NEWS CURRENT TAX LEGISLATION TAX REFORM ANALISYS Tax Reform In Ukraine Int. Appr. To Tax Reform Four Draft Tax Code Comparison

INTERNATIONAL APPROACH TO TAX REFORM (by Richard Laliberte) Fiscal Reform Project/Barents Group (funded by USAID) Content Compare the evolution and level of tax revenues in Ukraine with other countries Provide information on timing and nature of Tax Reform in selected countries Present standard Tax Reform objectives Suggest a process for reforming that tax system in Ukraine Present key components for tax reform success  Comparison of % Change in Tax Revenues & GDP 1993-1997 Evolution of Tax Revenues in Ukraine Tax Revenues & Importance of Private Sector as % of GDP  Timing of Tax Ref. in Selected Countries In Hungary, major improvements to personal income tax and VAT took place in 1988 and to corporate income tax in 1989. Estonia made radical revision of its tax laws in the early 90's, heavily influenced by the World Basic Tax Code. Latvia adopted new laws on profit and personal income tax, including tax administration and procedure rules in 1993 and on VAT in 1995. Lithuania introduced some changes to their income tax laws in 1990 and to VAT in 1993. In 1995, Kazakhstan adopted a modern and compact tax code based on market-economy principles. It contained both substantive tax rules and administration provisions. Kyrgyzstan in 1996 and Uzbekistan in 1997 also adopted tax codes to some degree modeled on the Kazakhstan code. Moldova is introducing their tax code in stages. Title 1 & 2 of the code covering income tax provisions for both physical and legal enterprises were adopted in June 97 and became effective in January 1998. Title 3, VAT, was passed in early 1998 and came into effect on July 1, 1998. Drafting is now concentrating on property tax and other type of levies. A concept paper was initially proposed by the Government and approved by Parliament (in 1996) setting up the objectives and the timeframe of the tax code and tax reform In July 1998, Russia adopted Part One of the tax code. It contains mainly general administrative and tax administration organizational principles. However, it does not contain the rules for specific tax bases and it very unclear at this point when such rule will be introduced. Ukraine has made significant improvements to the VAT and corporate tax system in 1997. However, the tax laws still have not been consolidated into one document and suffers from a lack of legal clarity. To my knowledge, it is also the only country considering many tax codes and tax legislations at the same time.  Tax Reform Standard Objectives Revenue adequacy. Tax system should: Generate adequate revenue for financing government expenditures and debt service payments Rely on a range of taxes to assure stable revenue flow during a year & from one year to another Limit number of taxes to avoid unneeded complications and burden on taxpayer compliance Neutrality and Efficiency Tax law should not interfere with the incentives provided by the market to invest, save, produce or work Ratio of administrative costs and compliance should be well below the level of revenue collected for a given source of revenue Tax Rates and Tax Computation Average and especially marginal tax rates needs to be low enough to avoid discouraging economic activity and to be competitive with trading partners. This can be achieved by putting in place a broad tax base. Tax computation underlying the tax system should be understandable and internally consistent Where possible, tax computation should be consistent with financial and international accounting principles and requirements. Simplicity Tax system should be easily understandable by both taxpayers and tax administrators The tax legislation should have a high degree of transparency and clarity Equity (Tax system should be fair with respect to:) horizontal equity (equal tax on equal incomes) vertical equity (higher rates on higher incomes) Stability The underlying structure of the code should remain relatively stable over time, although ongoing policy and legislative refinements are to be expected  Tax Reform Process Identify main goals and objectives of the reform -- creation of a framework Issue for consultation a concept paper indicating main policy proposals, revenue impacts, distributional impacts and time frame of proposed changes Draft tax legislation that support policy proposals Issue draft tax legislation and explanatory notes for consultation Submit final legislation to Parliament for approval Develop new administrative provisions and train tax inspectors and tax accountants on new filing requirements  Key Components for Tax Ref. Success Establish clear goal and objectives Mandate a group of tax policy analysts and lawyers to design tax policies and draft legislation Put in place a good decision making and consultative process Provide adequate time for each steps of the process but at the same time set a clear time frame for reform © Ukraine-Today.com