What’s Wrong with Ukraine’s Proposed New Draft Tax Law

The following is a statement by the American Chamber of Commerce in Ukraine (ACC), dated July 25, 2024, on the new Draft Tax Law #11416.

The ACC calls on the Parliament and the Government to ensure a level playing field for business in Ukraine and safeguard the fundamental principle that prior to squeezing greater taxes from honest taxpayers, all efforts must be made to ensure that individuals and legal entities operating in Ukraine pay their fair share of taxes in effect today. Any proposed changes must reflect sound tax policy and a commitment to ensuring tax compliance and pursuing tax justice.

Unfortunately, the recently proposed draft tax policy changes (Draft Law #11416) do not meet these objectives and, instead, are expected to lead to further discrimination against transparent businesses, increase distortion in competition between taxpayers and tax evaders, undermine trust, and promote the expansion of the shadow economy.

We urge the Government and Ukraine’s law enforcement agencies to intensify their efforts to curb the shadow economy to collect much-needed budget revenues and ensure fair competition. Based on our estimates, losses from the illicit markets of excisable goods over the last year alone exceed $1 billion USD.

Additional examples illustrate the gravity of this issue across numerous sectors. For example, the estimated share of the shadow market for iPhones alone was 71%, resulting in circa $135 million USD in state budget losses due to non-payment of VAT, while losses due to tax evasion by internet service providers approach $100 million USD annually. In the HoReCa sector, only 5 companies pay 31% of all taxes paid in the HoReCa restaurant business, while over 40,000 restaurants are operating in Ukraine.

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What is most alarming in the proposed tax changes is the proposed 1% revenue tax to be applied against corporate revenues. This is a dangerous precedent that should not be introduced as it is a completely new sales tax alongside the existing VAT regime. To our knowledge, no country in the world has a sales tax and VAT regime simultaneously as is being proposed in Ukraine.

We have no doubt that proceeding as proposed will increase the overall tax burden substantially on bona fide taxpayers who report their revenues in a transparent and legitimate manner, incentivize shadow economy participants to double down on their efforts to evade taxes as the stakes are even higher, create significant difficulties for doing business in Ukraine, discourage existing businesses from investing further as well as make new investors reconsider business plans, decrease Foreign Direct Investment (FDI), reverse de-shadowing of Ukraine’s economy and increase the cost of administering taxes.

 In addition, we are opposed to discriminating against bona fide, legitimate taxpayers through the introduction of new taxes, such as the proposed excise tax in EUR on flavored carbonated waters, which is targeted primarily at U.S. and international companies.

At the same time, the ACC appreciates the urgent need to broaden the tax base by extending the military tax across all categories of private entrepreneurs, as well as legal entities, to ensure all taxpayers contribute to financing the fight. However, a sharp one-time increase in the military tax to 5% is likely to result in a decrease in real wages while increasing the attractiveness of informal employment; thus, we urge a more gradual approach to increasing this percentage.

We also welcome the Government’s determination to level the playing field, by avoiding unfair competition by businesses that avoid taxes or benefit from preferential treatment. To that end, initiatives like the removal of the 150 EUR limit on cross-border ecommerce, making all such parcels subject to VAT, is a step in the right direction as this is consistent with EU and international practice, and will increase taxes collected materially.

In conclusion, the ACC firmly believes that the source for additional tax revenues is in combatting evasion and ensuring equal rules for all, not increasing taxes on legitimate taxpayers who already bear the highest burden. Discrimination against legitimate taxpayers will damage transparent businesses and significantly increase the shadow economy.

We urge the Parliament and the Government, with the input of the IMF, European Union, and G7 Member States, to ensure that the tax burden is shared by all market participants and that new tax policies do not disproportionately target bona fide, legitimate taxpayers in Ukraine to the detriment of further economic expansion and investment.