Single Tax in Ukraine has turned into a tool for tax reduction rather than reducing compliance burden for small businesses - IMF
MOSCOW. July 10 (Interfax) - The International Monetary Fund has criticized separate aspects of Ukraine's Single Tax System, pointing to opportunities for arbitrage between tax groups and for reducing taxes instead of its stated aim of easing the compliance burden for small businesses.
"Diagnostics of the ST framework have identified several shortcomings of the system: multiple rates and variations in tax base enable arbitrage between the ST tax groups, Ukrainian media quoted a policy discussion posted on the IMF website on Friday following the first review under the under the Extended Fund Facility.
"The ST became a tool for tax reduction rather than reducing the compliance burden for small businesses. Attractive concessions in the form of low effective rates are granted to legal entities and professionals, who would not be eligible for an ST regime in the rest of the world," IMF experts said.
They said ST taxpayers can strategically minimize their tax burden by repeatedly switching between the general income tax system and the ST system. This allows them to take advantage of the general system's loss carry-forward rule during periods of investment by opting-in to that regime at the start of the year but transiting back to the low-rate ST when the business, after the initial investment period, turns profitable.
IMF experts said complex criteria for group membership leaves room for discretion and complicates enforcement.
Separately, the IMF criticizes the 2% ST rate introduced after the crisis began, however the Rada has already passed a law on its abolition from August 1 this year.
The ST regime also creates a double challenge for the overall consistency and functioning of the income tax system, the IMF said. Its experts said the ST system in its present form in Ukraine particularly incentivizes the most profitable taxpayers to opt into the system, capping tax liabilities, underreporting and hiding turnover.
For labor taxation and labor informality, the ST is even more problematic given that numerous companies and individuals opt for self-employment status under the ST instead of a standard labor contract, making them eligible for much lower tax payments, the IMF said.
"Unjustified self-employment, an issue in many countries, is of prime importance in Ukraine. It introduces distortions, in particular because social security contributions are levied on the basis of the minimum statutory wage irrespective of hours worked, implying a lower effective rate for those who work longer hours," the IMF said.
The IMF said Ukraine introduced the ST system in 1998, however, since that time it has changed substantially and expanded compared to the initial goals. ST taxpayers are divided among four groups, it said. Over 2018-2022, the number of ST taxpayers grew 25% to about 2 million taxpayers and generated relatively stable tax revenues of approximately 0.9% of GDP during 2020-2022, the IMF said.