Ukraine seeks to raise tobacco, petrol excises to EU level in 2024-2029
MOSCOW. Dec 28 (Interfax) - Ukraine's National Revenue Strategy for 2024-2029 enables tax authorities to access information on taxpayers' bank accounts, reinstates a progressive personal income tax system and transforms the country's system of excise taxes on tobacco products and fuel to bring it in line with the European Union's corresponding laws, Ukrainian media outlets have been informed.
The 2024-2029 National Revenue Strategy was approved by the Ukrainian government on December 27 and has been published on the Finance Ministry's website. The strategy's adoption of this strategy is one of the structural benchmarks of the cooperation program with the International Money Fund that Ukraine pledged to fulfill before the end of 2023.
PERSONAL INCOME
The strategy proposes replacing Ukraine's current 18% flat tax on personal income, introduced in 2016 instead of limited progressive tax rates of 15% and 20%, with a progressive tax system.
"To reinstate progressive rates with one or two substantially higher personal income tax rates for a portion of the income of individuals with high incomes that exceed the level set by the law, to replace the minimum non-taxable income with a personal social guarantee for low-income individuals," the document said, describing the planned changes.
The strategy also proposes a review of personal income tax benefits and special terms, introducing a system of incentives such as tax deductions for expenses on the development of one's own labor potential, children's education, development and expansion of one's own business, improvement of one's living conditions and amenities without external assistance, medical care, etc.
At the same time, the transition in 2016 to today's flat income tax rate has positively impacted the budget due to the absence of effective control over individuals' income, as supervisory bodies were unable to receive information from banks on the actual amount of money held in taxpayers' bank accounts.
"Therefore, simply introducing a progressive personal income tax rate without changing the administration instruments for this tax is not efficient," the document said.
All personal income tax reform measures will be aligned in terms of content and timing with simplified tax system reform measures in order to prevent abuse and discourage employers from opting for civil law relations with bogus self-employed persons instead of official labor relations.
In parallel with reforming the personal income tax system, the Ukrainian authorities will adopt legislative amendments enabling supervisory bodies to tighten control over individuals' incomes and expenses by receiving access to banks' information on the movement of funds in taxpayers' accounts, the strategy said.
Tax administration reform will have to be conducted prior to the personal income tax reform in order to ensure the confidentiality and protection of data in the State Tax Service's systems (including information received from taxpayers and tax agents).
SMALL BUSINESSES AND AGRICULTURE
The National Revenue Strategy proposes narrowing the use of the simplified tax system (that caters to individual entrepreneurs, small enterprises and agricultural producers) by excluding legal entities from it, adopting measures to reduce abuse, raising the registration threshold for VAT payers and raising the actual tax rates to general tax rates.
The documents envisages steps to merge Group 2 and Group 3 individual entrepreneurs (Ukrainian enterprises entitled to the simplified tax system are divided into four groups depending on the size of hired staff, their annual revenue and their field of operations) into one group in 2025-2027, which will pay the tax based on earned income using a graded tax rate scale.
"This scale will envisage a minimal rate of 3% for trade operations and will include a range of rates of up to 17% for a number of services (in order to encourage the voluntary transition to the general personal income tax system)," the strategy said.
The graded tax rates for certain operations and services will be raised gradually over the next three years.
According to the strategy, single tax rates for Group 3 legal entities will be gradually increased to the profit tax rate level (18%) over a three-year transitional period in the course of the simplified tax system reform, after which legal entities will be prohibited from using the simplified tax system.
As part of the simplified tax system reform, the list of operations permitted for Group 1 individual entrepreneurs will be decreased by excluding high-margin businesses from it. The fixed tax rate used by such individuals will be replaced with a tax levied on their actual income. Individuals that do not use cash registers (online registers) during the transitional period will have to pay maximum tax rates, envisaged for certain categories of operations after the transitional period is over.
The use of cash registers will be mandatory to the unified second group.
Meanwhile, the tax base of farmers (individuals) who will continue to abide by Group 4 simplified tax system rules will be expanded by introducing a tax on land based on its mass evaluation, the document said.
The reform will abolish exclusions that permit business operations without having to keep records and confirm the origin of commodities sold by them by providing corresponding documents. Such record-keeping will be simplified as much as possible, but will be mandatory regardless of a taxpayer's form of business organization and/or area of operations.
Prior to the reform's start, the State Tax Service will have to take a series of measures as part of tax administration reform to ensure the confidentiality and protection of data in the service's systems, including by switching to analytical work with anonymized data bodies (including information received from taxpayers and tax agents) in 2024, a move that should enable tax authorities to access information on bank accounts.
The simplified tax system reform, in turn, will start a year after the aforementioned points of the tax administration reforms are fulfilled.
TOBACCO AND FUEL EXCISES
Under the strategy, Ukraine will also reform its tobacco and fuel excise taxes, bringing them in line with the EU's corresponding laws and gradually introducing excises minimal for the EU market in 2024-2029.
