Ukraine Tax Code Published

by Tatiana Smolenskaya, Tax-News.com, Moscow

09 August 2010

On August 3 the Ukraine government published a new draft Tax Code for public consultation prior to a second reading in Parliament. However, it quickly became known that Deputy Prime Minister Sergei Tigipko, who headed the working committee responsible for the Code, was not consulted on this draft before publication, and was still intent on publishing his own draft with further amendments.

Tigipko maintained that the draft Tax Code, as published, was the work of the Ministry of Finance and Tax Administration, and not endorsed by his working group comprising representatives from small, medium and large Ukrainian businesses and investors. Tigipko said his group had finished the job and were soon ready to publish their own draft tax code for consultation.

When questioned whether this means that the government would be submitting two draft Tax Codes, Tigipko insisted that this was up to the cabinet, which had not yet passed either document. Tigipko is additionally economy minister and leader of the ‘Strong Ukraine ‘ party, whose deputy president, Oleksandra Kuzhel has formally denied the rumour that Tigipko had been dismissed from his position as head of the working party.

Tigipko told Ukraine Radio that, among the substantive issues not properly covered by the published draft, were:

• Automatic VAT-refund mechanisms for exporters;
• Corporate profit tax accounting reflecting the book-keeping accounting standards;
• Tax rules for banks and financial institutions reflecting European standards; and
• Measures aimed at removing discrimination against small businesses.

Other omissions from the published draft include:

• No progressive personal income tax rates - the 15% flat tax is retained;
• No tax on bank deposits;
• No real estate tax;
• No exemption of new house construction and sale from VAT;
• No luxury tax;
• No action to reduce the burden of social security payroll deductions, currently running at about 37%.

The published version of the code includes some points that have already been welcomed. The powers of the tax authorities to investigate have been considerably reduced compared to the first draft. Court orders would now be required for searches of premises and fines assessed by the tax authorities would have to be confirmed by the courts before being enforced.

The monthly flat tax on small entrepreneurs would be increased from UAH200 to UAH600 (USD77) and only businesses with turnovers of less than USD38,000 would be exempt from income tax. Small business spokesmen already think this insufficient to discourage the black market.

Whilst big businesses are thought to be the main beneficiaries of the tax cuts in stages, for example the reduction of corporate income tax from 25% to 20% by 2014, there are still complaints that the tax code does not allow for consolidation of accounts for tax purposes.

Although public consultation on the code is only due to last until August 20 and the new tax code is an essential element of IMF support for the Ukraine, it would seem that the debate will need more time.

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