Recently, a number of officials and deputies, fully justifying the statement of US President Ronald Reagan about the economic views of the authorities: “Everything that moves, tax. If it continues to move after that, regulate,” the initiative to return the tax system to pre-war rails was repeatedly voiced.
The policy of returning the ideology of aggressive tax collection, the covert and overt increase in the administrative and tax burden during the war, without any equivocation, was also relayed into Ukraine's international obligations - the December Memorandum with the IMF and the January Memorandum of Understanding with the EU as part of a new large-scale macro-financial assistance.
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Tightening clamped nuts.
The main trend of the end of 2022 - the beginning of 2023 was the return to the Big Stick Tax Policy (paying taxes from under the cudgel). Its victims have already become a reduced excise rate on fuel, VAT preferences for the IT industry. This should also include the return of the “poisoned” VAT administration system in the form of massive blocking of tax invoices (the October upgrade brought significant problems for every sixth taxpayer). Next in line is the complete lifting of the moratorium on tax audits, the curtailment of the single tax at a rate of 2% of income, the shrinking of the scope of the simplified system (as part of the fight against payroll tax evasion), the restart of the expanded fiscalization of small businesses and the abolition of the reduced 7% VAT rate on fuel.
The degree of determination of the economic authorities is also evidenced by the almost instantaneous appearance of a government bill implementing some of the listed “benefits” (project No. 8401 of 31. 01. 2023). Although the “age of high taxes” and tightening the screws are extremely bad signals for investors, employers, economically active citizens and the economy as a whole.
At the same time, one should not forget that Ukraine is in a war.. And we finance the entire military sphere with our taxes, because the financial assistance that comes to us in the form of grants and loans from the West and the progressive East, for political reasons, is used for any purpose other than military.
Therefore, the budget of the army is Ukrainian taxes, and they are not enough. It is understandable why the government is concerned about the increase in the budget. However, the path chosen for filling is wrong.
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Penalty for opening a company abroad.
In the intellectual vacuum of an aggressive tax policy towards business, at least single signals from the state about the desire to change something for the better are urgently needed. And this is not only about the sudden resignations of officials suspected of corruption from the ranks of the tax and customs services..
At the end of October 2022, the Verkhovna Rada registered under No. 8137 and started considering the draft law of Ukraine “On Amendments to the Tax Code of Ukraine on Improving the Taxation of Controlled Foreign Companies”. The so-called controlled foreign company rule (CFC rule) appeared in Ukraine back in 2019 as an element of our obligations under the OECD/G20 BEPS project (remember the ultra-toxic bill No. 1210) and has become a local narrative in the fight against offshore companies and oligarchs.
It would have remained so, but the invasion of the Russian Federation significantly changed the economic life of Ukrainians, a significant part of whom were forced to leave their homeland. In order to survive, thousands of them, without changing their Ukrainian residency, became owners of start-ups and small businesses there, at the same time being under the strict regulations of the CFC rule.. For example, just the fact that an ordinary Ukrainian fails to submit a notification to the tax authorities about opening a company abroad within 60 days entails a fine of UAH 805,200 (300 living wages for an able-bodied person). And still ahead are the duties of filing reports, calculating taxes, conducting an audit of CFCs and much more.
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Taxation of investments.
Another CFC problem is the negative impact of this rule on investments in Ukraine or, to be more precise, its separate subspecies - round tripping - sending funds abroad by residents, which then return to the country in the form of foreign direct investment (FDI). This phenomenon for many years, including due to raiding, corruption, imperfection of the judicial system that exists in our state, remains an important source of investment in the country. According to the NBU, in 2010-2021, the volume of foreign direct investment through round tripping reached $11.1 billion. United States, which accounts for a quarter of all FDI inflows to Ukraine. And it is these investments that the CFC rule from January 1, 2022 will tax at the level of a potential investor - an individual with a tax at a rate of 6.5 or 10.5%.
Thus, the CFC rule, being in peacetime just a burdensome element of tax administration, in wartime became a repressive mechanism in relation to relocated economically active Ukrainians who do not want to give up their country's residency, as well as a significant obstacle to the flow of investments into the country. It is the solution of the problems of reinvestment in Ukraine and its citizens abroad that is the main goal of the bill No. 8137.
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There is no way back.
It is unlikely that anyone doubts the assertion that a working recovering economy is vital for Ukraine. It's a matter of national survival. This means that it is not the time to return the tax and administrative pressure.. An attempt by officials to start hard “managing” the economy again is a gigantic mistake, next to which, let’s not forget, are corruption and inefficiency (unreformed customs and tax services, an outright failure of the Economic Security Bureau).
There are several other arguments against the return of the imperfect pre-war tax system:.
In war conditions, it is at least short-sighted to demand full compliance with the numerous and complex rules and procedures of tax legislation, and the current institution of confirmation of the impossibility of the payer to fulfill his tax obligations (Order of the Ministry of Finance dated 29. 07. 2022 #225) is ineffective.
A significant number of entrepreneurs and company officials are abroad or are internal refugees and are unable to fulfill their tax obligations in full, this also applies to employees of regulatory authorities. The state must begin to trust its citizens, at least during the war!
The economy is very weak (we lost 38-45% of GDP in 2022), and the policy of tightening the screws is wrong both in terms of social consequences and current processes - total uncertainty, double-digit inflation, infrastructural terror of the Russian Federation, which will lead to an even greater cooling of the formal.
Ukraine needs a simple and fair tax system that creates a comfortable environment for a quick economic recovery without scrutiny, pressure and interference. The old pre-war tax model does not meet these criteria.. Radical tax reform is inevitable.
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Read more articles by Vyacheslav Cherkashin at the link.