Tax increases will reduce economic activity and increase corruption

The members of the Ukrainian Business Council, which includes 117 business associations from various sectors of the economy, present their compliments and address the following:

OnJuly 18, 2024, the Verkhovna Rada of Ukraine registered Draft Law of Ukraine No. 11416 "On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Peculiarities of Taxation during the Period of Martial Law" (hereinafter - theDraft Law),which is intended to increase the state budget rev enues.According to the URB experts, the mentioned draft law has a number of negative provisions for the stable operation of enterprises and the economy (in particular, an increased military tax for employees, a corporate turnover tax, a military tax on jewelry and cars), as it mainly imposes a burden on bona fide businesses and employees.

The drafters of the bill do not take into account the negative consequences of its adoption, which will be a decrease in business activity, leading to a decrease in the overall tax base, increased risks of shadowing the economy and the introduction of various tax optimization schemes that automatically increase the risk of corruption.

The introduction of new types of taxes will significantly burden businesses and government agencies with additional reporting forms, the need to introduce new administration and control procedures, and will put additional fiscal pressure on Ukrainian businesses. Against the backdrop of ongoing Russian aggression, destruction of infrastructure, shrinking markets and outflow of personnel, this makes economic stability impossible.

At the same time, the draft law lacks measures to combat the shadow economy and measures to improve the efficiency of the State Tax Service. Such factors will lead to discrimination against bona fide businesses and contribute to the growth of the shadow economy.

Realizing the need to broaden the tax base to finance the country's military spending without introducing new taxes, the BOC experts propose to seek additional revenues in the following areas:

1. Intensify measures to combat the shadow economy and improve the efficiency of regulatory authorities by introducing systemic changes that will provide additional revenues to the state budget

• Ensure a complete reboot of the Customs and Tax Services by commissions with a decisive vote of international experts to minimize "shadow schemes" and fill the budget, establish effective KPIs for the BES, State Tax Service, and State Migration Service, and ensure annual assessment of losses from various taxes using the tax gap methodology;
• improve the administration of the real estate tax and utilize the full potential of this tax;
• automate tax administration processes as much as possible.

2. Reduce central budget expenditures

• Review and optimize budget expenditure items to optimize the structure, increase efficiency and reduce budget expenditures as a matter of urgency.

3. Involve business associations in the development of a new draft law and work out options for finding other sources of budget revenues.

• Conduct a joint search for sources of tax revenues to the budget instead of the government's harmful innovations, such as the increased military tax for employees, turnover tax, and military tax on jewelry and cars.
• Review the approaches to introducing new additional fees and their administration, and consider options for introducing a temporary surcharge to the existing tax rates of value added tax.
• Clarify that the rule on extending the powers of local councils to regulate the minimum tax base for personal income tax applies exclusively to the main place of work when the full monthly working hours are fulfilled, making it similar to the minimum base for the unified social tax.

Ukrainian business calls on the Government and MPs to take into account the proposals of the business community, hold a professional discussion of alternatives to filling the budget and possible cost reduction, and jointly develop optimal solutions for sources of budget revenues.