August 4, 2010, the Ministry of Finance of Ukraine (MFU) launched the draft Tax Code that had been previously made public for a nationwide discussion. The document had been assiduously prepared, the MFU and the State Tax Administration of Ukraine (DPAU) assured. Well, it certainly needed work, considering the business community’s stormy response to certain clauses and criticism of the draft bill —adopted [by the Verkhovna Rada] in the first reading, by the head of state.
The time frame of the nationwide discussion, however, turned out rather tight as the government had to summarize all proposals and submit the text to parliament not later than Aug. 5, 2010 (proposals and remarks pertaining to the draft code were to be forwarded to gromada@sta.gov.ua, the DPAU informed).
One can single out several clear differences in the upgraded draft. Above all, the clauses providing for the real estate tax and from individual incomes from the placement of available funds on deposit accounts are no longer there, ditto the one about the progressive personal income tax scale previously filed by the government. The uniform tax rate is kept at 15 percent. Nor does the draft code exempt construction works and sales transactions on the primary housing market from the VAT (this exemption was proposed by the Ministry of Regional Development and Construction of Ukraine). Instead, the draft code proposes the tourist tax to be levied on tourists by hotels, holiday camps, resorts (when such tourists are allocated homes or apartments owned or leased [by these resorts], as well as by entities authorized to collect this tax by the local councils. The tax rate is proposed at 0.5-1.0 percent of the cost of such temporary home or lodge less the cost of food, domestic services, and telephone bills. The proceeds would be forwarded to the local budgets, to be used for the development of the tourist infrastructure of a given territorial community.
Among other things, the draft code envisages reducing the VAT rate — from 20 to 17 percent, as of Jan. 1, 2014 (19 percent as of Jan. 1, 2012 and 18 percent as Jan. 1, 2013). Ditto the company income tax: from 25 to 20 percent, as of Jan. 1, 2014 (24 percent as of Jan. 1, 2012 and 22 percent as of Jan. 1, 2013).
President Viktor Yanukovych of Ukraine believes that passing this tax code bill will make Ukraine “a state with a comprehensible tax policy.”
“I regard the fact that Ukraine has spent 19 years without a tax code as a very serious shortcoming, just as I believe that our decision to have this tax code enacted in the shortest possible period of time will have its big pluses for the economy, business, industries, and investors,” President Yanukovych said at a press conference in Simferopol. The Cabinet is also counting on the Verkhovna Rada to pass the tax code bill quickly, so as to be able to draft the 2010 budget program using the new tax rules. “The new tax rules must serve to stimulate the real sector of the economy and make doing business easier,” says First Deputy Prime Minister Andrii Kliuiev, explaining the role of the tax code in the budgetary process.
Meanwhile, after the draft tax code was made public, something embarrassing happened. The document submitted for nationwide discussion had been drawn up by the MFU and DPAU, but without being coordinated with Serhii Tihipko, Deputy Prime Minister for Economic Affairs. Tihipko’s comment was simply that the Cabinet is considering two drafts of the tax code, the first one being the brainchild of the Finance Ministry and the State Tax Administration of Ukraine, and the second one being worked upon by Tihipko’s task force, made up of Ukrainian businesspeople. According to the press service of the Sylna Ukraina (Strong Ukraine) Party, the second version of the draft tax code will be made public in a couple of days. [This feature was carried by Den on Aug. 5, 2010. – Ed.]
Tihipko summed up his attitude by saying, “None of the [draft] codes has been [made available to be] processed by this government. As to what you see in print (i.e., Uriadovy kurier [Ukraine’s official publication, containing the final resolutions made by the Parliament, Executive Orders, and Cabinet decisions]. – Authors), I personally believe that there are a number of statements that have to be corrected, specifically [ones that can] improve administration. We will keep working and I’m sure our MPs will pass a good tax code bill.”
The Day asked its experts to comment on the business community’s attitude to this draft Tax Code, whether it needs further upgrading.