Ukraine also plans to switch to the EU's minimal excise taxes on alcohol in 2028, also deciding whether to further increase the rates given the level of incomes in Ukraine, according to the strategy.
In 2027, under the strategy, Ukraine plans to impose a tax on sugar-sweetened beverages in line with world practice and, in 2024-2028, study the global experience of using cigarette vending machines as a tool for cracking down on the shadow market.
The main objective of the excise tax reform is to align this system with EU laws, because Ukraine's current excise tax rates are far lower than the EU's, the document said. The measure is expected to produce additional revenue of 1.5%-2.2% of GDP.
Ukrainian laws envisaged bringing the country's tobacco excise tax rates to the EU's minimal rates, adopted in 2017, before 2025, but the planned rate hike was since eaten away by inflation due to the use of the hryvnia as its base rather than the euro. Therefore, Ukraine's tobacco excise tax rates will be tied to the euro as they are aligned with the EU's
The strategy also calls for a comprehensive review of certain excises' structure in order to protect receipts, boost their adjusting qualities and simplify their use after the end of the crisis in Ukraine.
Ukraine plans to introduce control with electronic tracking of the turnover of alcoholic beverages, tobacco products and liquids uses in electronic cigarettes.
The strategy also tasks the Ukrainian authorities with bringing this system in line with European VAT legislation, including by adding to it certain provisions of the Council of the EU's November 28, 2006 Directive "On the Common System of Value Added Tax".
Specifically, Ukraine will have to review the list of existing tax benefits and instances of lowered VAT rate application to abolish those that are not mandatory in the EU. Apart from that, Ukraine's VAT administration system will have to aligned with the requirements regulating the VAT administration procedures and the system's functioning in EU member states.
Benefits introduced during martial law in Ukraine may be reviewed after martial law is lifted, the strategy said. Following the benefits system's review, some operations now exempt from VAT may become VAT-taxable but at lower rates. Preliminary estimates show that if a reduced 7% VAT rate is introduced for operations that are exempt from VAT today, it could bring approximately 335.1 million hryvni (a year) to the country's budget. The planned changes will be implemented gradually from 2025 to 2027 and will be aligned with the schedule for fulfilling Ukraine's EU accession obligations. Budget receipts growth is estimated at 0.3%-0.6% of GDP.
LOCAL AUTHORITIES
The strategy proposes enhancing local authorities' functions in local tax administration and conducting tax audits based on information from local authorities.
Corresponding legislative amendments will be drafted to expand local authorities' functions, as tax authorities are now entirely responsible for administration of budget-forming taxes for local authorities.
Legislation will also be adopted in 2024-2025, requiring local authorities to take stock of real estate property and land plots to check them for presence in the state registers of taxable assets and to add information on such assets, including information from archive documents, to the Justice Ministry's databases.
The strategy proposes formalizing in 2024 the Justice Ministry's responsibility to update data in the State Immovable Property Rights Register based on information submitted by local authorities and ensuring local authorities' right to access tax authorities' information on assets and entities that pay local taxes and other duties and are registered in the relevant administrative units.
The document also envisages laying the legal groundwork for inspections by supervisory bodies on the basis of local authorities' information on owners and users of immovable property that was subject to taxes in an improper manner.
A total of 1,952 local budgets are formed in Ukraine's regions, the strategy said. They are filled partly through local taxes and duties (the single tax, the tax on immovable property other than a land plot, land use fees, etc.) and partly through the distribution of nationwide taxes and duties (the personal income tax, the profit tax, the retail excise tax, payments for subsoil use to extract mineral resources of local significance).
In 2021, local taxes and duties accounted for a mere 6.2% of all tax receipts, and for around 26% of local budget's tax receipts. The single tax accounted for the bulk of local tax receipts - 51.5%, or 46.3 billion hryvni, land use fees for 39.2%, or 35.3 billion hryvni, and the real estate tax for 8.7%, or 7.8 billion hryvni.
REAL ESTATE TAX
The strategy calls for starting to levy taxes on real estate property based on its estimated value.
The proposed model is expected to replace today's system whereby the sum of tax is calculated based on the size of properties and the minimum wage in Ukraine.
Thus, Ukraine's State Property Fund will have to approve a regulatory act in 2024-2025 that will lay the legal groundwork for a real estate evaluation procedure that will reflect an asset's current market value and can be used for taxation purposes.
Real estate assets included in the State Immovable Property Rights Register should be evaluated in 2027-2028 and this information should be added to the database of assets' estimated value.
In 2027-2028, specialists of the Finance Ministry, the State Tax Service, the State Property Fund and the Justice Ministry will have to work out a model for levying taxes on real estate assets based on their estimated value.
The official exchange rate for December 28 is 37.62 hryvni/$1.