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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