Ukraine tax reform proposals presented

The National Reform Council of Ukraine announced on Sept. 3 that it is beginning its review of three comprehensive proposals for tax reform. The key tax reform proposal comes from the Finance Ministry, which suggests boosting the enterprise profit tax to 20% (from 18% currently), the personal income tax to 20% (currently ranging between 15% to 20%), and cutting the payroll tax to 20% (from 41.5% currently). The VAT rate would remain unchanged at 20%. Natural gas production tax is planned to decrease from the current 55% (28% for wells deeper than 5 km) to 28% (14%) as of 4Q15. On top of that, MinFin suggests to eliminate VAT benefits for agricultural companies. The Ministry also suggested stricter criteria for simplifying the taxation system.

Another concept was submitted by the head of the parliamentary committee on tax and customs policy, Nina Yuzhanina, which proposes cuts in the VAT tax and enterprise profit tax to 15%, the personal income tax to 10% and the payroll tax to 20%. The third concept was developed by civil society representatives and proposes taxing that part of enterprise profit that has not been reinvested (at a 15% rate), elimination of VAT privileges and merging the personal income tax and payroll tax. 

Alexander Paraschiy: Comprehensive tax reform has been on the Finance Ministry’s agenda since the start of the year, but it had been concentrated primarily on the debt restructuring. Now that it has been performed, it looks like the authorities are making tax reform a priority.  Still it’s not clear what will come of these efforts.  Firstly, the differences between the three reform proposals are quite radical and the Finance Ministry has not looked cooperative in considering alternative points of view.

Secondly, the Finance Ministry is already anticipating budget collections to fall in 2016 owing to less transfers from the central bank and less import duties resulting from the launch of the free trade area with the EU. In this context, conducting radical tax reform bears a risk of declining tax revenue.

Finally, the Finance Ministry proposal insists on quite painful changes, like limiting application of simplified taxation and increased tax rates, which is a very risky move in the context of high tension in society.

It’s positive that the government is considering reforming Ukraine’s archaic, ineffective tax system, but the proposals have poor prospects for political support and implementation if the authorities don’t find ways to compensate potential losses in tax revenue, which could be heavy, even if they’re temporary.