What are the alternatives to the draft law on tax increases?

Members of the Ukrainian Business Council met with MPs to discuss rebooting government agencies, finding alternatives to tax increases, etc. The meeting took place on August 09, 2024 in Kyiv. The meeting was organized by the Ukrainian Business Council, partners - Help-Hilfe zur Selbsthilfe e.V. and the Economic Expert Platform.

Among the representatives of the Verkhovna Rada Committees were Olena Shulyak, Chairperson of the Verkhovna Rada Committee on Organization of State Power, Local Self-Government, Regional Development and Urban Planning , Yaroslav Zheleznyak, First Deputy Chairperson of the Committee on Finance, Taxation and Customs Policy , Oleksiy Ustenko and Halyna Vasylchenko , members of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy.

The meeting was opened by Olena Shulyak, who spoke about the current situation with the draft law 11416 "On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Peculiarities of Taxation during the Period of Martial Law". The Chair of the Verkhovna Rada Committee on the Organization of State Power, Local Self-Government, Regional and Urban Development emphasized her desire to find complementary alternatives, but stressed the need to replenish the budget, which is the main goal of this draft law.

"I am confident that we will find a balanced solution that, on the one hand, will allow us to find additional funds to finance our army, and on the other hand, we will find ways to implement the reforms that business is so eagerly waiting for. Finally, this is the issue of justice, which is very sensitive for Ukrainian business today. Unfortunately, today white business is unprotected and uncompetitive compared to those companies operating in the shadow or gray zone, " said Olena Shulyak.

Yaroslav Zheleznyak thanked business representatives for their support and active work on the upcoming reform of the Bureau of Economic Security of Ukraine. However, this is not the end of the process, and further initiatives of business associations are needed to select candidates for the position of the Bureau's Director, as well as members of the commission for re-certification of existing and recruitment of new BES employees for key positions, re-certification of BES employees and selection of the Supervisory Board. These steps will contribute to the success of the reform, reduce the risk of "failure" and increase its effectiveness for businesses, in the first place.

As for the reform of the State Customs Service of Ukraine, the story is very similar. Most of the changes will follow the example of the already developed BES reform. The draft law No. 6490-d on the customs reboot was adopted as a basis, is currently being finalized by the Committee and is due to pass the second reading soon. Businesses are given the opportunity to nominate candidates for the position of the head of the Service, members of the disciplinary commission and those who will re-certify the State Customs Service.

Olena Khotenko, representative of the Association of Taxpayers of Ukraine, thanked the MPs for implementing important reforms and emphasized that the business is ready to actively support the reboot of the BES, SMS, and STS.

"Rebooting the BES, customs, tax authorities, changing the administration system and methods of administration are the most important steps in overcoming the shadow sector. It is necessary to create equal conditions for white business and minimize tax evasion, " commented Olena Khotenko.

Ms. Khotenko also spoke about the extremely negative impact of the tax increase on business operations. The calculations of the Ministry of Finance under the draft law No. 11416 are extremely inaccurate and exaggerated, and do not take into account the increase in shadowing due to the tax increase. Olena Khotenko also drew attention to the promising draft law No. 11090 on additional budget revenues.

"Business representatives have identified the most negative provisions of draft law 11416: the turnover tax, 5% salary tax, 30% jewelry tax, and 15% car tax.

Business association experts have reasonable alternatives to the harmful provisions of draft law No. 11416 - they are to use the potential of the property tax, reduce state budget expenditures, in particular, state orders for higher education, minimize shadow schemes, and temporarily raise the VAT rate by several percentage points,"

" - said the representative of the UBA.

Dmytro Mykhaylenko, Head of the Tax Committee of the Ukrainian Chamber of Commerce and Industry, presented alternative ways to fill the budget instead of those presented by the Ministry of Finance. One of the options is to increase the value added tax as opposed to charging a percentage of turnover. After all, VAT administration is well-established and clear to businesses.

The turnover tax is actually toxic. Depending on the number of links in the economic chain, it significantly increases the tax burden. Or it will lead to certain distortions in economic transactions, when economic agents will be forced to engage in commission or agency transactions, " said Dmytro Mykhailenko.

Other necessary steps include optimizing public spending and controlling the earnings of individuals working in the informal sector without registering an enterprise.

Yaroslav Zheleznyak supported the business representatives and emphasized the shortcomings of the Ministry of Finance.

Olena Shulyak also noted the negative impact on the mobile operators and jewelry industries. The increase in tax liabilities in these sectors will increase the shadow share.

Myroslav Laba, an expert at the Economic Expert Platform, also presented alternatives to the draft law No. 11416. One of the proposals is to increase the share of personal income tax that goes to the state budget from public sector employees (ministries, agencies, state-owned enterprises, etc.).

Yaroslav Zheleznyak supported the idea, but put forward a proposal for its correction. Instead of raising the personal income tax, it would be better to increase the military tax for positions created by the state to 10%. In this way, the percentage of tax collections will go directly to the state budget for defense needs.In this way, the percentage of tax collections will not go to city budgets, but will go directly to the state.

Olena Shulyak noted that it will be extremely difficult to reduce the share of personal income tax that goes to local budgets, so a working group should be created to work on this issue in a comprehensive manner, together with local government associations.

Halyna Vasylchenko, MP, emphasized the urgent need to expose shadow business. According to the data presented at the committee, there are up to UAH 3 trillion in the shadow economy, so first of all, we need to work on reforms to legalize it. Halyna Vasylchenko also drew attention to local taxes. It is important to change the tax code for the administration of local taxes and fees. Currently, the draft law No. 11067 "On Amendments to the Tax Code of Ukraine and Other Legislative Acts on Improving the Administration of Property Tax" has been developed. Due to efficient administration, the state will receive additional UAH 20 billion.

Oleksiy Ustenko, Member of Parliament of Ukraine, spoke about the prospects of overcoming the illegal market of excisable goods. Currently, the "shadow" trade in tobacco products reaches 19%, alcohol and fuel - 41% and 18%, respectively. The potential for additional budget revenues from blocking "shadow schemes" is significant, and it is worth focusing on this area.

Denys Ovdiienko, CEO of Pandora, noted that according to preliminary estimates of industry experts, if the military tax on jewelry is increased, the shadow share in the industry will increase from the current 30% to 40-45%. After the 10% tax was canceled a year ago, the industry has just begun to overcome the "shadow", with turnover doubling in a year, and now the new regulations may break this trend.

Volodymyr Metelytsia, Ukrainian Agribusiness Club, said that agrarians negatively assess the norms of draft law 11416, but instead propose a temporary increase in VAT to 23% and personal income tax to 3% to simplify administration. He also spoke about the importance of introducing an economic reservation for 25% of agricultural workers. In this case, according to experts, state budget revenues will increase by UAH 200 billion per year.

Borys Emeldesh, President of the All-Ukrainian Professional Association of Entrepreneurs, spoke about the risks of abusing the simplified taxation system.

"We believe that the STS needs to be rebooted. The updated version should help minimize abuses and should be aimed at implementing some changes," said Borys Emeldesh.

One of the first steps should be to define the criteria for labor relations and freelancing. It is also necessary to introduce an ultra-simplified regime for self-employed persons without registration and reporting. In addition, the obligation to use cash registers should be reconsidered, leaving fiscalization only for entrepreneurs who have a significant risk of exceeding the limits of the single tax rate.

Following the discussion, the participants reached a common opinion on all the issues discussed and agreed to work together to implement the projects discussed.