On August 2, the Global Business for Ukraine and member companies of the European Business Association met with Danylo Hetmantsev, Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, and Svitlana Vorobey, Deputy Minister of Finance of Ukraine, to discuss draft law No. 11416, which provides for an increase in rates of a number of taxes.
According to Danylo Hetmantsev, the total additional budget needs currently amount to 500 billion hryvnia due to increased defense spending. Part of this amount will be covered by increased borrowing in the form of government bonds, funds from de-shadowing, but the government plans to raise about 125 billion hryvnia through tax increases.
In turn, businesses understand the need to accumulate additional resources for defense needs during wartime. However, currently, the entire burden as a result of the proposed tax increase falls on honest businesses, which can have a devastating impact – up to and including investors making decisions to cease operations in Ukraine due to unpredictability and non-competitive conditions compared to the shadow sector.
In the opinion of the EBA’s members, until the government uses the potential of the shadow economy, it is difficult to understand additional taxes solely on white businesses. De-shadowing can release additional billions of hryvnias to the state budget. According to estimates of the Institute of Socio-Economic Transformation in 2023, potential losses of budget revenues from the shadow economy amount to about 400 billion hryvnia. In particular, the largest losses are from smuggling at the border – 80-150 billion hryvnia, salaries in envelopes – 70-110 billion hryvnia, counterfeit goods and illegal trade – 46-51 billion hryvnia, etc. Therefore, we would like to draw attention to the inexhaustible fiscal potential of the shadow economy. At the same time, we want to emphasize that without reforming customs, a full-fledged restart of the State Bureau of Investigations, and effective work of law enforcement agencies, an effective fight against the shadow economy is impossible.
Among other proposals for filling the state budget, the EBA’s experts highlight the following measures:
Increasing the tax burden on the gambling industry.
Introducing measures to combat schemes of evasion from payroll taxes through individual entrepreneurs, including salaries in envelopes. For example, increasing the single tax rate for the simplified taxation system and using the existing tools of control bodies to prevent business fragmentation schemes.
To avoid harming conscientious users of the simplified taxation system, it is worth considering the possibility of applying differentiated rates.
Strengthening the fight against gray schemes in e-commerce. Introduction of a fiscal lottery to stimulate the registration of all cash transactions through cash registers/electronic cash registers.
Studying the fiscal potential of revising untaxed limits for import operations (with goods up to 500 euros in accompanied baggage and up to 150 euros for postal and express shipments), which are currently not taxed with customs duty and VAT. Determining the most appropriate threshold for the value of untaxed operations and introducing a simplified/automated regime for declaration and taxation.
Reviewing the proposed mechanism for taxing the car market, in particular assessing the fiscal effect of taxing transactions in the used car segment.
Finally, if necessary, assess the effect of increasing the VAT rate, while not limiting yourself to assessing the purely fiscal effect, assess the impact on the Ukrainian economy in the medium and long term.
In addition, according to businesses, it is necessary to optimize government budget expenditures and review some government expenditures. We call for increased efficiency of government spending, which involves financing socially significant programs that contribute to economic recovery and strengthening defense capabilities.
The EBA separately noted and received consent that these measures should be temporary. At the same time, the participants of the discussion have differences regarding the term of introduction. The EBA proposed to introduce it for a fixed period of one year, and representatives of government agencies are inclined to introduce these measures until the end of martial law plus a certain fixed period.
In addition, the EBA’s companies voiced their comments and proposals regarding specific tax rates and explained how their increase could affect their companies and industries.
In particular, the EBA opposes a turnover tax. For some companies with low profitability, such a tax burden will be unbearable. A turnover tax will undermine the competitiveness of Ukrainian companies, both on international markets and in Ukraine, since 1% of the turnover will be applied at each stage of production. Business is categorically against a turnover tax in combination with corporate income tax and VAT for legal entities without any simplifications compared to the simplified system.
According to business calculations, for example, for mobile operators, a tax burden of +5% of turnover will actually lead to 12-13%. For car dealers, +15% will actually be 17% of turnover, which negates the feasibility of continuing the business of selling new cars. For jewelry, +30% of turnover completely nullifies the profitability of the business. It should be noted that both the relevant Verkhovna Rada Committee and the Ministry of Finance listened to the arguments of businesses and are inclined to understand the negative consequences and the need to exclude this initiative from the draft law.
The EBA expressed reservations about the mechanism for collecting advance payments for the retail trade of petroleum products for corporate income tax, in particular regarding the possibility of offsetting against future periods.
The EBA does not support an increase in taxes on legal salaries without effective combating schemes of tax evasion on salaries, including through the abuse of the simplified system.
We also object to granting local authorities the right to set an unlimited value of the minimum base for personal income tax.
We oppose the norms regarding inventory during inspections and within the terms set by auditors due to high corruption risks.
The introduction of new taxes, such as excise duty on sugary drinks, without a transition period can significantly harm companies. This will entail costs for setting up software solutions and affect long-term contracts at fixed prices. The tax rate is proposed to be three times higher than the European one. We propose to single out the excise duty on sugary drinks into a separate bill and to finalize it in detail with business representatives.
In addition, the EBA opposes changing the approaches to taxing Diia City residents, as this may undermine investor confidence in the state due to non-compliance with the obligation to maintain a stable tax regime and fixed tax rates for 25 years.
In a conversation with businesses, Svitlana Vorobey noted that raising taxes is a forced step, but it is the fastest way to raise funds for the state budget. The growth of defense expenditures entails the need to increase domestic tax and non-tax revenues. At the same time, the Ministry of Finance is open to discussions and changes to the proposed concept of increasing taxes within the framework of the unchanged amount of necessary additional tax revenues.
We are grateful to Danylo Hetmantsev and Svitlana Vorobey and their teams for their willingness to listen to businesses and openness to dialogue. The EBA has officially sent the voiced proposals and reservations. All additional calculations will be provided by the EBA in working mode. We hope that they will be taken into account and that together we will be able to develop a new bill that will help fill the budget and reduce the amount of the shadow economy without devastating consequences for the work of white businesses.
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