A tale of two taxpayers
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.