The government's draft tax changes will discriminate against honest taxpayers

The American Chamber of Commerce in Ukraine calls on the Parliament and the Government to ensure a level playing field for doing business in Ukraine and protect the fundamental principle that before levying more taxes on honest taxpayers, every effort should be made to ensure that individuals and businesses operating in Ukraine pay their fair share of taxes currently in place.

Any proposed changes should reflect a sound tax policy and a commitment to ensure compliance with the tax law and tax fairness.

Unfortunately, the recently proposed changes to tax policy (Draft Law No. 11416) do not comply with these principles and will instead further discriminate against transparent businesses, increase the distortion of competition between taxpayers and tax evaders, undermine trust and contribute to the growth of the shadow economy.

We call on the Government and law enforcement agencies of Ukraine to intensify their efforts to combat the shadow economy in order to ensure budget revenues and fair competition. We estimate that the losses from illegal markets for excisable goods exceed USD 1 billion in the last year alone.

Other examples illustrate the seriousness of this problem in many sectors of the economy. For example, the share of the shadow market for iPhones alone is 71%, which results in losses to the state budget from VAT evasion of about USD 135 million, and losses from tax evasion by fixed-line Internet providers are close to USD 100 million annually.

In the HoReCa sector, only 5 companies pay 31% of all taxes paid in the restaurant business, while there are more than 40,000 restaurants in Ukraine.

The biggest concern in the proposed tax changes is the 1% corporate income tax that will be applied to corporate income. This is a dangerous precedent and should not be introduced as it is a completely new sales tax on top of the existing VAT regime. To our knowledge, no other country in the world has a sales tax and a VAT at the same time, as is proposed in Ukraine.

We have no doubt that the proposed changes will significantly increase the overall tax burden on honest taxpayers who report their income in a transparent and legal manner, encourage shadow economy participants to redouble their efforts to evade taxes as the rates will become even higher, create significant difficulties for doing business in Ukraine, demotivate existing businesses from further investment, and force new investors to reconsider their business plans, reduce foreign direct investment, and lead to a decrease in the number of foreign investors.

In addition, we oppose discrimination against honest, legitimate taxpayers through the introduction of new taxes, such as the proposed excise tax in euros on sweetened sodas, which primarily targets U.S. and international companies.

At the same time, the American Chamber of Commerce in Ukraine understands the urgent need to broaden the tax base by extending the military tax to all categories of private entrepreneurs as well as legal entities to ensure that all taxpayers contribute to the fight.

However, a sharp one-time increase in the military tax to 5% could lead to a decrease in real wages and increase the attractiveness of informal employment, so we call for a more gradual approach to increasing this percentage.

We also welcome the Government's determination to level the playing field by preventing unfair competition from businesses that evade taxes or enjoy preferential treatment. To this end, initiatives such as abolishing the EUR 150 limit on cross-border e-commerce, making all such parcels subject to VAT, are a step in the right direction as it is in line with European and international practice and will significantly increase tax revenues.

Finally, the Chamber is convinced that the source of additional tax revenues is the fight against tax evasion and ensuring equal rules for all, not increasing taxes for honest taxpayers who already bear the biggest burden.

Discrimination against honest taxpayers will harm transparent business and significantly increase the shadow economy. We urge the Parliament and the Government, with the support of the IMF, the European Union and the G7 member states, to ensure that the tax burden is distributed among all market participants and that the new tax policy does not disproportionately target honest, diligent taxpayers in Ukraine to the detriment of further economic growth and investment.