Tax and accounting insights for Ukraine
29.10.24
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Changing the mechanism of personal income tax payment: discussions continue

Improving the mechanism of personal income tax (PIT) in Ukraine will reduce the imbalance in the financial support of territorial communities and enable them to improve the level of public services.

This was stated by the First Deputy Minister of Finance of Ukraine Denys Uliutin during the round table "PIT and Communities" organized by the U-LEAD with Europe* program on October 24 to discuss the impact of changes in the mechanism of PIT inclusion in local budgets. The event brought together representatives of the Ministry of Finance of Ukraine, a number of other Ukrainian and international agencies, and experts from the Polaris project**.

Discussions on changing the mechanism of personal income tax transfer to local budgets began after the change in the administrative-territorial structure in 2021 and the formation of new territorial communities.

A number of draft laws have been registered in the Verkhovna Rada that propose different approaches to the distribution and crediting of personal income tax in Ukraine. In order to develop a unified concept, the Verkhovna Rada of Ukraine has set up a working group under the Committee on Finance, Taxation and Customs Policy to discuss the registered draft laws and develop new concepts.

The relevance and importance of this topic is also reflected in government documents, in particular, in the Action Plan for the Reform of Local Self-Government and Territorial Organization of Power in Ukraine for 2024-2027.

In order to select the optimal mechanism for PIT enrollment, U-LEAD and Polaris experts modeled the impact of changing the PIT enrollment mechanism on the tax capacity of hromadas, and presented the results of such modeling during the Roundtable.

"The current model of personal income tax crediting creates disproportions in the financial security of hromadas and is beneficial only for large cities with large employers. However, the activity of the population is often concentrated in smaller cities, towns and villages that are satellites of megacities and suffer from this model. Today, almost 1200 communities are subsidized. This model did not suit communities before the full-scale war, and now the gap between the tax capacity of communities has increased even more," emphasized Denys Uliutin.

He also noted that one of the main challenges that the Ministry of Finance, the State Migration Service, other state authorities and local governments are working on is the objectivity of population data.

"The number of people in communities, which is crucial for any model of personal income tax collection, is currently unknown. There is no unified database containing up-to-date and reliable data on the number of people in each territorial community. During the full-scale war, this problem was exacerbated by the temporary occupation of certain territories and the wave of internal migration of Ukrainians," said Denys Uliutin.

Another task that needs to be worked on is to determine the level and number of services that the state should guarantee and for which the basic financial basis should be determined, including through the mechanism of personal income tax crediting.

In such a situation, a reasonable and objective choice of the most successful PIT crediting mechanism will fulfill two tasks at once: improve the tax capacity of communities, reduce disparities between them and ensure the proper quality of public services.

Denys Uliutin also noted the importance of additional subsidies in the budget to equalize the capacity of territorial communities affected by armed aggression.

"This somewhat reduces the disproportion, although it does not overcome all the problems at the level of financial security of territorial communities. At the same time, using the expertise of countries where taxes are distributed harmoniously between territorial communities can help create a model where all citizens, regardless of their residence in a particular community, will receive equally high-quality public services," summarized Denys Uliutin.

For reference.

* The U-LEAD with Europe Program (Ukraine - Local Empowerment, Accountability and Development) unites the vectors of cooperation between the Government of Ukraine, the European Union and its member states: Germany, Poland, Denmark and Slovenia - to create a transparent and accountable multi-level governance system that addresses the social needs of Ukrainians.

** The Polaris Program "Support to Multi-level Governance in Ukraine", developed for the period from 2024 to 2028, is funded by the Government of Sweden. The goal of the program is to strengthen the capacity of communities in Ukraine to provide public services and participate in recovery and reconstruction in line with the requirements of accession to the European Union. The program covers 5 areas: education, fiscal decentralization and budgeting, administrative services, local government-led recovery, and international community cooperation. Polaris assists in the implementation of reforms in Ukraine by working with local governments, ministries, administrative service centers, advisory groups and experts.

CMU
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