In less than four months, Ukraine’s new government team managed to voice out a considerable number of ideas in the economy, to present the bills, and even to adopt some of them. Perhaps the most ambitious project is a change in tax legislation – tax amnesty, and the universal property, income, and expenses declaration by the Ukrainians.
Transforming an idea into law
In the framework of the idea of the universal declaration of income, the Verkhovna Rada has introduced draft law No. 1183 "On Amendments to Ukraine’s Tax Code and legislative acts on the voluntary one-time declaration of the assets of individuals." The document invites Ukrainians to declare their property in the form of movable, immovable property, cash, securities, and other assets and to use it after tax.
Back in 2012, Oleksandr Klymenko, the then Minister for Taxes and Duties, proposed introducing this system. In 2014, Oleksandr Shlapak, the then Minister of Finance, voiced a similar idea, proposing to apply universal declaration and comparison of incomes and expenses of the Ukrainians in 2015.
In 2017, Volodymyr Groysman, the then Prime Minister, planed to elaborate draft a bill on the universal declaration of income and expenses by individuals.
Finally, in May 2019, Danylo Getmantsev, the then expert of the presidential team on economic issues put this issue on the agenda, which finally materialized in bill No. 1183.
Everything should be reportable
The proposed bill is technically small, but it is truly revolutionary if adopted, affecting the life of every Ukrainian.
The Tax Code of Ukraine would be supplemented by a special subsection, which imposes an obligation on individuals to carry out the so-called “one-time declaration,” which should report on all assets in the form of cash, property, securities, shares in legal entities (not only in Ukraine, but also in other countries of the world).
The document proposes a campaign for a universal declaration from January 1, 2020, to May 31, 2020, and imposes an obligation on the citizens themselves to do this by submitting a declaration to the supervisory authority (at the tax address of the declarant).
9% tax amnesty
In addition to the mandatory declaration, there are also some pleasant aspects: you can omit information on the source of the declared funds, circumstances of acquiring rights to them and the cost in the declaration. Almost tax amnesty in its purest form and legalization of property.
It is also necessary to indicate the amount of income from which the declarant has acquired the assets and has not paid income tax on individuals. That is the declarant indicates this amount on his own, and he will be required to pay income tax at a rate 2 times lower than that specified in Article 167 of the Tax Code of Ukraine - 9%. That is, when indicating income in the amount of 4,000 USD in the declaration as to the basis for the acquisition of elite real estate, you can pay a tax of 360 USD from it and calmly use the acquired property. If you have questions about the discrepancy of the declared amount, you can always refer to the right not to declare the value of the property.
However, there are some loopholes to reduce this percentage of tax. For example, if part of the assets is invested in government bonds with a maturity of 1 year without the right of early repayment or is on a deposit with the state bank for a period of 12 months without the right of early withdrawal, only 5% tax will be levied on this amount (not 9% for all other income). If you invest 4,000 USD in a state bank or government bonds, you will have to pay 200 USD.
Finally, the state undertakes not to bring the declarant to criminal and administrative liability for a number of articles of the Criminal Code, the Code of Administrative Offenses, the use of data from declarations as evidence or grounds in opening a criminal proceeding or conducting an audit.
Nevertheless, the indulgence is selective: it does not include acts interpreted as serious crimes against the foundations of national security of Ukraine, life, health and freedom of the person, peace, human security and the international law and order, as well as committed in the sphere of drugs trafficking, crimes in the field of official activities and professional activities related to the provision of public services, as well as acts that are corruption violations according to the law.
Live up-stroke income
The declarants might face some difficulties when submitting subsequent declarations of property status, in which Article 392 on control over the expenses of individuals comes into force.
According to the requirements of the article, the declarant will have to indicate not only his own income, but also the expenses incurred for the acquisition of assets, work, and services. At the same time, the expenditures mean spending money that exceeds 6,000 USD (the amount established for financial transactions subject to mandatory financial monitoring).
Simply put, after receiving a declaration of income and expenses from individuals during the next campaign (say, for 2020), fiscal service simply reconciles the indicated expenses, as well as cash specified in a one-time declaration.
If the expenses indicated in the declaration are higher than total income and assets in excess of 10 minimum wages as of January 1 of the reporting year, fiscal service gives such an individual 60 business days to explain the inconsistency between expenses and income.
If the fiscal service remains not dissatisfied with the response of a person living beyond their means, they can carry out a travel ban and impose a fine by obliging them to pay a tax of 18% of the excess of expenses over income and a fine of 25% of the tax liability.
For instance, if in 2020, the declarant submitted income information in the amount of 20,000 USD and 20,000 USD in cash in a one-time declaration, but only the indicated expenses amounted to say, 50,000 USD, then a person will have to pay 1,500 USD in the form of tax liability.
How can the proposed universal declaration campaign affect Ukrainians?
According to the experts, there are two main options: positive ones, when the proposed innovations would not practically affect the majority of Ukrainians, and pessimistic ones, which might lead to greater “shadowing” of the Ukrainian economy.
Another hunt for corruption or its legalization?
Economist Oleksandr Okhrymenko believes that universal declaration should begin with officials, starting with the president, who would not only declare his property but also make the provisions of the bill really work. Otherwise, this would end in the failure as the tax amnesty of 2015.
Otherwise, according to the expert, failure is inevitable, especially if tightening the screws is paralleled with reducing the amount of cash that can be operated on in banking operations without confirming their source.
Economic expert Oleksiy Kushch has a similar opinion, he believes that the main goal of the bill is not so much an attempt to find out the material condition of citizens, but to legalize shadow income.
"Recently, there has been a massive worldwide attack on dubious income under the BEPS (Base Erosion and Profit Shifting) program. Now in London, when buying property is over 50 thousand pounds, you must definitely tell the story of your first million. Switzerland is taking similar actions. All this leads to a narrowing of the maneuver field for domestic corrupt officials, and it is much more convenient for them to legalize their property in Ukraine than to bring assets and money abroad," Oleksiy Kushch commented on the proposed bill.
According to the expert, ordinary Ukrainians are unlikely to feel the consequences of the new bill. Most likely, the fiscal service will pay close attention to potential corrupt officials.
“The most logical thing would be to propose the introduction of mandatory universal declaration, not for all persons, but only those with assets for a sufficiently high amount (for example, from $ 1 million), which would make the law more specialized and justified,” the expert believes.
Go into the shadows
According to Oleksiy Kushch, the second scenario might, on the contrary, greatly change the life of Ukrainians. However, everything depends on the subsequent actions of the authorities.
“If the state decides to tighten control over cash flow and reduce the amount that can be used for cash operations from the current 2,000 USD to, say, 400-600 USD, it might cause some problems. Given the current prices, this amount is not always enough to buy decent household appliances, not to mention something more. As a result, both business and the population will try to convert to cash out of state control and thereby increase the shadow economy with a drop in the tax base," Kushch describes the pessimistic version of the events.
The expert considers the obligatorily submitting declarations to the tax service, which traditionally does not enjoy the confidence of Ukrainians, an additional irritant for the people, many of whom do not see any reason to legalize anything.