The fate of the draft laws 4309 and 4308 had been finally decided. The amendments to the Tax Code (4309) got 306 votes. The changes in the state budget got 305. President Poroshenko’s victory is obvious: early parliamentary elections will take place, Yatsenyuk will remain the head of the government, and therefore held responsible for the reforms, and the changes to the budget have been adopted. Most importantly, both the poor and the rich shall pay to the state budget. Yet, the value for money for the poor and the rich in Ukraine differs. They say "for some the diamonds are too small, others have nothing to eat". Now, let’s flesh this out.
Causes and effects of the laws
Russian blockade of the Ukrainian exports had reduced Ukrainian government revenues. Devaluation of hryvna was more severe than expected. Military operation areas did not provide enough tax revenues too. Ukrainian government and the IMF thus had sufficient grounds to expect 6-6.5% decrease in GDP in 2014, 19% increase in consumer prices (from December to December), 5.7% falling of real wages and the increase in the unemployment rate to 10%. The war in Donbas costs Ukrainians UAH 1.5 billion per month.
Review of Ukraine's state budget, budget savings, changes to the Tax Code and other unpopular measures appeared on the agenda. The changes made before were rather superficial. Now the significant transformation of the tax system is at stake, as well as the change of principles of taxation for individuals and large businesses.
Individuals will get poorer. Besides the increased fees for water and gas, individuals will have to pay (until January 1, 2015) the 1.5% War tax and 15% deposit interest tax. The big business will pay more too. Not surprisingly, these efforts of the government provoked the resistance of various lobbyist groups - farmers, metallurgists, miners and natural gas producers, investment bankers and others. In fact, the oligarchs and the owners of any profitable business will have to pay.
The government expects that changes to the Tax Code will eliminate the benefits and increase taxes and duties. This should provide additional revenues of UAH 11.4 billion to the budget till the end of the year and UAH 32 billion in 2015.
The main sources of budget replenishment: who will pay the bills?
Amended Tax Code includes four groups of sources of replenishment: increased income tax for individuals, increased tax burden and denial of benefits for business, amended administration of environmental tax and the revenues from the international partners (the EU).
1. Income from individuals (+UAH 6.2 billion)
15% on passive incomes. Taxation of income from capital (at 15% rate) as well as deposit interest tax. This tool will provide additional UAH 3.3 billion to the personal income tax. It has been previously initiated by the Government and adopted by Parliament.
A national war tax (1.5% of personal income), valid until January 1, 2015. This tool will provide additional UAH 2.9 billion.
There is an interesting trend related to the increase of individual tax burden. According to statistics, total revenue from personal income tax for the first half of 2014 was UAH 34 billion, which is UAH 160 million more than for the same period of 2013. At the same time the total revenue from corporate income tax was UAH 25 billion only, which is 5.8 billion less than last year. This trend looks puzzling even taking into account the decrease in revenues from enterprises in Donbas.
2. Revenues from business (+UAH 7.3 billion)
The following spheres cannot be called insufficiently profitable despite lobbyists’ allegations: production and sale of gas and ore, production of gasoline with ethanol added, exports of agricultural products, the sale of alcohol and tobacco products, operations with taxation optimization tools such as securities and derivatives. Let’s not forget that management of such assets is primarily performed by applying optimization schemes through "tax platforms" in Ukraine and offshore schemes abroad.
So called "tax compromise" of the largest oligarchs was an important outcome of the negotiations last week. Ihor Kolomoyskyy highlighted his contribution to managing the conflict and limiting military actions within Donbas borders. The amendments to the law, made available online last night, included the reduction of taxes for Kolomoysky’s enterprises (fee for use of mineral resources, extracting oil and condensate). To make up for these losses, 8% fee for use of iron ore was included the amendments. In fact, Akhmetov and Zhyvaho companies, as well as "ArselolMittal" will have to pay this fee. One billion reduction of government support for coal mines remained unchanged. Reduction is due to the rising coal cost and the optimization. Again, these will mostly hit Akhmetov’s pocket.
Hence, all the oligarchs will eventually pay, yet in different parts. The government expects the revenues per each article as follows (of course, if no optimization or decline in production will take place):
Oil, gas and iron ore producers. Increased payment for subsoil use for oil, gas condensate and natural gas production. Additional revenues shall total with UAH 4.8 billion. Kolomoiskiy, Akhmetov, Zhyvago, "MittalArselol" and smaller oligarchs controlling production enterprises will bear the losses.
Farmers. Budget reimbursement of UAH 1.8 billion of value added tax in cash. Amendments to the extension of VAT treatment for exports of cereals and industrial crops until January 1, 2015. Budgetary reimbursement will be reduced. The agrarian lobby represents different factions in Parliament. In view of public statements of lobbyists, government considered minor concessions on changes to tax legislation (these were postponed by 3 months), and a compromise was reached.
Forestry and woodworking. By cancelling VAT exemption for supplies of timber, fuel wood, timber industry waste. The additional revenues shall total with UAH 0.4 billion.
