Business Sense: By Taxing Foreigners At Higher Rate, Tax Code Will Hurt Investment

KIEV, Ukraine -- Jorge Zukoski says that a 30 percent income tax on foreigners is unjustified, compared to 15 percent for Ukrainians. The latest version of the draft tax code was published this week for public discussion.
Since the chorus of disapproval that met its first publication in June, some positive changes have been made. But a large number of discriminatory and unfavorable provisions remain, and more work is needed to create a fair and thoughtful final document that will likely be voted on in parliament in September.

The American Chamber of Commerce in Ukraine applauds the foresight of parliament in ensuring that this far-reaching piece of legislation is open for input from relevant stakeholders.

The chamber and the business community we represent has spent a lot of time preparing professional and detailed recommendations and targeted amendments that are geared to protecting the interest of the state as well as the private sector and the citizens of Ukraine.

Unfortunately, and despite assurances from the relevant parliamentary committee as well as the Cabinet of Ministers, a majority of these suggestions have not yet been incorporated into the latest version of the document.

Keep in mind that the original version of the draft tax code submitted to parliament on June 15 created such an outcry that the process of adoption was put on hold to solicit and accept input for the new comprehensive Tax Code.

Therefore, committees and working groups comprised of tax experts united under the chamber umbrella continue working on improving the quality and consistency of this piece of draft legislation within the framework of a working group on the draft tax code headed by Deputy Prime Minister Sergiy Tigipko, as well as with other relevant decision makers.

One of the primary focuses of the business community has been and will continue to be focused on ensuring equitable and equal treatment of all taxpayers. The latest version of the draft tax code no longer creates additional problems for taxpayers within the process of administration of taxes, but some outstanding issues remain rather restrictive.

An example of a positive improvement is a provision that foresees that a documentary check is conducted by tax authorities only by agreement with the taxpayer. This important change will significantly simplify doing business considering the historical number of tax audits experienced by the business community in the past.

Another positive sign is that the latest version of the draft tax code contains regulations that foresee a resolution in favor of the taxpayer, not regulatory bodies, in a case where there are contradictions within various legislative provisions.

At the same time, the foreign investment community remains concerned with the personal income taxation section, which foresees an unfriendly and discriminatory 30 percent income tax for foreign employees working in Ukraine, keeping in mind that the income tax rate for Ukrainian citizens stands at 15 percent.

This is not in line with international best practices and in some cases may contravene bilateral tax treaties. (Foreigners working in Ukraine will pay income tax at 15 percent on worldwide income if they declare themselves residents.)

This discriminatory taxation of professionals creates unfavorable conditions for recruiting new employees and retention of current expatriates and will adversely impact the business activity of many international companies operating in Ukraine.

The business community remains strongly committed to further promoting the necessity to balance the rights, obligations and accountability of taxpayers and the tax authorities.

More specifically, it is crucially important to introduce a provision into the draft tax code obliging authorities to be liable to taxpayers for failure to refund value-added tax or accurately execute legislatively prescribed acts on a timely basis.

Such practices are common around the globe and will bring Ukraine’s tax system in line with international best practices, helping to attract and retain investment.

The expert community, united under the chamber’s umbrella, continues its work on developing a well thought-through and viable final version of the draft tax Code, advocating for much-needed, comprehensive reform of the Ukrainian taxation system, promoting tax efficiency, fairness, neutrality as well as effective tax administration and enforcement, which are essential to increasing Ukraine’s competitiveness and helping to overcome the recession that the economy is experiencing and allowing the country to take advantage of global growth trends.

It is a big task and one that the business community is committed to getting right the first time.