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Statement of the Tax Group
of the Reanimation Package of Reforms
Regarding the Draft Law on Tax Liberalization
The Reanimation Package of Reforms considers the absence of constructive
dialogue on tax reform between the legislative and executive branches, as well as society at
large, to be problematic. We call on all sides to come to agreement and to develop a single
unified vision of tax reform for Ukraine. We also call on the Ministry of Finance to officially
release its draft law on tax reform as soon as possible, so that independent experts can
provide their opinions on it.
Draft law (Reg. No. 3357), developed under the supervision of Nina Yuzhanina, head of the
Taxation and Customs Policy Committee of the Verkhovna Rada of Ukraine, was registered on
October 26, 2015. The draft has been initiated by a record number of parliament members.
This draft law provides for progressive changes aimed at normalizing the relations between
businesses and fiscal bodies, striking a balance between their rights, obligations, and
responsibilities, improving tax administration, introducing progressive forms of taxation, and
implementing other conceptual norms to help Ukraine emerge from the crisis and normalize the
sphere of tax relations.
The draft law includes the proposals of the experts, in particular the following ones made by
the members of the Reanimation Package of Reforms Tax Group:
• to transit to the tax on distributed income so as to prevent the tax agencies from
interfering into companies’ activities, improve investment climate in Ukraine, and provide an
additional financial resource for economic growth;
• to considerably reduce the fiscal load on salary fund, which is a powerful economic
argument for de-shadowing salaries;
• to remove the grounds for such corruptive actions of tax officers as annulment VAT
payer’s registration in view of missing at the registered office or non-confirming data on legal entity
before the state registrar;
• to render lawful all the tax credit registered in the Unified Register of Tax Invoices and to
make its arbitrary withdrawal impossible;
• to introduce a public register of applications for VAT refund specifying the sums,
individual taxpayer identification numbers, and taxpayers’ names;
• to satisfy applications for VAT refund on a first-come, first-served basis;
• to provide automatic refund of VAT to all categories of taxpayers;
• to introduce fully functional electronic services, in particular an online taxpayer’s cabinet;
• to revoke the controlling functions of the district departments of the State Fiscal Service,
to transform them into service centers and reduce their staff;
• to liquidate the tax police and take other measures to significantly improve the business
climate in Ukraine.
At the same time, we understand that a liberal tax reform should not lead to
macroeconomic destabilization. The RPR Tax Reform group has always been fiscally responsible
in this respect. Considering the estimates of the Ministry of Finance of Ukraine slightly overrated,
we do acknowledge a fiscal gap that might emerge during implementation of the suggested tax
reform. However, we are convinced that it would be impossible to bridge this gap without cutting
down the budget expenditures, as their large amount is a burden for economy (52-54% of the GDP
being redistributed through public finance) and impedes economic growth. We call upon the
Government to put forward concrete proposals on how to reform the public sector and cut down
the budget expenditures. We are ready to support such proposals and to provide our own
recommendations on cutting spending. To stimulate the executive authorities, we suggest
formalizing it in the Constitution that redistribution through public finance shall not exceed 35%, as
it is in the successful transition economies, and obliging the executive authorities to reach this
indicator in several years.
As far as budget income is concerned, we suggest partially compensating for the potential
losses by increasing corporate property tax and improving its administration. The gap can be
partially filled by excluding specific regulations of the draft law, as it is described below.
Our experts are working on their set of revenue- and expenditure-side proposals, that, in
our view, would help close the fiscal gap created by the tax reform.
For all the positive moments, a number of regulations of the draft law are rather
controversial:
• introduction of temporary extra overdraft (the limit of tax invoices to be registered in the
Unified Register of Tax Invoices without cash security) in the amount of average monthly
registered, yet not fulfilled tax obligations for 2015 – as this regulation might lead to formation of
fraudulent tax shelters;
• according to our estimates, if the VAT rate is reduced to 15%, the state budget income
might decrease by UAH 50 billion. At the same time, it is necessary to cut direct, not indirect taxes,
as it is possible to reduce the tax burden so as to boost economic growth and competitive ability of
domestic producers;
• preservation of the single social contribution, rather that its abolition (as proposed by the
Ministry of Finance by 2018) or incorporation into the individual income tax, which would streamline
tax administration and help resolve the problems in the pension system;
• the issue of reforming the simplified taxation system should be considered only after a
full-fledged implementation of a liberal tax reform.
We call on the legislative and executive authorities to pool their efforts with the
experts and develop a common approach to the reforms so as to successfully implement
the tax reform that would, on one hand, shape conditions necessary for Ukraine to emerge
from the economic crisis, and on the other hand, balance the state and the local budgets, as
well as the Pension Fund. We think that achievement of mutual understanding regarding
liberalization of the tax system combined with fiscal responsibility shall guarantee that the
State Budget is balanced, as well as help the economy emerge from a deep crisis.
Experts of the Tax Reform group
of the Reanimation Package of Reforms