Uniform tax could ease tax burden

Ukraine’s Ministry of Labor and Social Policy has dusted off the bill “On the Uniform System of Collecting and Accounting Contributions to the Universal Compulsory State Social Insurance” and is waiting for it to be passed by parliament. There are plans to start the next year with this law. MP Ksenia Liapina, the head of the cabinet’s council of entrepreneurs, says there is a special governmental directive to this effect.

All this started in the fall of 2002 when the first bill of the series, entitled “On a Uniform Social Tax,” was drafted and submitted to the Verkhovna Rada. (The authors of the current version insist that this will be a “contribution,” not a “tax,” and ask that people not confuse these two concepts.) The reasons for drafting this bill are still topical today: businesses and salaries have to be dragged out of the shadows and transformed into transparent economic phenomena.

Parliament voted down the bill. Several months later another bill was tabled, entitled “On the Uniform Social Contribution.” The next year it was followed by a bill entitled “On the Uniform Social Contribution and Administration of the Collection and Accounting of the Uniform Social Contribution.” These and the next three bills on the same subject failed to attract any interest in parliament.

Today’s bill, like the previous ones, envisages a single deduction for social purposes from salaries instead of several to four agencies (the Pension Fund and funds covering unemployment, loss of work capability, and work accidents). Then the state will channel this money into the required social funds.

How will it benefit from this? The system of keeping track of social protection payments will be updated and, in the opinion of the authors of the bill, the state will be able to supervise and manage this capital more effectively. This reform is also supposed to reduce the shadow sector where salaries are concerned. The goal is to decrease the amount of the “uniform social contribution” compared to the sum of current social deductions.

According to Deputy Labor and Social Policy Minister Olena Hariacha, both employers and employees are interested in this reform. She explains: “For the employer it means fewer administrative expenses; for the employee, a transparent system; you get as much as you have paid, because there will be a personalized accounting system.”

The state social insurance register will contain data on payers of the “uniform social contribution” and a database of insured persons, in the form of files complete with electronic signatures. Ms. Hariacha adds that, if this bill is passed, a cumulative system will be introduced, whereby pensions and social pensions will be accrued based on this uniform database.

The deputy minister believes that this system is effective: “Every insured person will have a cumulative account and it will be that person’s property. With a social insurance certificate in hand everyone will be able to check personal account receipts.” Hariacha stresses that the government will submit this bill to the Verkhovna Rada by Dec. 1, which means that it will be possible to institute this cumulative system in 2008. In her opinion, some 100 billion hryvnias will be paid into the social fund next year.

Meanwhile, the Ukrainian labor ministry is set on easing the employer’s burden. One option is that payroll deductions will be redistributed: employers’ deductions will be reduced and employees’, increased. Instead of today’s 38 percent, employers will pay 28 and employees, 16.3 instead of 3.5 percent.

The expert community also intends to move further in this direction. Tetiana Zatserkovna, who once headed a working group in the cabinet’s council of entrepreneurs, which focused on the uniform social contribution and simplified taxation procedures, says that “pressure on the Fund [must] be divided between employer and employee. If the rate of the uniform social contribution amounts to some 34 percent, then the employer and employee must each pay 17 percent.”

Zatserkovna further explained that not only employees will have to pay more to social funds. “Under this bill, employers’ revenues will be taxed, and the sum total of the uniform social contribution cannot be less than the sum of the minimum wage. The maximum amount of this contribution will be the equivalent of 15 living wages.

All we can do is wait for this bill to be passed in parliament, although it may well be shelved like all its predecessors.