A tale of two tax­pay­ers

Kyiv Post Legal Quarterly - - Contents - By Olena Gon­charova gon­charova@kyiv­post.com

Tax fairness is a key prin­ci­ple of Fi­nance Min­is­ter Natalie Jaresko’s pro­posed tax plan, which seeks to shift the bur­den from some of the poor­est to the wealth­i­est. She has noted that teach­ers to­day pay a 20 per­cent in­come tax on their mea­ger $170 monthly salaries while lawyers earn­ing $4,000 pay only 4.5 per­cent – all be­cause the teacher is an of­fi­cial em­ployee and the lawyer is an in­de­pen­dent en­tre­pre­neur.

Nar­row­ing the tax gap, thus, is a much needed area of com­pro­mise, ac­cord­ing to the Fi­nance Min­istry. “We need sweep­ing re­forms that will de­crease taxes for those who really need it,” Jaresko told par­lia­ment dur­ing an emer­gency ses­sion on Dec. 17. Tax pref­er­ences are to be slashed as well. Mea­sures would af­fect busi­ness own­ers who em­ploy in­de­pen­dent con­trac­tors whom tax col­lec­tors clas­sify and reg­is­ter as “pri­vate en­trepreneurs.” They ben­e­fit from a sim­pli­fied tax sys­tem. Jaresko aims to re­duce the num­ber of ser­vice providers who ben­e­fit from the sys­tem and raise the rates for those who use it by re­mov­ing in­cen­tives.

But her vi­sion didn’t re­ceive a warm wel­come in par­lia­ment. Prime Min­is­ter Arseniy Yat­senyuk said the gov­ern­ment will take into con­sid­er­a­tion par­lia­ment’s feed­back to im­prove the bill. “We will fin­ish the bud­get and adopt it to­gether,” Yat­senyuk promised. Un­til that hap­pens, the sim­pli­fied tax sys­tem re­mains in place. The other tax cat­e­gories are the 20 per­cent value added tax, cor­po­rate in­come tax and per­sonal in­come tax. There’s also the so­cial se­cu­rity con­tri­bu­tion.

Small busi­ness can reg­is­ter as sin­gle tax­pay­ers if they don’t make more than Hr 20 mil­lion a year. This tax was first in­tro­duced in 1998 to help small- and medium-sized busi­nesses be­cause they just have to pay a 4-per­cent en­tre­pre­neur­ial tax. Big busi­nesses have abused this mea­sure though.

There are four groups of sin­gle tax­pay­ers de­pend­ing on their rev­enue and size of work­force. Those who reg­is­ter as pri­vate en­trepreneurs avoid pay­ing VAT, cor­po­rate and per­sonal in­come tax. The new tax code pro­poses to merge the groups. They are: Group A – in­di­vid­ual providers of goods and ser­vices who do not hire help. They op­er­ate only on mar­kets and/or pro­vide con­sumer ser­vices to the pub­lic. Their yearly rev­enue does not ex­ceed Hr 300,000.

Group B – in­di­vid­ual en­trepreneurs with up to 10 hired work­ers and an­nual rev­enue of up to Hr 2 mil­lion.

Group C – agri­cul­tural pro­duc­ers whose share of pro­duc­tion doesn’t ex­ceed 75 per­cent of the pre­vi­ous fis­cal year’s vol­ume. The tax rate for them re­mains at the level of the mon­e­tary as­sess­ment of one hectare of land and their an­nual rev­enue does not ex­ceed Hr 2 mil­lion.

Start­ing in 2016, all pri­vate en­trepreneurs in group B will pay a 5.7 per­cent tax rate. This rate will not change the fol­low­ing year, while in 2018 they are ex­pected to pay 13.3 per­cent and up to 20.9 in 2019. Le­gal en­ti­ties and those pri­vate en­trepreneurs whose rev­enue ex­ceed Hr 2 mil­lion will no longer ben­e­fit from the sim­pli­fied tax sys­tem if the new tax code is ap­proved.

In 2014, the num­ber of pri­vate en­trepreneurs whose rev­enue ex­ceeded Hr 2 mil­lion were 5,667 or 0.6 per­cent of all sin­gle tax pay­ers.

Ac­cord­ing to ex­perts, un­der the new sys­tem more tax­pay­ers will mi­grate to­ward the gen­eral tax­a­tion sys­tem, take many busi­nesses out of the shadow and in­crease bud­get rev­enues. Still it’s too early to lift the sim­pli­fied tax sys­tem.

Volodymyr Kotenko, head of tax and le­gal ser­vices in Ukraine for Ernst & Young and chair­man of the tax com­mit­tee at the Euro­pean Busi­ness As­so­ci­a­tion, be­lieves the aim of the new tax leg­is­la­tion is to re­vive the com­pet­i­tive­ness and bal­ance be­tween small and medi­um­sized busi­nesses on the one hand and big busi­ness on the other.

The big­gest prob­lem, ac­cord­ing to Kotenko, is bad tim­ing – the pro­posed changes should have been in­tro­duced in par­lia­ment and to the busi­ness com­mu­nity at least six months be­fore the vote.

“Peo­ple need time to ad­just ev­ery­thing to the new tax code, understand the specifics of ac­count­ing re­ports they will need to file,” Kotenko told the Kyiv Post, adding that it’s a cru­cial as­pect for those busi­nesses who don’t evade taxes. Cal­cu­lat­ing taxes would be­come com­pli­cated, ac­cord­ing to Kotenko. Iryna Kuz­ina, at­tor­ney and head of the Kharkiv of­fice of Ilya­shev & Part­ners Law Firm, agrees that the ac­count­ing be­comes more dif­fi­cult.

“The new code will sig­nif­i­cantly in­crease the tax bur­den for em­ploy­ers with low ex­pen­di­tures. Some of them could take ad­van­tage of ‘in­flat­ing’ ex­penses,” Kuz­ina said. Ac­cord­ing to her, the newly pro­posed leg­is­la­tion would not be­come “eas­ier” as the min­istry claims it, be­cause the pri­vate en­trepreneurs should keep their record of ex­penses, and prove their fea­si­bil­ity dur­ing a tax in­spec­tion.

Kotenko of Ernst & Young is cer­tain the sim­pli­fied tax sys­tem should be kept, but it’s really im­por­tant to “de­crease the num­ber of those (le­gal en­ti­ties) who should not use the sys­tem.”

“First of all, the min­istry should work out clear mech­a­nisms to con­trol non-tax­able funds out­flow, then the ques­tion of tax rates won’t be that painful for busi­ness,” Kotenko said.

Lo­cal en­trepreneurs rally in Kharkiv on Dec. 18, call­ing on gov­ern­ment not to raise tax rates to 5.7 per­cent next year, as en­vi­sioned by Fi­nance Min­is­ter Natalie Jaresko’s pro­posal. (UNIAN)

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