COMMENTARIES
REAL ESTATE TAX IS NECESSARY
Leonid RUBANENKO, president, Association of Tax Consultants of Ukraine:
“At long last Ukrainian society can see a single document, instead of a pile of directives. Our experts took part in a rewriting of Chapter 2, about the management of taxes and duties [Ukraine’s legislation remains heavily influenced by the Soviet heritage, including the legalese which is often very hard to translate; in this case “taxes and duties” are actually taxes, considering that since the proclamation of Ukraine’s independence, every single law has been written with an eye to feathering the bureaucrat’s nest; hence the ambiguous, often misleading terminology, mismanagement, abuses of office, rampant corruption, etc. – Ed.] Quite a few of our proposals have been taken into account, including the income tax proviso. After long debates with the MFU [our experts] succeeded in [setting forth the formula] providing for this tax to be levied on companies with branches/offices. Also, this draft Tax Code authorizes the companies to sell their greenhouse emission quotas, in keeping with the Kyoto Protocol. Some work can still be done. Personally, I would reinstate the real estate tax. Experts are also divided on the tourist tax I think this tax shouldn’t be levied on people using hotel accommodations while on business trips. This tax must be levied on genuine tourists.”
DEPOSIT ACCOUNT TAX: UNTIMELY
Stanislav ARZHEVITIN, first deputy chairman, VR Finance and Banking Committee:
“I wholeheartedly support withdrawing the clause about the individual deposit account income tax from the draft Tax Code. I believe that Ukraine isn’t ready for such innovations, although it’s true that other countries have this kind of tax. We shouldn’t snatch pieces from the wealth of world banking experience. We should first try to determine whether our society is prepared [to partake in this experience], analyze our individual bank deposit accumulation statistics, how much [in terms of interest rate] the state can guarantee these depositors, and so on. In fact, instituting this kind of tax carries yet another risk. Data concerning all depositors had to be made accessible to tax inspectors. Considering that anyone in Ukraine can pay several hundred hryvnias for a DVD with any databases, you can try to imagine the social consequences of such data falling into the wrong hands.”
TAX REFORM: STILL TO BE CARRIED OUT
Tetiana ZATSERKOVNA, member of the Entrepreneurs’ Council at the Cabinet of Ministers of Ukraine:
“Our Council has submitted numerous proposals, but they’ve adopted only those that would bring the clauses of this draft Tax Code closer to the existing taxation procedures. They’ve made a few cosmetic changes to certain clauses of the first draft Tax Code. In fact, no reform has taken place. Our businesspeople expected the Tax Code to provide for simplified tax management procedures — for this would result in lesser fines/penalties, fewer inspections [by Ukraine’s numerous regulatory and oversight authorities] and easier inspection schedules. The original draft Tax Code was drawn up with an eye to retaining the previous tax base — in other words, keeping all taxes intact. Why was it possible? I think that after they’d started working on the draft, the government would often fail to send down clearly formulated tasks that, when solved, would go upstairs. I agree that [the new draft Tax Code] contains provisos that make doing business [in Ukraine] easier. For example, the income tax and accounting procedures appear to have been brought closer together, and the clause about tax authorities being within their right to write off a sum on the bank account of a business entity already indebted to the [central] budget is no longer there. Still, the business community expected more.”
JOINT LIABILITY FOR BUSINESSES AND TAX AUTHORITIES
Viacheslav VLASOV, director, Tax and Legal Services, PricewaterhouseCoopers Ukraine:
“The draft Tax Code, which was made public, is a compilation using the document that was previously adopted by the Ukrainian Parliament, but taking into account a great many corrections submitted by members of the business community. The positive aspect is that this bill doesn’t aggravate the tax-management procedures. I would single out several serious concessions made for the benefit of our businesspeople.
“First, the MFU has agreed that the [newly established] procedure of checking business entities’ books without harassing them with on-the-spot inspections (whereby a businessman visits the local tax authority, bringing with him tons of papers, whereupon these papers are examined and the tax authority invariably dispatches a team to inspect his business) must be carried out only with the taxpayer’s knowledge and consent. This move will, of course, make doing business in Ukraine easier, considering that the bureaucratic menu boasts desk and visiting documentary audits. Second, [this draft] retains the clause about the procedures of adopting and enacting tax laws. I mean that no innovative tax legislative initiative can be implemented earlier than six months from the start of the next calendar year. Another positive aspect is that, should one law contradict another the tax authorities will apply the rule that is in the interests of the taxpayer, not the controlling authorities. In fact, the business community hopes to introduce the tax authority’s responsibility clause (as in the case of belated VAT refunds).
