Ukraine official proposes cutting payroll tax in half

Ihor Bilous, the head of the State Fiscal Service (formerly the Revenue and Fees Ministry), declared his intention to cut the payroll tax by more than half to 15% from 34-37% currently, according to the UNIAN news agency. “It is a reduction in rates, and it is a significant reduction – more than twofold. This rate will be less than 15%. We want totally legalize all salaries, but on the other hand, we want to make any violation subject to criminal prosecution,” Bilous said.

Alexander Paraschiy: Authorities have talked about the need to reduce substantially the payroll tax for many years. In fact, the size of this tax (34-37%, depending on type of employment) is a key incentives for businesses to search for tax evasion opportunities. Various proposals have been discussed but all of them faced the problem of a dramatic drop in Pension Fund revenue (estimated at UAH 80 bln, at minimum). This time, authorities are proposing a unique approach in which the tax cut is applied only to those enterprises that agree to promptly legalize their wage bill without reducing their payroll tax burden. In turn, official salaries would have to be significantly boosted in order to meet the lower tax rate.

It is difficult to predict the reaction of businesses to this innovative idea but it has a chance for success. Paying salaries in envelopes also has costs and their legalization, without higher tax payments, should interest companies , particularly in helping to cut down on bribes. The major risk for such initiatives is their implementation.