concept for reforming the tax system of ukraine

CONCEPT

For reforming the tax system

of Ukraine

Cutting taxes and fees

Current taxation system:

22

Proposition:

9


Abolished:

Fee for certain types of entrepreneur activity (currently paid by 123 000 subjects)

Fee as a surcharge for the natural gas to be paid by consumers of all types of ownership

Rent for transporting oil and its by-products via main pipelines and oil networks, transit transporting gas and ammonia through the territory of Ukraine

Parking fee for vehicles

Tourism tax

Fee for viticulture, horticulture and hop growing


Transformation:Excise tax

Excise taxFee for primary registration of vehiclesEnvironmental tax (from fuel)Fee as a surcharge to the existing tariff for electricity and heating except electricity generated by cogeneration plants

Environmental tax (except for fuel)Environmental tax

Fee for specialized use of forest resource

Payment for use of natural resources

Rental feeFee for use of radio frequency resource of Ukraine

Fee for special use of water

Tax on real-estate except for land propertyReal-estate tax

Payment for land

Single taxSingle tax

Fixed agricultural tax


Conversion of taxes from national to local:

Real-estate tax

Fixed agricultural tax

Reform of corporate profit tax

Single tax based on standard financial reportsTaxation basis: financial result defined according to standard financial reports, adjusted for a limited number of tax differences.Number of taxable differences reduces from 49 to 3:

Depreciation Forming reserves Financial operations (securities transactions, interest cost)

Including differences regarding: expenses for education, repair, business trips etc. to be abolished

Reforming of agrarian sector

90.2%9.8%

remain under special regime

transfer to general system13.5 thd

1.5 thd

47.7%

52.3%

96.6%

3.4%

remain under special regime

transfer to general system

45.9 thd

1.6 thd

criterion 1:Annual amount of

earnings under UAH 20 mln

criterion 2:Farmland area under

ha 3 thd

Area proportionQuantity proportion

Quantity proportion Earnings proportion

67.7%32.3%

CONCEPT

for reformingwage tax

in Ukraine

Malta

Bulgaria

UK

Portugal

Ireland

Cyprus

Croatia

Romania

Lithuania

Slovakia

Luxembourg

Latvia

Spain

Poland

Danmark

Estonia

Slovenia

Germany

Greece

Netherlands

Sweden

Czech Republic

France

Hungary

Finland

Austria

Belgium

Italy

Ukraine

Euro zone

EU-28

23.3

24.5

25.2

25.4

28.7

28.8

29.2

30.4

31.9

32.3

32.9

33

33.5

33.9

34.4

35

35.6

37.8

38

38.5

38.6

38.8

39.5

39.8

40.1

41.5

42.8

42.8

54.538.5

36.1

9

General tax load* on salary incomes in Ukraine exceeds 1.5 times those in EU-27

EU36.1%

UA 54.5%

* Sum of total wage taxes against total salary incomes

TAX LOAD ON WAGES (INCOME TAX + social insurance), %, 2013

Plain decrease of rates of SST and IIT to average EU level would significantly reduce

cash flow from SST and IIT

Background for reforming SST: Statistics of Ukraine and UN

10

0 - 0,5 МЗП

0,5 - 1 МЗП

1 - 2 МЗП

2 - 3 МЗП

3 - 10 МЗП

10 - 17 МЗП

понад 17 МЗП

0

5

10

15

20

25

30

35

40

5.78

9.70

37.2

2

24.7

0

22.0

0

0.50

0.09

6.40

17.3

7

34.8

5

16.8

1

22.8

1

1.16

0.60

Бюджетний сектор Приватний сектор

0 - 0,5 МЗП

0,5 - 1 МЗП

1 - 2 МЗП

2 - 3 МЗП

3 - 10 МЗП

10 - 17 МЗП

понад 17 МЗП

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

0.41

2.88

23.3

4

27.2

1

42.1

4

3.05

0.97

0.58

5.19

17.8

8

16.4

0

44.6

1

6.12

9.23

Бюджетний сектор Приватний сектор

In Ukraine over 70% of employed people get monthly payment less than 3 minimum salaries (МЗП). Incomes of these people make up over 50% of total salary incomes..

Structure of salary incomes in 2013 EMPLOYMENT RATE, %.

Structure of salary incomes in 2013 INCOME RATE, %

Background for reforming salary taxes

Single social tax (SST): reform patterns

Payroll

Accruing SSTat a rate from 36.76% to

49.7% (depending on risk class)

Payroll

Fixed SST At a rate 41% of minimum salary

(in 2014 – UAH 499.38 )

Current model New Model 2

SST percent rate15%

charged on salary exceeding minimum salary

Withholding SST from salary

at 3.6% rate

Withholding SST from salaryat 3.6% rate

Payroll

Fixed SSTAt a rate 37% of minimum salary

(in 2014 – UAH 450.66 )

New Model 1

SST percent rate19%

charged on salary exceeding minimum salary

Withholding SST from salaryat 3.6% rate

Incomes amount UAH 143.5 bln

Incomes make UAH 141.1 bln

Incomes amountUAH 189 bln

Wage taxation: IIT and SST

Criterion Current pattern Model 1 Model 2

Accrued salary 3650 3650 3650

Charged IIT on salary (Employer)

IIT rate 40.2% 37% МЗП + 19%

excess

41% МЗП + 15%

excess

IIT amount 1 467.30 912.74 864.18

IIT withheld from wages (Employee)

