Tax changes adopted

A new Internal Revenue Code has been approved this month (November 18) by the Ukraine Parliament and is now due to come into force next year,  becoming one of the most controversial rulings for the last five years, with critics suggesting that abolition of flat rate taxes for entrepreneurs opens up more opportunities for intervention by corrupt officials.

Small and medium-sized businesses currently pay a flat tax of UAH 200-600 ($20-$75) per month, depending on the nature and volume of their business but the new code incorporates these small businesses into the general tax system rather than paying a onetime monthly payment that allows business owners to avoid dealing with tax officials.
One of the main points of the new Internal Revenue Code is the new level of relationship between the country’s tax administration and its inspection of the profits earned by individual businessmen. It is forbidden to refuse to submit accounts to the tax inspectors and those found guilty of contravening this rule will be punished as under the existing legislation. At the same time the powers of inspectors will be widened. For example, if a company declares losses during four reporting periods (once a quarter, six or nine months) the tax administration can inspect it without any notice.

Also, the procedure of administrative filing will be changed. Today if a company makes a complaint to the central office of tax administration then the next year it must address the district or regional centre and then it can address the court.


Prime-Minister Mykova Azarov says that the main achievement of the new code is the step-by-step reduction in tax rates. However, compared with the first variant of the Internal Revenue Code, the reductions will be much lower and will tax profits at a rate of 16%, which will be introduced only in 2016. Tax vacations are provided to small-scale businesses which have income of no more than UAH three million per year during the last three years and no more than 20 employees.


For some economic sectors such as light industry and three, four and five star hotels which start operation before 1st September 2012, there will be zero tax rates. This privilege will be extended to shipbuilders, ship-repairers, aircraft construction and airplane repairs (for a period of five years). Up to 1st January 2015 income tax will not be paid by publishing houses while energy companies will get this privilege indefinitely. Buyers and sellers of timber, grains, scrap metal and building and assembly materials used in the building of social housing will be exempt from rnpaying VAT. The same exemption will be extended to producers of agricultural and forestry products and the fish industry up to the end of 2014. Until 1st January 2016 components for the aircraft construction industry and goods connected with filmmaking can also be imported tax-free.


The document from the Cabinet of Ministers also describes how VAT repayments will be made to ‘honest taxpayers’, but the new changes may start not until 2014. There are calls a special 20 day audit to determine genuinely honest companies who would be eligible for repayments twice the average.


It was decided to leave a progressive scale of income tax: 15% for Ukrainians who earn no more than ten times the minimum wage ($1,100  - the minimum wage is $110) and 17% all others. Individuals with bank deposits must pay 5% tax on any income. There is also a proposed reduction in the tax paid by non-residents’ down from the current 30% to 15% and 17% depending on income level.


The main proposals in the Internal Revenue Code


Profit tax: 2010 – 25%


2011 – 19%


2012 – 19%


2013 - 18%


2014 – 18%


2015 – 17%


2016 – 16%


Exemptions offered zero rate profit tax:


Small-scale business for a period of five years, hotel business, light industry, biofuel production, heat and energy from biofuels, methane extraction and use, shipbuilding and aircraft construction for a period of 10 years and airplane repairs for five years


VAT


From the 1st of January 2014 VAT will decrease from 20% to 17%


Elimination of VAT charges on scrap metal concerns, grains and technical and cultural industries, forests and juridical, consulting and audit services.


The simplified system of taxation


Private entrepreneurs with incomes of less than UAH500 thousand per year will pay UAH 20 to 200 per month.


Private entrepreneurs with incomes of less than UAH 300 thousand per year will pay UAH 200 to 1500 per month plus make payments to the state pension fund.


Corporates with earnings of up to UAH 1 m per year will pay 6% of income plus VAT or 10% of receipts without VAT.


New Tax Code of Ukraine.


Main Points


The main changes we expect to come into effect in 2011 following the new Tax Code are:


 • Corporation Profit Tax – the rate is to change, with 19 % (2011-2012), 18 % (2013-2014), 17 % (2015) and 16 % (2016). Currently the rate is 25 %.


• Tax relief for 10 years for specific types of enterprises (consumer industry, hotels etc).


• VAT decreasing from the current 20% to a rate of 17 % by 2015.


• Tax on deposits at a rate of 5 % (currently 0%).


• Reduction of 12 different specific taxes.


• Real Estate Tax – new tax, imposed on real estate ownership, other than tenancy of land.


 From the 1st January 2012 the tax will be imposed on flats of more than 120 sq m and houses bigger than 250 sq m.


• Private Entrepreneurs, simplified tax system: some activities carried out by private entrepreneurs will be excluded from the imposition of the simplified tax system. A unified rate tax will be levied on IT specialists, increasing fivefold (UAH 1000).


• 5% tax on profit from savings deposits exceeding UAH 200,000  ($25 000) .