Tax Authorities: Pressed for Time

Premier Yanukovych, addressing the fourth session of Verkhovna Rada at its opening, made it clear that he expected to somehow make up for shortcomings in cooperation between the cabinet and parliament. In particular, a number of bills aimed at upgrading the tax laws remain to be passed. He noted that the government would like the deputies to handle these bills alongside the budget one, so the 2004 budget program (the cabinet wants it to reach UAH 60 billion, something unprecedented in Ukraine) would be on the new tax basis. The premier, however, did not assume responsibility (nor did the cabinet, of course) for the current ambiguous situation in the tax and budget domains. Instead, he pointed out that the cabinet had done its best “for the new budget to be adopted on the new tax basis.” That this is not actually so is evidenced by the president’s veto on the VAT bill that the previous parliamentary session had a hard time passing.

Be it as it may, both the cabinet and parliament have once again found themselves pressed for time. Under the law, the tax process must be completed before September 15, and this considering that the presidential campaign is underway, accompanied by debates on the political reform, meaning that budget problems could become politicized as well.

True, there were signs of an upbeat mood almost as soon as the new legislative session was called to order. Thus, the Finance and Banking Committee seconded most of President Kuchma’s proposals concerning the law On Changes in Certain Legislative Acts of Ukraine. When asked by The Day, FBC First Deputy Chairman Viktor Kapustin said the committee had agreed on practically all clauses of the presidential proposal, adding that all it took was for the cabinet to clear the details of taxation, involving the Finance Ministry, Customs, and Tax Services. Another stumbling block in introducing the new tax basis was the removal of tax exemptions, but this issue could be settled when working on the budget bill.

This summer, First Deputy Prime Minister Mykola Azarov said the government planned to completely reorganize the Tax Service of Ukraine by the end of the year. He noted in part that the September session had to pass a number of bills canceling various taxation patterns: “What I have in mind is nullifying various taxation systems and tax concessions remaining in the agrarian sector in the first place.” Those opposing the tax reform in the countryside insist that this year is the wrong time to do so. “No year would be the right time for this reform, and there are no guarantees that failing to solve such problems in the rural areas will help improve financing,” he stated, adding that the countryside would actually be supported by effecting targeted subsidies. At the same time, Mr. Azarov believes that there is a “risk of losing a part of budget returns,” primarily with regard to local budgets. The Vice Premier does not agree with those fearing that the introduction of a uniform 13% income tax will result in heavy local budget losses. He says economic and payroll fund growth, as well as bringing payrolls out of the shadows will prevent such losses, stressing that, after passing the 13% personal income tax bill, monthly bank payroll allocations will increase by approximately one billion hryvnias.

Will his figures prove valid after the fall? With social allotments to the payroll fund remaining practically the same, there are not likely to be sufficient stimuli for employers to bring their wages and salaries out of the shadows, while those in their employ appear to have rather limited possibilities to demand that kind of payment. In this sense the government seems to be given to wishful thinking.

Pitfalls are also likely to appear when debating the tax bill, among them the value added tax issue that proved a stumbling block during the last parliamentary session. One can assume that the debate will resume, even if the finance committee is of a different opinion, especially considering that VAT compensations are still due exporters. Some estimates point to UAH 4 billion of such debts, enough to worry both domestic business and international financial institutions. Meanwhile, the National Bank of Ukraine thinks it best to make early payments for such debts, while the cabinet cannot figure out how to pay its creditors inside Ukraine. This issue is sure to surface during parliamentary hearings and might well serve to upset the budget applecart. Many experts believe that this kind of tax should be introduced step by step, relying on a differentiated approach, Since most production assets register a high rate of depreciation, imposing this tax would destabilize the economy. The private real estate tax would further cause social tensions, considering the current lamentable living standard.

The company income tax is among the issues even the cabinet fails to agree upon. The Finance Ministry believes that its rate should be kept at 30%, to make up for local budget losses after effecting the uniform 13% individual income tax.

On the other hand, the situation with the special trade patent, canceled by the parliament, remains to be clarified with regard to patent- holders. The State Administration, in response to businessmen’s protest, promised not to levy any tough sanctions on them until October 1. But then the cash register issue will surely arise. Under the new legislation, all retail outlets must have such cash registers. Will the businesspeople have enough time and money to solve this problem? What stand will the tax authorities take after the deadline?

In all, Ukraine’s tax authorities will soon find themselves pressed for time. Everybody understands that the existing tax structure, the way taxes are imposed and collected, can no longer be tolerated. Still, little time and few political opportunities are left for making the proposed tax reform understandable and acceptable.