Current Situation

• Both EPT and VAT have been reduced in % of GDP
• Revenues should now be stabilized in % of GDP

• Both EPT and VAT rates are competitive

 Recent Developments
EPT
Positive:

• EPT tax credit for housing for servicemen repealed
• 10% tax on depreciation replaced by 0.8 diminishing factor
• More flexibility for businesses to depreciate assets

Negative:

• Free Economic Zones
• Simplified Tax System

VAT
Positive:

• Zero-rating repealed for electricity and coal
• Exemption for critical imports repealed
• No VAT refund for barter export prolonged

Negative:

• Free economic zones
• Simplified Tax System
• Tax privileges for agriculture

 Issues to be Addressed:

• Still too many VAT privileges
• Simplified tax system to be improved
• Wage deduction should match wage payment: no deduction should be allowed until wage arrears are paid

EPT

• Free Economic Zones
• Doubtful payments
• Quarterly filing, monthly installment payments, Consolidated return
• Taxation accounting Vs. International accounting standards (IAS)
• Rules for reorganization and liquidation

VAT

• Free Economic Zones
• Registration requirement and application for small suppliers
• VAT refund:
• Customs
• Zero-rated and exempted goods

 Draft Tax Code Propositions:
EPT

• Replacement of EPT and VAT by a 9% turnover tax (Timoshenko)
• Reduction of the general rate from 30% to 20% (Hubskyi)
• Income to be reported on a cash basis (Hubskyi)
• Low-rates (7,5% and 15%) for Small and Medium Businesses (Government and Sergienko)
• New exemption when profits are used to increase wages (Sergienko)
• New amortization categories (Hubskyi)
• Reduction in losses carry-forward period to 4 years (Government)

VAT

• Replacement of the EPT and VAT by a turnover tax (Timo shenko)
• Reduction of VAT rate from 20% to 15% (Hubskyi)
• Introduction of a multi-rates VAT (Sergienko)
• Switch from accrual basis to cash basis (Sergienko)
• Elimination of most of VAT privileges (Hubskyi) or some of them (Government and Sergienko)
• Increase in threshold for quarterly filing (Government). Every taxpayer quarterly (Hubskyi)

 The Turnover Tax

• Turnover Tax would replace actual EPT, VAT and to a certain extend would be applied for PIT (9% flat rate)
• The Turnover Tax would apply to every sales of goods and services, including exports
• Rates 9% and 5% (for export) would apply
• Certain types of transaction would not be taxed

• Disadvantage Ukraine's goods on domestic and foreign markets
  • Imported goods
  • Exported goods
• Would apply to export
• Would benefit to integrated firms
• Would lead to revenue shortfall
• Would reduce overall equity

Illustration of the effect of Turnover Tax: goods produced domestically and goods exported

• Why having a VAT?
• Over 80 countries are using VAT
• VAT encourages export and domestic products
• VAT reduces cost of investment
• VAT is neutral on resources allocation
• VAT is neutral on firm's integration
• VAT is producing stable flow of revenue

 Excise Taxes

• Currently too many taxes. Positive step: tax codes to repealed up to 10

• Excise taxes on oil products are low

 Recommendations:
EPT

• Example of measure to consider to improve tax system:
  • Various simplified tax systems should be integrated into a unified approach. Consideration should be given to a three-step approach. Integrated simplified system should not apply to VAT.
  
  • Three-steps approach for simplified tax system for small and medium business. The proposal would that way integrates major proposals in four draft tax codes:
    • First step: presumptive tax based on turnover
    • Second step: regular tax regime on cash basis
    • Third step: regular regime on accrual basis
• Repeal diminishing factor for depreciation.
• Allow deduction for bad debt following international accounting standards. Base tax accounting on IAS.
• Freeze expansion of Free Economic Zones and Special Investment Regimes.
• Correct the mismatch between wages deduction and wages payments.
• Adopt annual filing. Monthly or quarterly installment payment should be based on previous results or anticipated current result. Appropriate Interest charges should apply when discrepancy.
• Introduce rules for reorganization and liquidation.
• Harmonize PIT and EPT top rates for better integration and for withholding rates on investment income (Government proposal).

VAT

• Maintain actual system. Don not reduce VAT rate. Do not introduce turnover tax.
• Reduce the number of privileges: imported gas, privileges for agricultural producers, sales of meat and milk by processing enterprises.
• Increase registration threshold and harmonize it with simplified tax system threshold. Adjust threshold for quarterly filing accordingly.
• Simplify and faster system for VAT refund.

Excise Taxes

• Increase share of excise taxes in total revenue.
• Reduce the number of excise tax (draft tax codes proposals).
• Increase excise taxes on oil products. Consider increases for tobacco and alcoholic products.

 Notes
P. 4 Harvard Institute for International Development
P.6 Sources: Ministry of Finance of Ukraine and Barents Group LLC