2% of GDP in Additional Revenues as a Result of a Crackdown on Simplified Taxation are Unrealistic

The review is a response to the article Tax Reform – What’s On the Table written by Pavlo Kukhta, member of the Editorial Board of iMoRe

Author:

1-2% in additional revenues as a result of a crackdown on simplified taxation are absolutely unrealistic figures. They only testify that those who produced them are very far from the Ukrainian realities and operate with abstract numbers only. 

Pavel Kuhta’s article is an interesting and professional piece that tries to more or less objectively compare the available options concerning tax reform. Of course, a lot is left out of the box, and I personaly would polemize with some statements – but here the author has a right for his own opinion and choice. To my understanding, the options are described mostly correctly with a couple of exemptions.

  1. The asset tax (on the real estate, fixed assets, etc.) is offered by RPR as a minimal threshold for a tax on redistributed profit (in the form of “option 4”, with no inspections) (RPT). In other words, it should be deductable from payable RPT. This important point is missing.
  2. The real estate tax should be accounted on the imputed value of land only. In such a way we completely eliminate discretion and any necessity in the inspections on this tax.
  3. A tax on a book value of the fixed assets in the most recent versions was offered as a temporary one, just for the period in which the base for real estate tax will be calculated.

A few more comments.

1-2% in additional revenues as a result of a crackdown on simplified taxation are absolutely unrealistic figures. They only testify that those who produced them are very far from the Ukrainian realities and operate with abstract numbers only. Accounting of costs in small business brings back all fallacies related to discretion=corruption, thus means in fact abolishment of simplified taxation. This should be necessarily noted in course of discussing of this proposition.

The problems with appraisal of fixed assets are likely exaggerated. According to the comments we obtained from practicing auditors, the most of large companies and all firms with genuine FDIs routinely update the appraisals of their assets according to international accounting standards. These firms own the vast majority of all valuable assets in Ukraine. Thus, it even might be an option to tax fixed assets of large business on a permanent basis.

The rest of my personal views on tax system and tax reform issues are explained in the series of articles I continue writing for VoxUkraine.

Tax Reform Week

Tax Reform – What’s On the Table (Pavlo Kukhta, member of the Editorial Board of iMoRe)

Open Letter to the Expert Community and the Ministry of Finance of Ukraine from the VoxUkraine Group of Economists

Pavlo Sebastianovich: Medium and Small Businesses Displaced From the Legal Field of High Tax Rates (Pavlo Sebastianovich, Civic Platform “Nova Kraina”)

Tetyana Prokopchuk: Business Believes that the Priority is to Simplify the Administration of Taxes (Tetyana Prokopchuk, Vice President of Policy of the American Chamber of Commerce in Ukraine)

Robert Conrad: Tax Reform is not Simply Changing the Law (Robert Conrad, Duke University)

Anna Derevyanko: Cosmetic Changes will not Work for the Society (Anna Derevyanko, Executive Director, European Business Association)

Ukraine Needs a Radical but Sensible Tax Reform (Anders Åslund, Senior fellow at the Atlantic Council in Washington and author of the book “Ukraine: What Went Wrong and How to Fix It”)

Roman Zharko: Core Problem of the Ukrainian Tax System is Practice of Discretionary Use of Fiscal Mechanism to Reach the Established Revenue Targets (Roman Zharko, PhD, Tax Manager, Baker Tilly)

Tax Reform in Ukraine: How to Accomplish the Impossible (Vladimir Dubrovskiy, expert of the RPR group)

Tax Reform in the Light of Macroeconomic Stability: the NBU Perspective (Dmytro Sologub, Deputy Governor at National Bank of Ukraine, and Serhiy Nikolaichuk, Director of monetary policy and economic analysis department at NBU)

Macroeconomic Implications of the Tax Reform (Yuriy Gorodnichenko, UC Berkeley, co-founder of VoxUkraine)

Tax Reform in Georgia: Lessons for Ukraine (Olena Bilan, Chief economist at Dragon Capital, member of the Editorial Board of VoxUkraine)


Disclaimer

The author doesn`t work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations