KIEV, Ukraine -- Since coming to power four months ago, President Viktor Yanukovych has promised to swiftly fix Ukraine’s ailing economy. But his all-powerful governing coalition may be tripping up in its first major test – an attempt at tax reform.
The business community is calling upon Ukraine’s government to shelve plans to adopt a new draft tax code in July, asking instead for the initiative to be put off until September. The tax plan, pushed by Prime Minister Mykola Azarov, is draconian and needs major revisions, business groups say.
Represented by the Chamber of Commerce in Ukraine and the European Business Association, top foreign and domestic investors see the document as a rushed and dangerous hodgepodge of new rules. The plan, they say, will not fix Ukraine’s messy and corrupt tax system – in which people who declare incomes honestly are punished with excessively high rates and others hide their profits and live in the shadows, depriving government of much-needed revenue.
The clear-cut message for Ukraine’s leadership is: The proposed tax code is unacceptable and could threaten jobs and businesses, partly by giving excessive powers to tax inspectors.
“If they adopt it very quickly without proper input from the relevant stakeholders, then we have an unacceptable mess that will not work for the business community or the country,” said Jorge Zukoski, president of the Chamber of Commerce in Ukraine. “It will be a step backwards, not forwards.”
On June 23, Azarov downplayed criticism of the 500-page tax code drafted by his government. He said his coalition, which controls parliament, should still proceed with plans to adopt it in early July.
However, he seemed to be contradicted the very same day by Yanukovych.
“I believe that the tax code in its current form is not balanced and requires a serious revision,” Yanukovych said on June 23. “The position is clear: the tax code should be adopted for industry, businessmen, and the people, rather than tax officers.”
The statement is a strong signal that Yanukovych is being responsive to the complaints from business community representatives, who warned that the proposal gives unchecked powers to tax authorities.
Many also fear it would not offer tax relief to small businesses that need it most, nor would it bring clarity to an existing system whose complexity fuels abuse and corruption.
Although the government gave no estimates, the proposed tax code seems to be driven by the state’s need to squeeze cash from as many taxpayers, individual and corporate, as possible.
The proposal allows tax inspectors to immediately levy and collect fines for violations. “This scares us,” said one business community leader. A company can challenge the assessment, but won’t get its money back until it wins the dispute in court, he said.
“This differs dramatically from the promises given by government to ease the taxation system,” said Volodymyr Kotenko, head of the tax committee at the European Business Association.
Also, the new tax code proposes removing a six-month transition period for taxpayers to adjust to new rules adopted. “As businesses and investors, we need predictability and equality in tax administration,” Zukoski said. “But this would bring the opposite.”
Oleksandr Zholud, an economist at the International Centre for Policy Studies, a Kyiv-based think tank, said the proposed tax changes could also give tax officials access to confidential bank information and the complete financial history of a company.
“God knows what this confidential information will be used for, given the high level of corruption seen with tax inspectors,” Zholud said.
But Azarov, who headed the tax administration with an iron fist under the authoritarian 1994-2005 presidency of Leonid Kuchma, continues trying to sell his draft tax code as one that will offer relief for businesses and broaden the tax base.
In defending his position, he points to plans to reduce the value added tax from the current 20 percent rate to 17 percent. The profit tax rate will be reduced, meanwhile, from 25 percent to 20 percent.
Some experts see the proposed tax cuts as good for big business, including the business oligarchs who back Yanukovych’s coalition. But they see little in relief for small businesses struggling to survive.
“The most important thing for many businesses is not the tax itself, but how easy and transparent it is to figure how much you should pay and how you can do that fast and simple,” said Anton Stefaniv, who runs a small printing business in Kyiv.
While running for president, Yanukovych promised tax holidays for small businesses. However, the proposed tax code would grant such a privilege only to the smallest of businesses – entrepreneurs who make less than $38,000 per year in revenues and businesses with less than $12,500 per year in revenue.
“The government should be focusing more on tax efficiency in collections, not just in widening the base dramatically,” Zukoski said. “One place to start if you want to broaden the base with tax cuts is to reduce the hefty social taxes on salaries.”
Tax experts said the proposed tax code also poses bad news for foreigners and many professionals – such as accountants, auditors and others – not allowing them to pay a single small and flat monthly tax earmarked for small business entrepreneurs.
Software programmer Oleksandr Shuvalov, who currently pays the single flat monthly tax, is one of many who will be affected. He fears that such a change will simply push many workers into the grey economy, which is where up to half of the nation’s economic activity takes place.
“My guess is that more companies will suggest that their employees work unofficially,” Shuvalov said.
So, what needs to be revised?
Experts want the government to introduce a tax code that introduces property taxes, curbs powers of tax authorities and simplifies the byzantine procedures.
“They obviously should decrease fines, which they suggest raising 10 times,” Zholud said. “For example, a minimum fine for a minor mistake they want to increase to Hr 1,700 (about $200), which is unacceptable.”
Yaroslav Misyats, head of the Small and Mid-Sized Business Party, said tax officials should bear responsibility for legal violations and negligence, and suffer fines as well.
Other say the revenue limit for business and entrepreneurs to qualify for tax holidays should be raised to a maximum of $70,000.
Among other suggestions are reductions in official payroll taxes that the government collects from employers. The current rate of payroll tax is 36 percent. That money goes to the pension fund, and the high rate prompts employers to not declare their workforce as official employees to evade the taxes.
Some experts believe that lower payroll taxes will encourage more employers to make their employees official and pay government taxes.