Tax reform: questions to answer

Overall tax rate is not much higher than in neighboring countries (DB-2015)

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Belarus CzechRepublic

Moldova Poland Romania SlovakRepublic

Turkey Ukraine

Overall tax rates, % of profit

profit tax labour tax other taxes

But compliance is a real problem (DB-2015)

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Belarus CzechRepublic

Moldova Poland Romania SlovakRepublic

Turkey Ukraine

Time to comply, hours per year

Current Tax System

State-level taxes

1. EPT (90%)

2. PIT (25% except Kyiv, Sevastopol)

3. Ecological tax (20%)

4. VAT

5. Excise tax (alcohol, tobacco, fuels, vehicles, electric energy)

6. Rent payment (mineral resources, forests, water, pipelines)

7. Customs duty

War tax (temporary)

Single Social Contribution (SSC)

Local taxes

1. Property tax (housing, land, “luxury” cars)

2. Single tax (simplified tax system)

3. Excise tax on retail sales of alcohol, tobacco and fuels

4. Parking duty

5. Tourist duty

Evaluation of the current tax system by business (EBA)

• Overall tax burden is not reduced (96%)

• New rules of EPT administration is a positive change (49%)

• New SSC rules will not help legalize salary (87%)

• Changes for small business: 27% - negative, 30% -positive

http://www.eba.com.ua/uk/information-support/eba-news/important/item/31115-2015-2-11-1221

Questions

• Taxing more business or individuals?

• Taxing more profit, income or consumption?

• What should be the overall tax rate?

• How progressive should taxation be and for which taxes used?

• How many taxes should be there?

• Avoiding double taxation? (taxing dividends, charitable funds, excise on retail sales…)

Some additional rankings:

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Belarus CzechRepublic

Moldova Poland Romania SlovakRepublic

Turkey Ukraine

Ranks (higher mean worse)

starting a business enforcing contracts paying taxes CPI

Administering taxes

• Elimination of separate tax accounting for all but the largest firms, simplification for the largest firms

• Use of cash registers by small business since July 1st 2015

• VAT reports for all transactions, electronic reporting

• Enterprises fill over 10 documents for each tax

• [Unofficial] plans for additional tax and fines collection

Work of State Fiscal Service (SFS data)

2014 2 months 2015

# of tax inspections with settled results

33 613 (~2.8 thousand per month)

3 947 (~2 thousand per month)

Planned 5 104 (15%) 582 (15%)

Unplanned 28 509 (85%) 3 365 (85%)

Additional tax payments, UAH billion

7.96 0.93

From planned inspections3.52 (44%)

(~ UAH 690 thousand per inspection)

0.33 (35%)(~ UAH 563 thousand per

inspection)

From unplanned inspections

4.44 (56%)(~ UAH189 thousand per

inspection)

0.6 (65%)(~ UAH 179 thousand per

inspection)

Questions

• How to reduce time/cost of compliance? (are all those forms really needed?)

• How to reduce the number of tax inspections? (not with moratorium but permanently)

• How to develop the right motivation for taxpayers and tax inspectors? (carrots & sticks)

Simplified systemGroup Definition Tax rate

1Trade&servicesNo employeesAnnual income < UAH 300 thous.

Up to 10% of minimal salary per month

2Trade & services<10 employeesAnnual income < UAH 1,5 million

Up to 20% of minimal salary per month

3

Any number of workers, annual income <UAH 20 million (95% of enterprises, 30% of employment*)

2% of revenues (VAT payers)4% of revenues(VAT non-payers)

4 Agricultural business (>75%)0,45-1,35% of land/water price/value

*Ukrstat 2013 data

Simplified system tradeoffs

• Simple administering

• Less opportunities for tax inspectors to “nag” business

• Tax evasion

• Hard to grow for business (transfer to general system)

Should simplified system remain or should general system be simplified?