IIT rate 3.6% 3.6% 3.6%

IIT amount 131.4 131.4 131.4

IIT

Rate 15% 15% 15%

Amount 527.79 527.79 527.9

Total amount of SST + IIT 2 126.49 1 571.93 1 523.37

UAHExample based on IIT rules and offered SST patterns

IIT (individual income tax): Model 1

Monthly salary

Under 10 MS (minimum salary)in 2014 – UAH 12180

Current model

IIT rate

From 10 MS2014 – UAH 12180

15%

17%Charged on excess

sum

Monthly salary

Under 10 MS(in 2014 – UAH 12180)

Proposed model

IIT rate

from 10 to 17 MSin 2014 – from UAH

12180 to 20706

15%


sum

Over 17 МSin 2014 – over UAH 20706


sum

Additional earnings can amount around UAH 3.5 bln or 5.7%

IIT earnings in 2013made up UAH 58.9 bln

Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

from 10 to 40 MS(in 2014 – from UAH 12

180 to 48 720 )

15%

20%Charged on the

excess sum

From 40 MS(in 2014 – over UAH 48

720)

25%Charged on the

excess sum

Additional earnings can amount aroundUAH 2.5 bln or 4.3 %


IIT earnings in 2013made up UAH 58.9 bln

Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

From 10 MS(in 2014 – UAH 12 180)

15%

17%Charged on the

excess sum

Current model Proposed model


to 12180 )


to 48720 )

15%

20%charged on excess

sum

from 40 MS(in 2014 – over UAH 48720 )


sum

Under 10 MS

(in 2014 – UAH 12180)10%

Additional earnings can amount aroundUAH 4.7 bln or 8 %


IIT earnings in 2013 make up UAH 58.9 bln

Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

From 10 MS(in 2014 – UAH 12 180)

15%

17% charged on excess

sum

Monthly salary IIT rate


Under 5 MS

(in 2014 – UAH 6 090)

from 5 to 17 MS

(in 2014 – from UAH 6 090 to 20 706 )

15%


sum

Over 17 MS

(in 2014 – UAH 20 706)


sum

Additional earnings can amount aroundUAH 5.1 bln or 8.5 %



Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

From 10 MS(in 2014 – UAH 12 180)

15%


sum



Under 3 MS(in 2014 – UAH 3 654)

from 3 to 17 MS(in 2014 – from UAH 3 654 to

20 706)

15%


sum

Over 17 MS(in 2014 – from UAH 20 706 )


sum

Additional earnings can amount around UAH 8.9 bln or 15.2 %



Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

Over 10 MS(in 2014 – UAH 12 180)

15%


sum



Under 1 MS(in 2014 – UAH 1 218)

From 1 to 17 MS(in 2014 – from UAH 1 218

to 20 706)

15%


sum

Over 17 MS(in 2014 – over UAH 20 706)


sum

Additional earnings can amount around UAH 14.7 bln or 25 %



Monthly salary

Under 10 MS(in 2014 – UAH 12 180)

IIT rate

From 10 MS(in 2014 – UAH 12 180)

15%


sum



Additional earnings can amountUAH 1.5 bln

Individual Income TAX: Unification of passive income rates

IIT earnings in 2013make up UAH 0.7 bln

It is offered to unify IIT rates for all types of passive incomes: in particular:

Passive incomes considered as dividends paid to individuals who don’t pay income tax should be charged at 15 % IIT rate instead of 5%

Administration of taxes

Single accounting period – quarter – regarding principal taxes: Income tax, IIT, VAT, SST, Excise, Environmental tax, etc.

Effect – reducing number of reports and payments a year: Cutting expenses of the state and business resources for administration of taxes Simplifying conditions to pay taxes, improvement the presentation of Ukraine in

the Doing Business ranking

Single window of issuing accounts and records

Tax records, SST reports and statistics should be submitted to a single body

Effect – cutting time for reporting

Financial decentralization

Budget autonomy

Decentralization

KEY LINES OF CHANGES

Budget decentralization

Transfer of certain part of national taxes to the local budgets

New system of budget equalization

PRINCIPAL DIRECTIONS OF REFORMS

Capable communities

Independent planning and approving of local budgets

United communities get authorities as regional centers United communities receive direct budget relations

Certain part of national taxes is transferred to the local budgets

Ability to maintain local budgets in banks

Simplifying of procedures to obtain local guarantees to get loans from IMF

Further steps of the Government in decentralization:

-Supporting changes to Constitution of Ukraine directed to power decentralization

-“On local self-governance in Ukraine” (new edition)

-“On voluntary association of territorial communities”

-“On the grounds of regional state policy”

-“On decentralization in the construction area – delegation of responsibility to the local authorities”

- “On municipal police”

CREATION

OF

FINACIAL INVESTIGATION SERVICE

State Fiscal Service of Ukraine

Money Laundering Prevention Department

Tax police subdivisions

Ministry of Interior Main Department for Organized Crimes(to prevent economiccrimes)

Department of the State Service for prevention economic crimes

State Security Service of Ukraine

Main department on counterintelligence protection of public interests in economic security area

Central executive authority to protect economic security of the countryFinancial Investigation Service of Ukraine

Confirmed by the experience of Italy, Sweden, Austria, Poland, Georgia, the U.S. A.

concept for reforming the tax system of ukraine

Documents