Ukraine parliament to consider alternative tax reform proposal

Ukraine’s taxes and customs policy parliamentary committee submitted a bill for parliament’s review a tax reform draft bill. The draft is not available to read on the parliament’s web site but it has been previously presented to the public by Nina Yuzhanina, the document’s author and head of the tax and customs committee. Her version calls for cutting VAT rates to 15% from 20% currently, enterprise profit tax rates to 15% from 18% currently, personal income tax rates to 10% from 15%-20% currently and payroll tax rates to 20% from nearly 37%. Also the proposed tax reform envisages a significant revision of the State Fiscal Service’s functions and expansion of the use of electronic services to process tax submissions. The Finance Ministry estimated the losses from Yuzhanina’s proposal at close to UAH 150-200 bln.

IMF Resident Representative in Ukraine Jerome Vacher warned Yuzhanina on Oct. 21 on the potential consequences of submitting her radical tax reform proposal for review, promising to issue a statement that the IMF mission does not support radical reform proposals, according to the Interfax-Ukraine news agency.

In early September, the Finance Ministry presented its tax reform proposal (the so-called “all at 20” concept), which calls for raising the enterprise profit tax to 20% from 18%, hiking the personal income tax to 20 percent from the current range of 15% to 20%, and cutting the payroll tax to 20% from nearly 37% currently. On Oct. 16, Finance Minister Natalie Jaresko reported her reform proposal will cost nearly UAH 60 bln in state collections, inviting the public to suggest potential spending cuts. 

Alexander Paraschiy: The submission of the radical tax reform for parliament’s review puts Ukraine in a very uncomfortable position after Vacher’s harsh warning. Usually, the IMF does not intervene that openly into domestic policymaking and mostly observes the actions of authorities from the sidelines. If the MinFin plan can’t cover revenue losses in its proposal, then that task will be even more difficult for the Yuzhanina proposal. Against this backdrop, we anticipate a tough discussion between the IMF and the initiators of the radical reform with next tranche delayed till the story comes to its end.