Dear colleagues,The last four months in Ukraine have been extremely intensive and busy in terms of the public discussion of the tax reform. It might be for the first time in the contemporary history of Ukraine that a tax reform has been discussed in the society for so long and with such attention to details. It is also for the first time that not only MPs and the Government, but also so many citizens participated in this discussion.
I think nobody who is present here will deny the problems existing in the current tax regulations as well as the necessity to tackle them.
What kind of a tax system do we have now? It is complicated, difficult to understand and exposed to corruption. Its high payroll taxes hamper the development of business and middle class. The current tax system entails risks for the economy and for our citizens. Finally, it is very unfair. Today, a teacher earning UAH 4000 per month pays 20.1% in taxes, while a lawyer earning USD 4000 per month and working as a private entrepreneur under the simplified taxation system only pays 4.5%. That is why need not only changes in the legislation and not only a solution for a number of issues, but a comprehensive tax reform which would deliver appropriate tax rates for everyone and help us reach the point where business won’t have any fear anticipating its next “date” with the tax authority. The system we want to build should:
• secure lower taxes for those who really need it;
• reduces corruption risks;
• fosters employment and investments (domestic as well as foreign ones);
• creates conditions to reduce inflation and devaluation by supporting overall financial stability.
I want to point out that according to a recent opinion poll most Ukrainians think that the tax reform should contribute to a low inflation and economic stability as well as to fairness and transparency in taxation.
Having that in mind, we have one common goal – build up a tax system which can boost business, employment and prosperity for the country.
Of course, we are all people with our own opinion on the way we should reach our goal. This has triggered such a lively public discussion of the tax reform.
This discussion has already helped us reach a consensus in the society on a number of very important issues. One of them is that any tax reform does not have to undermine the basis for economic growth - the fitness of public finance which is crucial for low inflation and stable exchange rate of the national currency.
At the same time, discussions are still under way in some points of the coming tax reform, and my main objective in today’s speech is to propose the tax reform which, in my opinion, can be accepted to reach a consensus in these remaining points.
Just like the original proposal of the Ministry of Finance, today’s tax reform proposal is based on the following principles: responsibility, simplicity, effectiveness, fairness, consistency, attractiveness for investors and taking into account the actual capacity of business to pay taxes under the new system. We firmly believe that only a reform based on principles and clear values can bring prosperity to our country, business and citizens.
Being aware of our responsibility for the fitness of public finance, in our original proposal we set a flat rate of 20% for all four main taxes. This rate is based on the realistic approach to the capacity of our country to reduce public spending to balance the tax reform.
However, in the course of long discussions with the Prime Minister, President, MPs and business we reached a common understanding for the necessity and possibility to further reduce public spending. This, in turn, will enable us to further reduce tax rates now.
To lower the tax burden, we propose a more significant tax reduction in several coming years compared to our original proposal.
- to cut the payroll tax from the current 41% to 20% in 2016 already while keeping the maximum sum subject to taxation equal to 25 minimum wages. I want to emphasize once again that citizens will pay 0% in the payroll tax instead of the current 3.6%;
- to implement the new rate of the personal income tax and corporate profit tax equal to 18% starting from 2016. Thus, the revenues of citizens and business will be taxed at the same rate;
- to reduce the personal income tax and corporate profit tax to 17% in 2017;
- to abolish the payroll tax in 2018 and set a single tax on salaries equal to 20%.
To provide additional support to our most vulnerable citizens, we propose to keep the soxial tax exemption which is now equal to 0.5 of the minimum wage and to expand it by leaving the threshold amount for its application from the current 1.4 to 3 minimum wages (in 2016 – UAH 4134). It will enable us to implement one of the lowest salary taxes compared to the EU-countries; 16% of our citizens will be enjoying the social tax exemption and will not be paying 3.6% in payroll tax anymore.
This is exactly what our citizens are expecting from us. 68% of the Ukrainians think that taxes should be reduced for the middle class and for the poorest, not for everyone.
To foster investments in Ukraine, we propose to implement an investment tax credit. It should allow to use up to 50% of the calculated profit tax for investments into new equipment, facilities or technologies. Thus, we will be stimulating business to invest into production and in this way to contribute to employment and a faster economic recovery. Our proposal is to allow businesses to deploy up to 30% of their total investments using this mechanism.
To create an even playing field for all businesses, we propose to change the special taxation mode for agriculture giving farming companies a grace period of one year to adjust themselves to the new tax environment. For example, we propose to distribute the VAT paid by farming companies transferring 75% of the respective revenues to the state budget and granting 25% of the VAT amount to the payers (currently, farming companies retain 100% of the VAT). We also propose to re-introduce VAT refund for all grain exporters.
We are also unanimous on the necessity to change the simplified taxation system. We agree that this system must stay and serve as an effective tool for the support of small business and entrepreneurship. However, the taxation scale in this system should not be regressive, i.e. small business should not pay more taxes than their bigger competitors. That is why we are going to amend the simplified tax system by switching from the taxation of turnover to the taxation of profit. At the same time we will propose an extended transition to the new regulations. For example, the coefficient defining the expenses of the single tax payers belonging to group B will be 0.85 in 2016 and 2017 changing to 0.65 and 0.45 in 2018 and 2019 respectively.
Finally, another important element of the tax reform is the change of the tax revenue administration. Our goal is to make it simple, transparent and less exposed to biased treatment and misuse by tax authorities.
Our proposals in this point include the following:
▪ we should discard advance profit tax payments and establish a transparent and unbiased system for VAT refund from the state budget with equal requirements and rights for all VAT payers;
▪ we should officially release the data on VAT refund containing information on the respective payers, claimed VAT sum and refund progress;
▪ we should launch electronic offices for tax payers and define principles and mechanisms for their operation.
We are also aware of another extremely important element of the tax administration reform, which is the transformation of the State Fiscal Service.
We have already done a bit in this field. In June 2015, following several months of discussions with international experts, we elaborated and adopted a restructuring plan for the State Fiscal Service which should be implemented in 2015-2016. According to this plan, we must reduce the number of SFS employees by 30% (18000 employees) till the end of this year. We are now replacing the senior official of the State Fiscal Service and have already completed lustration at the SFS. We have also started a reform at the Office for big tax payers.
However, many issues remain to be sorted out. One of the rankling issues is the demilitarization of the tax police of the SFS. After discussions with MPs and business community we propose the following:
▪ creation of a financial investigation service on the basis of the tax police;
▪ demilitarization of the financial investigation service, abolition of the military status of its employees;
▪ the financial investigation service should have no right to perform tax checks of economic entities, which should contribute to the separation between the service and law enforcement functions of the State Fiscal Service;
▪ we should change our working practices and use analytic tools instead of enforcement mechanisms to control tax payments;
▪ the employees of the financial investigation service should be subject to the labour law, public service law and the regulations of the Tax Code.
So, my dear colleagues, the described compromise on the tax reform will allow us to meet the expectations of the society and business in Ukraine regarding the fast reduction of the tax burden. At the same time, it will help us deliver more fairness and transparency in the tax regulations and start to remove the numerous distortions in taxation.
This will enable us to make one more important step to restore trust between citizens and the government letting us hope that we will be able to de-shadow the economy of Ukraine.
Our way to this compromise was hard and sometimes painful. But I believe that important and fundamental decisions for the whole country always need detailed discussions with the society.
I am asking you to support this compromise and the draft state budget for 2016 which is based on the presented tax reform. I am asking for your support here and in the Parliament.
Thank you for your attention.