Employers' views and proposals on tax innovations

Together with representatives of about 50 FEU member companies, we took part in the discussion of the CMU's proposals to the Tax Code (draft law No. 11416) and alternatives to them, organized by the Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Danylo Hetmantsev and attended by Deputy Minister of Finance Svitlana Vorobey, who is responsible for tax issues in the Ministry.

We exchanged views and made specific substantive proposals on the search for additional sources of funding for the Defense Forces. We support the need for such a search, but our proposals are not related to increasing the tax burden on legal businesses, as proposed by the Government in terms of, for example, the introduction of a turnover tax and a significant increase in the burden on the payroll.

In particular, they suggested

- save on expenses. We estimate that cutting irrelevant expenditures and withdrawing the corresponding funds from local budgets will save the Defense Forces at least UAH 30-35 billion per year. And if the cost of maintaining the state apparatus is reduced (including by reducing its size, including in the military administrations of the temporarily occupied territories), the savings without significant consequences for the functioning of the state will be at least UAH 70 billion per year

- to de-shadow markets that are partially or completely in the shadows, such as the markets for excisable goods, land and agricultural products, the gambling market, the taxi market, and the elimination of smuggling and "gray" schemes at customs. The unshadowing of excisable goods markets alone can bring at least UAH 40 billion a year to the budget. Taking into account the de-shadowing of other areas listed above, the amount of additional budget revenues could double to UAH 80 billion per year.

In addition, they proposed less negative scenarios for generating additional revenues from the point of view of stimulating the transition to the shadow economy, in particular through

- introduction of an import duty. Under the current conditions, its introduction at the level of 10% for goods of groups 1-24 of the Ukrainian Classification of Goods for Foreign Economic Activity and at the level of 5% (excluding critical imports of raw materials, equipment and components not produced in Ukraine, as well as fuel and electricity) for goods of groups 25-97 of the Ukrainian Classification of Goods for Foreign Economic Activity will bring additional UAH 40 billion per year to the budget.

- introducing amendments to the Tax Code of Ukraine for the period of martial law, which would stipulate that the tax base for personal income tax and military duty on full-time wages cannot be lower than UAH 10 thousand. According to employers, this will allow them to raise an additional UAH 20 billion to the budget. At the same time, this option of increasing the taxation of wages will have a much less negative impact, encouraging employers to transfer salary payments to the "shadow", than the Government's proposed increase in the military tax rate from 1.5% to 5%.

They also provided suggestions on how to find sources of revenue in certain sectors of the economy. In particular:

- On the introduction of a military duty (quasi-excise) at a rate of 15% on passenger cars subject to the first state registration in Ukraine. According to employers, the following approach should be applied: for example, 0% for a passenger car produced in Ukraine, 10% for a new imported car, and 20% for a used imported car. This would allow achieving approximately the same fiscal goals set by the Government (UAH 24.5 billion per year) and at the same time stimulate the assembly of cars in Ukraine, and the creation of new jobs and increased tax payments. In addition, it was proposed to consider the possibility of introducing a utilization fee for all used wheeled vehicles, as well as for buses, tractors, trailers and semi-trailers, agricultural machinery, which should be fully allocated to finance the Defense Forces. Even its introduction at the level of 2-3% will allow to raise at least UAH 8-12 billion per year.

- Today, the Ukrainian fixed-line Internet access market has between 4 and 7 thousand Internet providers. As of March 2024, the register of providers includes 4442 entities, 2471 (56%) of which are individual entrepreneurs. 98% of them provide fixed-line Internet access services. Another part in the form of LLCs are also on the simplified system. The market is mostly in the shadows. According to rough estimates, the elimination of the simplified taxation system for Internet providers could bring the state UAH 3-4 billion in additional revenues per year.

- Introduction of monthly advance payments of income tax for gas station chains in the amount of 0.5 minimum wage per 1 cubic meter of fuel storage tanks. The average monthly advance payment under the proposed approach will amount to almost UAH 373 thousand, which is an unbearable burden for the networks, as it significantly exceeds the actual amount of income tax paid per filling station, even for the most transparent companies. Last year, on average, the networks paid UAH 48 thousand per filling station. Its beneficiaries will be the so-called "barrels" that evade taxes to the greatest extent. Instead, we propose a different mechanism: for example, payment of UAH 100 thousand in advance for gas stations with shops and UAH 50-70 thousand for gas stations without shops, regardless of the size of the tank fleet. Such a mechanism will make the networks that actively evade paying income tax pay it and is generally feasible for all standard gas stations.

We supported some of the Government's proposals, in particular, regarding the taxation of goods imported into Ukraine by individuals and sent by international postal or express mail if their total value exceeds EUR 45.

All of their proposals were backed up by specific figures. However, given Danylo Hetmantsev's statement that he largely supports our position, we hope that it will be taken into account when the draft law is finalized.