​Ministry of Finance of Ukraine: presently, distributed profit tax can only be implemented for small and medium-sized businesses with the annual revenue of up to 200 million hryvnas

11/6/18

In today’s meeting the Parliament’s committee for tax and customs policy has discussed a draft law implementing the distributed profit tax instead of the corporate profit tax.

The Ministry of Finance of Ukraine absolutely agrees with the objectives and approaches that were taken into account during the preparation of the distributed profit tax model and is ready to support all efforts to foster reinvestment into the economy as well as the de-shadowing of the economy and economic growth.

In the opinion of the Ministry of Finance, the real option to implement the distributed profit tax without jeopardizing the fiscal stability is to implement it for small and medium-sized businesses with the annual revenue of up to UAH 200 million and to apply the revenue compensator obliging this group of taxpayers only to pay the distributed profit tax in advance in the amount of 50% of their due corporate profit tax for 2018.

In this case, 98% of all legal entities would switch to the distributed profit tax and enjoy its advantages. Approximately 4,500 companies with the annual revenue over UAH 200 million that declared 85% of the total due corporate profit tax (as per 2017) will remain subject to the corporate profit tax.

This tax model was discussed with the IMF and, after challenging negotiations, was agreed as possible.

At the same time, we must emphasize that in the current situation Ukraine must see fiscal stability and further cooperation with international partners and creditors as its absolute priority. This especially concerns the IMF whose technical mission is now working in Ukraine. As previously reported, the IMF approved a new stand-by program with Ukraine at the working level. To have this program approved by the IMF Executive Board, Ukraine must meet its commitments concerning fiscal stability and responsibility as well as balancing its budget and cutting the budget deficit.

It is only further cooperation with the IMF which can help Ukraine prevent a default on its debts. Next year, Ukraine has to spend over UAH 400 billion to serve and to re-pay its debts. If Ukraine leaves the IMF program, it will lose access to the resources of international organisations and institutional investors, which will turn its default from a vague risk into reality as early as next year. This would be a major blow to business and to each Ukrainian citizen.

That is why Ukraine should refrain from steps that could result in significantly lower state revenues or higher budget spending. A fiscal revenue gap coming along with the peak in public debt payments would put Ukraine’s macro-financial stability at stake.

The Ministry of Finance estimates that direct losses for the state budget resulting from the implementation of the distributed profit tax for all existing corporate profit tax payers starting from January 1, 2019 will be equal to UAH 46.7 billion. Also, the Ministry of Finance expects significant budget losses in 2020 along with persistently high fiscal risks.

All figures for the distributed profit tax base have been agreed by the Working Group with the Ministry of Finance sticking to the approaches applied for state budget revenue forecasts for the respective year.

Budget losses resulting from the implementation of the distributed profit tax can be compensated by increasing other taxes or by cutting budget expenses. The budget expenses for 2019 do not offer options for fast and smooth spending cuts that would not affect socially sensitive areas like healthcare, education, defence and others.

The proposal made by the concept authors concerning the advance payment of the distributed profit tax in 2019 and 2020 can be subject to discussion, but, unfortunately, this idea can’t cover all expected budget losses – it can only cover the budget deficit in 2019 and, partially, in 2020, but it will also lead to a significant overpayment for the next years. It means that, in fact, this problem is only postponed to the next fiscal periods.

As far as big companies are concerned, the Ministry of Finance does agree that the current legislation makes it possible for them to optimize their taxes using low-tax jurisdictions. To minimize these risks, the MLI convention was signed, the draft law on the implementation of the BEPS Action Plan was prepared and the tax rates in bilateral tax agreements are being reviewed.

According to the IMF, Ukraine can only receive next loan tranches, if it adopts a balanced budget. It means that the IMF experts can only be positive on the approach in implementing the distributed profit tax that will prevent a budget deficit not only in 2019, but also in the next years. This view must be respected by the members of Parliament when examining the draft law on the distributed profit tax.

To keep the program of cooperation with the IMF and the macro-economic stability required by business for further development, we judge that the clarifications proposed by the Ministry of Finance for the draft law No. 8557 of July 05, 2018 pose the only plausible way to implement the distributed profit tax in 2019 for most taxpayers and to rely on further support from international institutions.

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