SIMPLIFIED TAX PROCEDURES: UPGRADING IN ORDER
Viacheslav BYKOVETS, first vice president, Small, Medium, Privatized Business Owners’ Association of Ukraine:
“This draft Tax Code lacks a number of proposals that were submitted by our business community. We believe that the model of simplified tax and accounting system for small businesses has to be changed. When working on the draft code, we opposed the narrowing of the list of lines of business being drawn up for this simplified model. Too bad they didn’t listen to us. Besides, most business suggested raising the maximum amount of revenues of individual payers of the uniform tax to one million hryvnias a year. Instead, we have 500,000 hryvnias in the draft code. The matter of responsibility of the tax authorities, for example, in case of breaching the deadlines of VAT refund inspections remains unresolved. The original draft, adopted by parliament in the first reading, contained a great many issues concerning tax management that raised protests in the business community. We succeeded in deleting from this draft code clauses and limiting the right of the tax authorities to inspect the homes of individual taxpayers, use equipment such as photo, video or audio recording devices, question individual taxpayers, apply tax pledge to the individual taxpayer’s property in the course of appellate proceedings involving the tax administration, administrative seizure, and so on. The amount of fines levied in retaliation for a repeated belated tax return or failure to submit it (during the same year) has also been decreased.”
INCOME TAX FOR NONRESIDENTS HAS TO BE REGULATED
Anna DEREVIANKO, executive director, European Business Association:
“This draft code is better than the previous one. There are no clauses providing for the tax guarantee that was so actively opposed by the business community. This is definitely a step forward, considering that the tax guarantee in the form of a bank guarantee would mean discrimination against the taxpayers who are unable to receive a bank guarantee compared to the solvent taxpayers, and would signify a breach of the principle of equality before the law. Also, the positive changes to the list of businesses exempted from the simplified taxation procedures under the previous draft Tax Code — I mean the absence in the new list of services by Internet providers, activities in the sphere of information and foreign trade. This is a positive aspect from the standpoint of Ukraine’s IT industry. There are, however, negative aspects. For example, the new clause whereby the investment losses sustained by individual payers of the income tax as of Jan. 1, the date of enactment of the Tax Code, will not be taken into account when assessing the investment re-venues, starting with the results during that year. Considering this new draft under study, our Association’s proposals about the balanced responsibility of the taxpayers and the state, settling the problem of the value added tax, export of services, clear-cut regulation of the income tax levied on the nonresidents, and other problems, remain topical.
DRAFT CODE TAKES INTO ACCOUNT BUSINESS INTERESTS IN MOST CASES
Ruslan ILLICHEV, director general, Employers’ Federation of Ukraine:
“The FRU, in collaboration with the Employers’ General Representative Authority, started working on the draft Tax Code in mid-May. If one compares the first and the second draft, published by the Uriadovy kurier on Aug. 3, the second one is a substantially upgraded document which mostly takes into account business interests. The Employers have submitted a total of 175 proposals for the draft Tax Code to the MFU, including one limiting the tax authorities’ right to inspect office and homes, with which the MFU conceptually concurred. Also, the clauses providing for time study and interviews of [corporate taxpayers’] staff were deleted and the amount of penalties for tax evasion was adjusted. The Employers’ suggestions concerning speedy amortization methods, consolidated tax for detached subdivisions, taxation procedures for foreign exchange transactions that have been harmonized with regard to accounting procedures — counting the costs of items listed in favor of the non-profit organizations in the amount of 2-5 percent was also considered.
“The MFU, regrettably, didn’t support the proposals about indirect taxation methods, determination of the time frame of the ‘connected person,’ ‘location of businesses,’ ‘providing of services,’ procedures of making changes to tax reports, tax clarifications, appeals procedures, balancing the responsibility of the state and the taxpayer — particularly with regard to timely VAT refunds. The MFU didn’t discard the usage by taxpayers of tax accounting differences and didn’t revise the procedures of taxation of consignment transactions and royalties, automatic VAT refunds, reductions in the fiscal powers vested in the tax authorities in the course of inspections, or tax remissions for certain industries, and so on.
“The Employers’ Federation of Ukraine will shortly organize a discussion of this draft Tax Code by the regional employers’ organizations. The result will be summarized proposals, allowing for those left unattended by the MFU, including an upgraded tax management, reduction of budget arrears of VAT, and significant reduction in the grounds of documentary checks. We will once again forward our proposals to the Ministry of Finance of Ukraine in the nearest future and insist on their being reflected in the final draft of the Tax Code.”
