Small business still runs the risk of tax minimization despite promises of “simplification”
The government has finished drawing up the law on a simplified tax system (No.8521) and asked the parliament to pass it as soon as possible. “Changes to the Tax Code reflect a maximal compromise with the entrepreneurial milieu, which particularly envisions canceling punitive measures for failure to pay social contributions in 2010, as well as exempting pension-receiving and disabled entrepreneurs from this payment,” reads a cabinet statement released on the eve of parliament registering the bill. The government also says that entrepreneurs will also be entitled to a “vacation,” i.e., they will not have to pay the “common” tax for one month annually under the new law. There will also be a differential approach to the definition of small business, based on annual turnover.
Among the most important provisions of the draft law is that it satisfies one of the small entrepreneurs’ essential demands, namely regaining the right to work with legal entities. The bill proposes linking the common tax rate for natural persons to the minimal wages. On the basis of the latter, all simplified-taxation entrepreneurs have been divided into three categories. “The first comprises those who earn an income of not more than 150 minimal wages — about 150,000 hryvnias — and do not hire any employees. They will pay a tax of one to 10 percent [of the minimal wage]. In terms of wages, it is 10 to 100 hryvnias. This applies to market sellers and those engaged in retail trade. The second category includes entrepreneurs with an income of about one million hryvnias and up to 10 hired workers: they will pay 2 to 20 percent of the minimal wage, i.e., 200 to 2,000 hryvnias. These are businesses that deal with retail trade, intermediary services, leasing, and restaurants. The third category means entrepreneurs who draw an income from 2,000 untaxed minimums, up to 2 million hryvnias: they can also hire up to 10 workers and will pay 3 percent, if they are subject to VAT, or 5 percent if they are not,” State Tax Service Deputy Chairman Oleksandr Klymenko told the 5th Channel.
What is the entrepreneurial sector’s attitude to the governmental version of a “simplified approach”? The Day put this question to businesspeople. Tetiana Zatserkovna, member of the Coordination Council for Small and Medium Business at the Cabinet of Ministers of Ukraine, does not think this draft law answers all the questions of businesspeople. “It is, of course, very good that the law lifts the ban on legal entities working with simplified-tax payers,” she says. “But, at the same time, it raises the common tax rate for businesses, while the annual income in fact remains the same,” she adds. “One should not forget,” Zatserkovna continues, “that businesses also have to pay a common social fee.”
“Entrepreneurs will find it difficult to shoulder a tax burden like this… For instance, it will rise 2 and 2.5 times for the smallest and larger businesses, respectively,” she explained to The Day. In her words, the problem of exempting employed pensioners from having to make a common social contribution to the Pension Fund remains unsolved. “Besides, the document says nothing about cash registers — and this uncertainty may turn out to be negative for small business,” she summed it up.
Viacheslav Bykovets, acting president of the League of Ukraine’s Small, Medium and Privatized Businesses, has a somewhat different opinion: “On the whole, the government has taken into account most of the businessmen’s opinions. So we can give [the Cabinet] a B for this draft law. Yet some questions still remain unanswered, and we will announce this when we study the document in detail. In my view, it is very important that simplified-tax payers will be again allowed to work with legal entities. This will save jobs for about 400,000 entrepreneurs.”
The economist Viktor Lysytsky is taking an almost rosy view of the proposed changes to the Tax Code because the government has thus shown that it heeds the opinions of entrepreneurs. Yet he takes issue with the simplified-tax payers’ regained right to work with legal entities. He claims this scheme was previously used to minimize taxes, and now there is a danger that “some frauds will take advantage of the regained right and begin to rob the state.” At the same time, Lysytsky thinks there are very few dishonest entrepreneurs of this kind.
Tax minimization schemes, to which simplified-tax payers resorted while working with legal entities, usually occurred in trade, the restaurant and the hotel business, Political Analysis Center director Volodymyr Fesenko told The Day. So, in his opinion, before the Cabinet-proposed changes are finally approved, one must make a sound decision about how to suppress these minimization schemes and maintain a dynamic development of small business. A possible compromise could be found in raising the common tax rate for simplified-tax payers in the potentially risky tax minimization spheres or imposing a ban on using the simplified system of taxation in those sectors.
TO THE POINT
“The number of natural persons [identified] as entrepreneurs in Ukraine is rising instead of falling. While there were 2,424,000 individuals at the beginning of the year, now there are 2,448,000 of them. In other words, there has been an increase of 24,000,” Klymenko said. In his words, owing to the automatic VAT refund system, 82 businesses all over Ukraine have earned more than 1.2 billion hryvnias.
