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Yatseniuk to business – “Come out of the shadows”

December 28, 2015

The newly adopted tax code, upon which the 2016 budget is founded, reduces employers payroll tax from 41% to 22% – a radical reduction to a tax commitment of a tax that very few employers actually pay unless they are simply too big to avoid the tax radar.

Thus the SMEs and private entrepreneurs are being asked to pay a 22% tax that they generally don’t pay now – instead of a 41% tax they generally don’t pay now.  Of those that do pay it in an effort to be quasi-legitimate with the tax authorities, generally it is done based upon the minimum wage, paying employees the remainder of their salaries in cash in an envelope.

In short, the Prime Minister is stating – “Now I would like to appeal to entrepreneurs – radical reform requires your understanding, responsibility and position. We have reduced by half the tax – it gave you an extra life.  As a result, I ask each Ukrainian businessman to come out of the shadows and stop paying salaries in envelopes.

A rightful and correct appeal for responsible citizenry and business from a national leader (at least currently).  Readers may ponder whether the MPs of the Verkhovna Rada will also take their assistants and advisors “out of the shadows” too – for your author knows many of them, and they are also paid cash in envelopes more often than not.

The expectation hope therefore is that the Ukrainian business world will begin to pay the 22% tax they generally haven’t paid instead of the 41% tax they haven’t paid.

How best then for the SMEs and private entrepreneurs to employ the tax savings they have been offered (on the taxes they have never paid)?

The Prime Minister humbly suggests those tax savings be used to increase the generally untaxed (or taxed on the minimum wage) salaries of the employee.  (Naturally he was not so blunt as to suggest salary rises equal to the theoretically saved 19% tax – but salary increases he certainly did suggest as a result of the “tax saving”.)

In order to keep pace with the projected inflation for 2016, those salary increases would need to be 12% to retain current salary purchasing power.

However, there is the matter of employee tax to consider – most of whom have also not paid tax, for they do not appear on their employers pay roll – or if they do they officially earn the minimum wage from which any tax is paid, with the rest coming as cash in an envelope.

Thus every currently non-taxed “employee” or “minimum wage employee” would become taxed at 15% for the vast majority – 20% for a chosen few earning far beyond the average wage.  (A Deloitte overview here regarding the generalities of the new Tax Code.)

In effect, the request is to SMEs and private entrepreneurs to become solid, morally upstanding businesses/citizens – employers paying the 22% tax instead of the 41% tax avoided, and employees pay 15% tax instead of the zero contributions currently made.

In short, the “western world” of universal suffrage is part of the “European integration” and whilst it may apply to voting, it also indirectly applies to being taxed – the Ukrainian leadership appeals to each citizen to play his or her full part in that tax effort.

So be it – or probably not.

Unless and until serious efforts are made, and seen to produce, revenue from large scale tax avoidance from those within the Verkhovna Rada itself it is more than questionable regarding business and societal “buy-in”.  As has been written before, the current investigations into Boris Lozhkin (head of the Presidential Administration) and money stashed in Austria will not find any evidence of money laundering that the investigation is seeking to find – significant tax evasion however, is a different matter.  To be fair to Mr Lozhkin, his is a most recent case that leaked went public, yet he is an example of the norm within the Verkhovna Rada and Bankova – he is not the exception.

As the current leadership has spectacularly failed (deliberately) to jail any (in)famous personalities for the chronic corruption (for those convicted would sing songs about those in power and their corruption) despite tomes of evidence in the public domain (and heaven only knows what evidence is held privately) there will be a severe lack of constituency trust when it comes to bringing the multi-billion UAH tax avoiders to account either – whether their deeds be past, current or future.

To encourage the Ukrainian constituency to pay its taxes, the Ukrainian constituency will want to see that the elite are paying theirs – and held accountable for avoiding doing so.

Yats

What are the chances of that when Verkhovna Rada aides and assistants are paid with cash in envelopes and it is possible to tie hundreds of Verkhovna Rada MPs to hundreds of off-shore companies?

All of that said, the Government of Ukraine has to start somewhere and clearly it believes that 22% employers tax is the place to start – though it would help considerably if they would set the example too.

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