national way.

Ця публікація розміщена на сайті Національного банку Польщі. Інколи я пишу для цього ресурсу англійською, редакція перекладає на польську. Теми – українські. Цікаві для мене. І добре, що для поляків :)

Володимир Кухар

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