Tobacco companies. Increase in excise tax will bring additional revenues of UAH 0.3 billion due to amendments for taxing cigarettes without filter and those with a specific tax rate at a level set for filter cigarettes. If the current level of consumption maintains and the cigarette smuggling channels cut off, the increase in excise tax revenue will come true.
3. Changes in the administration of the environmental tax. Partial reduction of the environmental tax income to special funds for better financing of the relevant programs. UAH 2 billion will stay in reserve. In fact, it is not about increased revenues, but on change in spending the tax income.
4. The EU assistance (+UAH 4 billion). Revenues in the frames of the programs of the European Union.
In fact, ordinary Ukrainians and big business will pay for the crisis and the war in equal parts: UAH 6.2 billion by individuals and UAH 7.3 billion by business. However, the social value of mentioned costs differs. The launch of various optimization schemes may or may not affect the government's optimistic assessment of the projected revenues from the business.
Why was there a compromise?
The ‘tax compromise’ happened under the auspices of President Poroshenko. He hosted the consultations with coalition partners, the oligarchs controlling "Economic Development" (Igor Kolomoisky) and "European Sovereign Ukraine" (Igor Yeremeyev) groups, as well as industry lobbyists from different fractions positioned as influential individual MPs.
The stands of the agricultural, coal and steel lobby on to the negative impact of draft law 4309a were publicly announced and suggested blocking of votes. However, the results of the closed parliamentary voting mean a compromise was found. ‘Svoboda’ is likely to preserve its quota in Yatsenuk’s government. The other political actors expect to get political dividends due to early parliamentary elections. Were there the alternatives?
‘Svoboda’ alternative. The rich have to pay for the war.
This thesis has been repeatedly expressed by MPs. Not just by ‘Svoboda’ members, but also by other political actors, e.g. MP Mykola Tomenko, a freelance adviser to President Poroshenko. The question was how to implement this decision.
On July 22, 2014, ‘Svoboda’ MPs (Oleksandr Myrnyy, Ihor Miroshnichenko and Oleksiy Kaida) had registered the Draft Law 4348 on amendments to the Tax Code of Ukraine (concerning the war tax). The draft law provided for the differentiated War tax rate for taxpayers whose income and property in 2013 tax declaration exceed UAH 500 thousand. The variable tax rate was suggested (10% for those who declared more than 500 thousand and less than 1 million, 15% for those who declared more than 1 million and less than 10 million, 20% for those who declared more than 10 million and less than 100 million hryvnas). Those who declared more than 100 million of income and property for 2013 would have to pay 25% of the income tax.
For some reason, draft law authors did not provide a single number of projected revenue from taxing the rich, despite the voter’s love for populism. Beyond doubts, this approach corresponds with ‘Svoboda’s’ campaign promises ("to set progressive luxury tax", "to introduce progressive tax rate of "small business - low taxes, big business - high taxes", etc.). At the same time, the draft law included no specific calculations and thus might had been hastily prepared. The lack of appropriate calculations will likely become the grounds for rejection of the draft law in the parliamentary committee.
Interestingly enough despite the absence of specific calculations ‘Svoboda’ leader Oleg Tyagnybok in his blog posted the infographic showing how much two of his colleagues - Oleksander Myrnyy (the author of the draft law) and Oleksander Shlapak (responsible for submitting the draft law on behalf of the government) would pay. The failure to calculate the economic impact of such tax on the rich (and thus start of the reasoned debate) remains questioned.
Do the tax pits and corruption remain on the agenda?
Plenty of talk about budget reserves took place after the Revolution of Dignity. As usual, most business lobbyists were happy to provide information about the "shadow" tax rates and schemes (tax pits, tax platforms, state programs, etc). According to the calculations by First Deputy Minister of Revenue and Duties of Ukraine Ihor Bilous presented in late March 2014, the amount of fraud in the tax system in 2013 totaled with UAH 200 billion. That is turnover of "tax pits" only.
Ihor Bilous’s later estimates suggest that "tax platforms" in 2013 channeled more than UAH 300 billion. This means that the state budget lost UAH 50-70 billion. Why did these stay out of the state budget? Considering the economic crisis and hostilities in the east the huge amount of shadow costs still looks impressive comparing to modest additional revenues to the budget (UAH 11.4 billion in 2014 and 32 billion in 2015), which are expected from Law 4309. And the same time, the Head of mentioned fiscal department said they "managed to pull out of the shadows almost UAH 1 billion per month fighting corruption schemes".
It should be noted that Ihor Bilous confirmed the estimates of total losses made by the "Open Society" Foundation at a press-conference in early January 2014 prior the adoption of the state budget for 2014. The "Open Society" Foundation forecast also estimated “more than UAH 100 billion total loss in state procurement (about 12.5 billion dollars at the rate of 8 UAH / 1 USD), considering the 30% "kickbacks" and official evaluation of senior officials on budget losses due to corruption risks in procurement made in 2011".
What did the government do to improve the efficiency and reduce the amount of procurement by state enterprises, considering the facts of overvaluation of purchasing prices and 30% corruption mark-up became clear? Rhetorical question, is not it? Yet, this will remain an important source of budgetary spending optimization along with the reduction of the state apparatus, state aid cuts for coal mining companies, etc.