The Ukrainian government seems to have finally opted for an early easing of the tax burden for this country’s citizens. Prime Minister Anatoly Kinakh suddenly admitted Friday before last on ICTV television that the existing taxes on the incomes of natural persons are among the heaviest in the world. Scarce are places on the globe where a 30% tax is imposed on a $200 remuneration. Moreover, almost nobody in Ukraine officially declares over $300, although it is common knowledge that this is the monthly salary of an average manager of any successful company in Kyiv, Donetsk, Odesa, or Dnipropetrovsk. So-called black money is paid as part of a salary in practically all Ukrainian small and medium businesses as well as in the absolute majority of big companies and banks. Does this mean they are all part of something criminal? The current ministers seem to be of a different opinion, for many of them were recruited to the government from business.
The cabinet radically changed its attitude toward the idea of tax reduction only after the replacement of the minister of finance. Former Minister Ihor Mitiukov had categorically opposed abrupt cuts of any, including income-related, taxes for fear of a budget crisis. Ihor Yushko, who came to lead the Ministry of Finance six months ago, has a more radical opinion on this. In his view, tax cuts will only help legalize huge resources and in time inevitably boost budget revenues. “The state should invite enterprises and individuals to step out of the shadow and work openly,” says Mr. Yushko who, before being appointed minister, was governor of the First Ukrainian International Bank (FUIB). The FUIB predominantly caters to exporters and big wholesale traders, and the former banker knows what he is talking about because he is aware of the business practice of his bank’s clients.
The Donbas born and bred minister of finance is most likely to win the support of his compatriots in parliament. Donetsk Governor Viktor Yanukovych said recently that he intends to work to ease tax burden on the wage fund. Under the pressure of well-organized local trade unions, Donbas steel mills and coal mines are increasingly forced to raise wages, which only exacerbates the problem of taxation. The Party of the Regions, representing the interests of the Eastern Ukrainian business elite in the leading parliamentary faction United Ukraine, is almost certain to make Verkhovna Rada consider this question on a priority basis. Other centrist parties that had made their way to the parliament also consider tax reform as a top priority. Taking into account that Viktor Yushchenko advocated income tax cuts when he still was prime minister, we can conclude that parliament stands a good chance to reduce the income tax as early as this year if, of course, Our Ukraine does not give in to political revolutionary opportunism.
Moreover, a great deal will depend on the attitude of President Leonid Kuchma and State Tax Administration Director Mykola Azarov. They both cautiously support the idea of tax cuts, considering, though, that measures should be taken to make up for the likely budgetary losses. With the individual income tax accounting for a little more than 15% of total state revenues, an abrupt reduction could present a problem for the government. Still the experience of Russia shows that the budget will be running a small risk. After halving the income tax to 13%, our northern neighbor earned one third more budget revenue. Vice Premier Volodymyr Semynozhenko thinks, on the basis of Russian experience, that a 10% individual income tax cut could produce a still greater effect. For in this case practically all this country’s enterprises will get an incentive to legalize their incomes. The government estimates that the shadow sector now accounts for 40 to 65% of the Ukrainian economy.
It looks somewhat strange, against the backdrop of governmental intentions, that the Tax Administration should have launched a campaign to spot illegal individual incomes. Mr. Azarov insists that strict control be exercised over individual purchases worth over UAH 10,000. Massive attempts to catch individuals hiding their incomes at the current stage of the tax reform can only scare off capital holders now waiting for a suitable moment to come out of the shadow. In a way, tax collectors have to intensify their checks because of the arrival in Kyiv of an FATF (Financial Action Task Force, an international organization to combat money laundering) mission. But the results of this mission’s work suggest that it is also going to recommend a tax reform. Tax cuts could actually become the most powerful instrument to combat money laundering.
Most Ukrainian industrial managers are clearly tired of cheating the state, being aware that they are cheating themselves in the long run. The latest statements of top cabinet officials inspire hope that basic tax rates will be reduced well before the next year’s draft state budget is deliberated. These hopes apply, first of all, to the individual income tax, now the most illegal of all. The State Statistics Committee claims the average pay of a Ukrainian is $62 today. This official statistical claim could well be considered incorrect, for the economy has been massively infected with the virus of converted wages. But if the income tax remains intact, enterprises will remain unlikely to officially report any sizable rises in their employees’ pay.
PS. The Cabinet of Ministers of Ukraine and Presidential Administration have officially presented a project to reduce Ukrainian income taxes. It is proposed to impose 10% taxes on salaries less than 400 hryvnias, 15% – up to 1,000 hryvnias, and 20% for over 1,000 hryvnias. “We hope that as a result of tax reduction, the citizens’ welfare will increase,” Head of the Presidential Administration Economy Department Pavlo Haidutsky stated. In his view, Verkhovna Rada will be able to pass a law to this effect as early as this year.
