Whenever somebody begins discussing what economic reforms Ukraine needs, it is often claimed that the Ukrainian government should cut taxes, which would lead to an economic miracle. There is also the idea of establishing an offshore zone in Ukraine. At the same time, they don't seem to notice that Ukraine already has an offshore zone, which is called the "simplified tax system".
Obviously, the emergence of simplified taxpayers in Ukraine was a necessary measure. When President Kuchma was setting up the mechanism of simplified taxation in the mid-1990s, it was pretty much a life saver for many Ukrainians. At the time, the country had an abundance of unemployed citizens who could not get hired, nor could they set up their own businesses in the absence of concessions. Hence, simplified taxation became the necessary concession that allowed Ukrainians to live through the troublesome decade of the 1990s, three crises and two revolutions, along with many other adventures. Now, however, some are wondering what to do with this group of taxpayers? Should the mechanism remain in place? If it shouldn’t, what could it be replaced with?
European Union member states do not offer their citizens the kind of concessions that Ukrainian simplified taxpayers enjoy. This is why may European businessmen are shocked when they hear about Ukrainian concessions. It is not rare that while setting up businesses with foreign capital in Ukraine, they engage their “own” simplified taxpayers, which allow them to obtain higher margins of profit in the course of their operations in Ukraine.
I will let you be the judge of this: where else in the world one may pay taxes of 0.6-0.7% on trade turnover while simultaneously be exempt from paying value-added tax? Even if VAT is to be paid, that still amounts to a tax burden of around 3%. It is hardly surprising that many simplified taxpayers use their concessions to “launder” money for businesses operating under the general taxation system. It was no longer a secret that the majority of the goods and services turnover in Ukraine is “performed” by simplified taxpayers. Their share in the total volume of goods sold in Ukraine in 2017 was 68%. That being said, Ukrainian simplified taxpayers paid a total of around UAH 10 billion in tax payments, which makes up a modest 4% of all tax revenue in the Ukrainian state budget. Whoever argues that Ukraine’s economy has a large shadow economy is right – we do have an extraordinarily large “shadow economy” thanks to, or rather because of, our domestic offshore zone – the simplified taxation system.
By signing the agreement on association with the European Union, Ukraine has accepted the obligation to bring the national legislature in line with the European laws on taxation. Although there is no simplified taxation system in Europe, there really is a small share of small-scale entrepreneurs, who, despite various restrictions regarding the nature of their operations and the number of employees they hire, are allowed to choose whether they want to pay taxes as a corporation or as an individual. Everything is simple and straightforward. If someone sells goods at a market, whether alone or with the help of a hired assistance, if someone owns a restaurant, a barbershop or a hostel, he or she has the right to file his tax payments as an individual, which exempts him from the liability to pay VAT and turnover tax. However, there is a limit on the total income amount. This is very similar to our simplified taxpayers that operate as part of the first category. These are the people that could be exempt from paying VAT and other taxes payable by corporations. As of right now, the simplified taxpayers of the first category are paying only 0.7% of their turnover, as well as the unified social tax for themselves. That is arguably what should remain in place, that would be similar to the way it is in Europe. When it comes to simplified taxpayers included in the second category, they are indeed responsible for most of the money laundering. The third category of simplified taxpayers should be transferred to the general taxation system. But in order for that not to appear just as a stick, it would be appropriate to lower VAT payable by corporations from 20% to 18%. This would certainly be a great incentive for Ukrainian businesses.
Obviously, simplified taxpayers would object to any reforms, it is far easier to “launder money” for big corporations and to complain about taxes, oligarchs and all those who are standing in their way. But the problem is that as long as there will be simplified taxpayers of the second and third categories, there will be no real investors coming to Ukraine from overseas. There have been numerous instances of foreign entrepreneurs that were willing to operate in Ukraine and were operating legally and paying taxes here, but were forced out of the market by our domestic competitors who are “laundering money” through simplified taxpayers and, therefore, are able to lower their prices and thus increase profits. In the end, encouragements and ratings do not seem to help.
Of course, if simplified taxpayers of the second and third categories are offered an opportunity to be transferred to the general taxation system, many of them would simply shut down their operations. Because they are not willing or able to operate legally, and actually they didn’t create a revolution to pay taxes like European businesses do. Thus, there might be an unemployment issue, but that is only in the short run. A reform of the simplified taxation scheme is like an operation for a patient who has cancer. At the beginning, the patient feels weak after the operation, but he gets better over time. But if no operation is performed, the patient simply dies. That is the case with our simplified taxation system. Surely, one could leave the issue as it is, but then the “shadow economy” would only flourish and all of Ukraine’s businesses would have to seek assistance from simplified taxpayers to launder their money. Another option is to create a policy similar to the European one, and it is certain to cause complaints and outrage in the short term. But after some time, it will become clear that it is better to operate “like they do in the EU”. I let you decide for yourself which option works better for you.