New Tax Code Favors Rich

KIEV, Ukraine -- The government is promoting a revised tax code after earlier versions were met with strong opposition from business groups and other experts. This draft, however, is not likely to quell opposition – not even within Prime Minister Mykola Azarov's team.

A woman sells vegetables at a Kiev subway station. Average Ukrainians and small businesses seem to have the most to complain about in the new version of the tax code promoted by the government.

The top official in charge of reforms, Deputy Prime Minister Sergiy Tigipko, moved fast this week to distance himself from the latest incarnation, which business and other experts described as disappointing for average Ukrainians and small business.

Experts also say the tax measure can hardly be called “reformist” – if reform means a simplified tax system that relies on broad-based streams of revenue sources, including a progressive income tax.

The newer version – still open to revision before lawmakers vote in the fall – is seen as a step forward in some ways. It reduces, for instance, the inspection powers of tax authorities and gradually reduces some tax rates.

However, the latest plan does not introduce a property tax on residential and business property. In many nations, such a tax is an essential component to preventing speculative bubbles by stimulating real-estate turnover and development, as well as providing a reliable source of revenue for local governments.

Moreover, a proposed luxury tax – on yachts, expensive cars, etc – has been nixed. Additionally, the income tax remains at a flat 15 percent, after attempts to introduce a progressive rate of taxation – based on the ability to pay – were scuttled.

Even further, nothing is done to ease the burden of payroll taxes – now at 37 percent – that go to fund pensions and various social benefits.

Iryna Akimova, President Viktor Yanukovych’s top economic adviser in the administration, has promised to resolve the issue later through legislation that overhauls the nation’s pension system.

“There is an ongoing discussion about a single social tax… But we simply cannot afford to lower those taxes in the near future, as this would require [an immediate] pension reform and many other complex actions,” Akimova said.

She also said that a property tax might also be introduced later.

And longstanding tax avoidance agreements remain in place with Cyprus and other offshore tax havens, which critics say robs the Ukrainian nation of billions of dollars in revenue yearly.

Business got modestly welcome news in other areas.

The value-added tax will be gradually reduced to 17 percent in 2014 from the current 20 percent rate.

The current corporate profit tax, 25 percent, will be reduced to 20 percent, starting from 2014.

Business representatives also say the newer version of the proposed code eliminates some of the most aggressive inspection and pressure tactics from tax authorities.

Authorities, for instance, would no longer be able to search the premises of the company without permission of a court.

Fines and other payments assessed by inspectors must also be approved by court order before they can be collected.

While offering tax cuts to Ukraine’s biggest businesses, including Yanukovych’s oligarch backers, some say the latest draft tax code is unfriendly to those who struggle the most to make ends meet – small entrepreneurs.

Yaroslav Misyats, head of the Small and Mid-Sized Business Party, said that the monthly tax for entrepreneurs in several professions would rise from the current Hr 200 to Hr 600.

“This includes Internet providers, accountants, engineering and others,” Misyats said. Business will be forced even more into the “shadows,” he said referring to Ukraine’s already large shadow economy.

Only small business will enjoy tax holidays, promised by Yanukovych during his presidential campaign: entrepreneurs and companies that make less than $38,000 per year.

Despite the lowering of the corporate profit tax and retention of many tax breaks, big business might not be happy either.

“It is critical to return the currently existing regime of the consolidated payment of corporate profit taxes. The idea of separate assessment and payment by taxpayers’ subdivisions is targeted to collect more taxes from businesses and is very unfavorable,” said Kostyantyn Solyar, an associate of Asters law firm.

“Also among negative trends is that the recent version of the code does not contain a taxpayer’s right to offset its tax liabilities against relevant financial liabilities of the state budget to such taxpayer.”

Politics at play

The new version of the tax code also reveals political splits in the Yanukovych administration.

Tigipko, the deputy prime minister who finished third in the Jan. 17 presidential election and is considered a politically independent force, said the published version was not approved by him.

He said he is working on his own draft of the code, which is due on Aug. 5. Moreover, members of leading business advocacy groups, such as the American Chamber of Commerce in Ukraine and the European Business Association, said they were also still working closely with Tigipko on his version of the tax code.

“There are a lot of differences between the published version and our version…We are going to present ours to the government…and members of parliament will decide which document is better,” Tigipko said.

Some believe politics – more than genuine differences – is behind Tigipko’s move, especially ahead of local elections scheduled for Oct. 31. A rivalry appears to exist between Tigipko and Yanukovych’s ruling Party of Regions, which dominates all branches of government.

“Tigipko does not have real power and he had nothing to do with the first version of the tax code, created by Prime Minister Mykola Azarov,” political analyst Volodymyr Fesenko said. “His version of the code won’t be official.”

There is still time to make changes. Government will give the public another month to review the proposal and recommend changes.

“We will try to find a balance between creating good investment climate and necessity to collect taxes,” Azarov said.

Earlier versions were also criticized as favoring big business and giving too much power to inspectors, and the latest one does address some of that criticism.

“The text we currently see shows that the authorities are willing to hear the voice of business,” Slava Vlasov, partner at PriceWaterhouseCoopers, said.

But opponents say the tax code is not good for Ukraine.

Allies of former Prime Minister Yulia Tymoshenko are vowing to block the legislation in parliament. “We will not vote for that code as it will damage business and leave thousands unemployed,” said Tymoshenko bloc member Andriy Senchenko.

Source: Kyiv Post