Taxation in Ukraine: who pays to the state, for what and how much

In the framework of the Truth Percentage joint project launched by VoxCheck and Ukrainian Radio we have figured out where the public money comes from and why we pay for everything, even for so-called free services. At the end of the article you can find some useful sources of information about tax rates and income tax usage directions in Ukraine. 

The public demands remain unchanged for decades: free public transport, free communal services and high salaries on top of that. This is understandable. If we have to pay for everything, what do we need the state for then? And above all, free medical care is specified in the Constitution.   

Where does the state get the money for all this „free” stuff?

According to the data of CASE Ukraine more than 90% of Ukrainians never paid the taxes independently. That is why they hardly suspect or understand completely that the state budget is filled from one clear source: their own tax payments.   

Most employees know that their salaries are somehow taxed. But in fact they are more interested in the „net” salary (tax-excluded). It is the employer’s matter to deal with the types and amounts of taxes on salaries. Moreover, some employees have no clear idea whether their earnings are taxed or whether they receive the „grey” salary.    

The whole state financing system is based on small contributions of millions of Ukrainians. This money is used to maintain the huge administrative machine, to pay for public procurements and to cover the expenses of all social obligations.

The taxes finance the so-called free medical care, low utility charges, retirement payments, free education and student grants, the salaries to public sector and so on. That means, if such public expenses are increased, the money can be taken solely from the pockets of Ukrainians.  

So what taxes are paid from the citizens earnings?

Three groups of earnings can be conventionally identified for direct taxes of Ukrainians.

The first group is the payroll taxes which the employee pays to national budget. 

These taxes include

• individual income tax (abbreviated as PDFO in Ukrainian)  in the amount of 18% from the salary  
• uniform contribution to compulsory public social insurance (uniform social contribution – ESV in Ukrainian) – 22%.
• military levy – 1,5%.

The second group of taxes is levied on individual entrepreneurs (FOPs in Ukrainian). The FOPs independently pay uniform tax (EP in Ukrainian) and ESV depending on the type of their business. If the FOPs are taxed under uniform taxation system they additionally pay PDFO and military levy.   

The third group is the taxes levied on passive incomes : bank interests, royalties etc. These are levied with 18% tax (the same as PDFO)

Moreover, there are indirect taxes. All Ukrainians without exceptions pay them, sometimes without knowing it.

According to the estimation of CASE Ukraine, approximately one fourth of the takeaway money received by the worker is withheld to the public budget as consumption taxes, or indirect taxes, no matter if the received income is legal or untaxed. 

Every time we buy something in the supermarket or receive any service (utilities payments included), we pay 20% from the cost of the goods as value-added tax (VAT or PDV in Ukrainian) . By the way, the VAT was implemented in Ukraine as early as in 1991 .

Tobacco and alcohol products are additionally levied with the excise tax. The imported goods are levied with the import duties. 

To put it simple, even if the citizens do not pay any direct income taxes, they “sponsor” the Ukrainian state by any means.

So why has Ukraine such high taxes, with living conditions poorer than in Europe where the taxes are lower?

This is a widespread myth launched by non-attentive media and pseudo-experts. 

Ukraine has a relatively low 18% individual income tax (PDFO). On the contrary, the top level of this tax can be up to 50% in the European countries and the USA. There are countries where the tax rate is even higher, France for example.

By the way, there are correct comments on this issue from some Ukrainian politicians, likewise, the former head of State Fiscal Service Roman Nasirov and the parliamentarian of the 8th congressing from Samopomich party Tetiana Ostrikova.

There are indeed rather flexible tax preferences in the European countries, and the average rate of VAT from the GDP is about 7% both in Europe and worldwide .

According to the  research of PWC the overall tax load in Ukraine is 51,9% while in the EU and in the European Free Trade Association the average rate is 40,3%.  However, this research does not take into account the lowering of ESV rate in Ukraine in 2016 to 22%, which means twice lower. So, Nasirov is right, now the overall tax load in Ukraine is lower than in Europe. 

As for Yulia Timoshenko, she lied and manipulated with VAT several times. The brightest example is given at the presentation of her “New economic course”.

Definitely, there are too many indirect taxes paid in Ukraine. Value-added tax is levied on much wider range of goods, compared to the European countries. There is high taxation of salaries fund which is paid by the employer while the employee might not know about it, but anyway it is covered by the worker in the end. There are also excises and import duties. All in all it amounts to about 60% of all tax revenues. The illusion of lower taxes is based on the fact that the tax payments are made not by citizens on their own but by the companies and businesses which act as the so-called tax agents.

Another topic for lies and manipulations is the distribution of tax burden. For example, in 2016 the former General Attorney Yuri Lutsenko highly decreased the quantity of workers who “support” the retired people.

 42,7 million people live in Ukraine. 12,3 million are retirees, 16,5 million people are employedі. It is difficult to check how many people get three minimum salaries; even so, if the quantity is true, they actually pay the taxes.  Скільки чоловік отримують три мінімальні зарплати, перевірити важко, але навіть якщо цифра правдива, то податки вони насправді платять. There is the individual income tax preference for those who get less than 1,4 of the minimum salary but they still pay the uniform social contribution. Moreover, the 1 million of “simplifiers” still pay the tax, which goes to the state treasury. In addition to the individual income tax and “simplifiers” tax, people pay VAT and excise. It is also incorrect to say that all people live off the budget money. 

So, where can we find the truth about taxes?

The social and economic research center “CASE Ukraine” made “The Bill from the State” online calculator which calculates in the game form how much tax you pay from your earnings and where they are spent for; one can see, for example, which part of levies goes to education, or to the retirement payments, or to the state security and defense.   

All tax rates can be checked out in the Tax Code, or at the website of the State Fiscal Service. The latter developed the portal with the structured tax information: who pays what and on which conditions.  

You can find competent expert comments on the tax reform from the writings of Oleksander Pochkun, the managing partner of  Baker Tilly Ukraine and iMoRe expert; Volodymyr Dubrovsky, the senior economist of CASE Ukraine; Oleg Getman, the tax reform expert from the RPR coalition, Oleksiy Gerashchenko, Kyiv-Mohyla Business School (KMBS) lecturer, the specialist on financial management and economic issues.