Ukraine’s tax changes are a step in the right direction

The steps may be small, but Ukraine is moving to a more transparent and equal tax system.

Late 2015, the Ukrainian parliament (Verkhovna Rada) adopted the country’s main new finance laws. Meanwhile, the state budget and amendments to tax legislation (as the basis for the budget) could be classified as New Year’s gifts; they were voted on by parliament on Christmas night and signed by the president on 31 December.

Throughout the course of the year, The Ministry of Finance discussed tax reform and a new tax code but as the final version was brought to Parliament so late, little time was left to properly dissect the plan. As a result, instead of true tax reform, Ukraine received another version of the current system. Several experts claim it is for the better, as there were proposals to significantly reduce benefits for the agricultural sector and sphere of simplified tax system.

Main tax changes which came into effect on 1 January:

  • Decrease of the single social contribution (SSC) rate accrued by employers to 22%, instead of the previous 36.76%-49.7%, with an extension of CAP and abolition SSC for employees
  • Progressive rate of personal income tax (15-20%) replaced with the single rate (18%)
  • Cancellation on CIT advance payments, and the introduction of quarterly reporting for payers with a gross taxable income exceeding UAH 20 mln. (about EUR 700K)
  • Clarification on the procedure for VAT refunds
  • Restriction of the VAT privilege regime in the agricultural sector
  • Increase in the excise for spirit and tobacco production (excluding natural wine)
  • Introduction of an electronic administration system for excise on fuel products
  • Reduction on the turnover limit for a simplified tax system

Most of the above changes have a positive impact on the ability to do business in Ukraine. This includes the benefits for businesses in terms of SSC cost reduction and PIT administration simplification; the significant tax burden on wages has been a regular topic of conversation, and is often referred to as one of the reasons why a big part of the Ukrainian economy has been in the shade.

The excise increase has been met with indignation from representatives of alcohol, beer and tobacco businesses; but these changes are in line with worldwide practice and are to be expected in order to meet EU standards.

The VAT amendments are significant – even revolutionary. Most years, we tell our clients that their chances of receiving a VAT refund in the ‘ordinary’ manner in Ukraine ranges from unlikely to impossible. The new procedure predicts the return of agreed amounts of VAT in a chronological order, as per the application’s submission time. Tax authorities are now obliged to post the list of applications on their website on a daily basis. This should eliminate any possibility for manual interruption to the system and as result, removes corruption.

Refund applications should be reviewed by tax inspectors and in most cases an additional tax audit should also be initiated. It is hoped that there is a change in the mentality of tax officers, from retributive to a more service-driven approach, and we will have more qualified tax auditors who will check the lawfulness of the application, rather than reject it by all means.

Another positive change is the allowance to include the VAT amount to credit (VAT for offset), even if a tax invoice contained errors in mandatory fields (eg. name of contractor, tax code, address) that do not change the sense of transaction or values. It is hard to compute how many tax invoices were reissued to replace one figure in a ZIP code or one comma in an address line.

There is optimism in the latest Ukrainian tax changes. The old system was not broken down as expected, and reforms are slow to come through, but it is a step towards transparency and equality in tax regulation.

Find out more about the Ukrainian business environment by downloading our latest report here.

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