Ukraine's Tax Reform In Doubt

by Tatiana Smolenskaya, Tax-News.com, Moscow

06 July 2010

President Viktor Yanukovych has suggested that the draft Tax Code in its current form is not balanced and requires a serious revision.

Yanukovych's recent comments, coupled with heavy criticism of the new tax proposals by the country's business community and foreign investors, raises the possibility that the important reforms may be delayed or postponed, at least until after municipal and provincial elections due in October this year.

The government hopes that the reforms will go some way to reducing a huge black economy, which is worth an estimated 50% of gross domestic product. But the President is of the view that the draft tax code, which gives tax inspectors sweeping new powers to inspect business records and levy fines on non-compliant companies, is unfairly weighted towards benefiting the state at the expense of businesses and entrepreneurs.

"The position is clear: the Tax Code should be adopted for industry, businessmen, and the people, rather than tax officers," he was quoted as saying by Interfax.

Yanukovych believes that the draft tax code as written does not have enough parliamentary support to pass into law.

In addition to new powers for the tax inspectorate, the government’s proposals include progressive reductions in corporate income tax from 25% to 17% and value-added tax from 20% to 17%. Yanukovych’s election promises also included tax holidays for small businesses, although the proposed tax code only offers this to the smallest of businesses – sole traders with annual turnover of less than USD38,000 and businesses with less than USD12,500 per year in revenue.

The government has also attracted criticism for failing to tackle the high rates of payroll tax, which can often exceed 50% of wages and encourage the employment of unregistered labour.

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