President orders a light to shine on all revenues
On February 6, President Leonid Kuchma instructed the government to introduce bills lowering citizens’ taxes, specifically on individual income and the payroll pensions. These compulsory payments are the main reason for the lion’s share of illicit financial flows in the Ukrainian economy. Ukraine is Europe’s only country where an income in excess of $200 is levied a forty percent rate and one-third of the payroll fund is paid to the pension fund. Naturally, such exorbitant levies induce people with medium incomes and big-time businessmen to evade taxes. Often managers of enterprises tell their employees to register as individual payers of the uniform tax (UAH 100-200). They sign monthly performance reports and pay wages as per contractor’s agreements. These inconvenient measures serve the benefit of all concerned.
Perhaps this legislative initiative should be regarded as part of the campaign to combat money-laundering. After all, reducing tax rates may unblock financial channels and bring shadow capital into the open economy. Without doubt, lowering taxes ought to have been the first stage of this campaign.
Last year, the Verkhovna Rada tried to pass a bill lowering the individual tax rates to ten percent on incomes of up to UAH 7,200 a year, fifteen percent on UAH 7,200-72,000, twenty percent on UAH 72,000- 720,000 and thirteen percent on incomes in excess of UAH 720,000. But parliament was gripped by yet another political confrontation and opposing factions refused to support the bill, simply as a gesture of protest against the regime. But those in power stayed, and all hopes for moving wages and salaries out of the “shadow” had vanished.
Instead, there was an imminent threat of increasing levies. Last year’s rate income tax scale proposed by the government originated in a poll of businessmen, organized by the presidential administration. Pavlo Haidutsky, head of the administration’s economic department, felt sure that thousands of businessmen and workers had seconded that scale.
On February 4, the president launched an offensive against shadow financial flows on another front, among the bureaucrats. A presidential decree provides for a separate income tax return to be instituted for certain officials “empowered to discharge functions on behalf of the state.” Soon, this special tax return will become a reality for the managers of state enterprises, institutions, and organizations. Legal responsibility for failure to file such tax returns, will be determined by the Cabinet of Ministers. Such tax returns will be verified by SBU and the general prosecutor’s office. The state tax administration has been instructed to work out a continuous monitoring system to keep track of ranking bureaucrats’ expenses. It is recommended to include the National Bank of Ukraine in this process.
It is not impossible that this edict will be implemented. In that case, all those ranking bureaucrats’ expenses over and above their official incomes will be examined. In addition, examiners may find many state structures had employees on various commercial entities’ payrolls. Those wages were paid using separate envelopes, and no one paid income or pension tax.
