The Ukrainian Taxation System

Briefly on what you should know before you enter the Ukrainian market

It is impossible to pay taxes and derive pleasure from this. That's the way people are: when they give away money and even do so in line with the law, they do not like it. Therefore, the taxation system of any country (we are not talking about various offshore schemes) cannot and should not be described in superlative terms. Since it is impossible to obtain pleasure from tax payments, a normal tax-ation system should reduce problems for businesses to the maxi-mum extent possible and reserve an opportunity for them to gain a deserved income as a result of their activities.

Taxes

The Ukrainian taxation system as it is has turned 12. It was started back in 1992. Therefore, it cannot be called well established. The number of annual amendments to tax laws is measured in tens and sometimes in hundreds. However, everything is not that bad. If you look carefully through these amendments, you will easily see that the overwhelming majority of them either relate to procedural issues or are purely lobbyist in nature (most frequently, such amendments provide for the direct or indirect introduction of benefits). And the number of "revolutions" in regulation of tax payments is decreasing every year.

The classification of budget revenues of the Ministry of Finance of Ukraine contains 38 taxes and dues currently active in Ukraine, plus several tens of non-tax payments. However, in reality, an average enterprise makes from six to eight kinds of payments. Indeed, it is clearly hardly ever the case that an enterprise risks becoming a payer of taxes for participation in horse races or the use of wild animals. Such exotic payments do exist in the Ukrainian taxation system. Nevertheless, of the UAH 47.5 billion that the State Tax Administration of Ukraine collected in 2003 to the consolidated budget, the amount of UAH 26.7 billion (more than 56%) was generated by two taxes: the individual income tax and the corporate income tax. With VAT, excise tax, tax on land and the uniform tax (levied on small business entities as per simplified procedure), this amount will be UAH 38.7 billion or 81.5 %.

It is worth noting that the Ukrainian taxation system still has no such customary Western tax as a tax on property. In Ukraine, neither individuals nor legal entities pay this tax. Although the Government plans to introduce this tax in 2006-2007, nobody that objectively exist in Ukraine during the dares say now whether this will really happen.

Bates

So, you may have noticed that Ukraine comprehensively applies direct and indirect taxes. Collection of direct taxes generates larger revenues for the Ukrainian authorities, First of all, these are the individual income tax and corporate income tax. Interestingly, the authorities decided to introduce serious amendments, particularly in the main revenue-making taxes, which is encouraging for taxpayers. In 2004, the income tax rate was reduced from 30% to 25%, and the former progressive scale of individual income tax rates (from 10% to 40%) has been replaced with a uniform tax rate of 13% (beginning from January 1, 2007, it will be replaced with a 15% rate). It is interesting that actual tax collections from the income tax in 2004 have increased, and the individual income tax continues to generate virtually the same revenue as before, As for the value-added tax, its rate still remains unchanged: 20%. However, both legislative and executive authorities are already prepared to reduce this rate to 15%. The only reason that prevented achievement of this reduction from the beginning of next year is political problems year of the Presidential election campaign.

In addition to reducing tax rates, Ukrainian authorities are working to simplify and codify the tax legislation. Although they have not managed to approve the Tax Code, they have already taken some steps in this direction. These include the cancellation in the late 90s of some kinds of payments that burdened enterprises heavily. First of all, this is the cancellation of the tax to the Chernobyl Accident Cleanup Fund and the innovations tax, and adoption of the Law of Ukraine "On the Procedure of Redemption of Taxpayers' Liabilities to Budgets and State Earmarked Funds". This Law quite toughly restricts the rights of regulatory authorities and, at the same time, allows taxpayers the opportunity to appeal actions of regulatory authorities. The provi-sions of this Law are quite liberal even compared to Western standards.

All of the amendments listed above are the elements of so-called tax reform. The tax reform in Ukraine means the evolutionary transition from the taxation system that was established in a transitional economy, to a taxation system that will apply in market conditions.

In any case, the current tax rates applied in Ukraine are already lower than tax rates applied in developed countries. In addition, they are decreasing as a tendency.

TAX ADMINISTRATION SYSTEM

In Ukraine the State Tax Administration of Ukraine (STA) collects taxes. This specific authority was established in late 1996. Before that time taxes were collected by tax inspectorates subordinate to the Ministry of Finance of Ukraine. The STA is a rather unusual authority. It includes a law-enforcement unit called the tax police, which reports to a civil officer. It enables the tax authority to track down violations of tax legislation independently, and in the case of tax evasions, to investigate them and bring these cases to court. All of these authorizations turn the Ukrainian tax authority into a powerful agency, if compared to a local scale. At the same time, work of the STA cannot be called well coordinated. Perhaps this is why the tax authority is being reformed with money loaned by the World Bank. The reform plan for which the World Bank loaned the money includes not only reforms of tax service operations, but also adoption of a number of laws that would bring the Ukrainian taxation system closer to Western standards.

Problems related to administration of the value-added tax are not only known in Ukraine, but also abroad. Problems of its redemption were repeatedly reflected in opinions of such an influential financial institution as the International Monetary Fund. However, things do not appear so clear. First, almost one billion hryvnyas is redeemed from the budget of Ukraine to the accounts of enterprises (to exporters first, although it is not only exporters for whom the Ukrainian system permits redemption). Second, the most favorable regime applies to enterprises with foreign capital, especially to firms with German and U.S. capital. The diplomatic missions of these countries watch carefully over compliance with VAT redemption obligations from the Ukrainian side. As a rule, to avoid misunderstanding, redeemed VAT amounts are channeled to foreign entrepreneurs strictly in line with a schedule. In addition, with the purpose of making money from VAT redemptions, the authorities intend to aggressively prevent illegal schemes. Plans are being developed to introduce amendments to the Law on VAT in the near future, and this will create a barrier against fraudulent entities that try to illegally receive VAT redemptions. The significance of such amendments is obvious to every-one. After that, the tax redemption situation will improve.

Summary

After a review of the Ukrainian taxation system, we have a rather controversial picture. On the one hand, there are obvious problems with tax administration (especially with administration of VAT) and instability of tax legislation. On the other hand, there is a clear trend toward a reduction of tax rates and success in simplifying their administration procedure. Certainly, Ukraine is no tax paradise. However, there is no arbitrariness on the part of tax authorities, as there was five years ago. Apart from that, we can't fail to emphasize that we don't know of even one case when non-residents left Ukraine due to taxation problems.

By Sergey Salivon

Rates of basic taxes collected in Ukraine

Opportunity Ukraine
January 2005



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