20:05 14.03.2024

Ukrainian Institute for Future proposes new liberal tax reform '4 at 10'

4 min read

The concept of liberal reform of the tax system of Ukraine, an alternative to the National Revenue Strategy, which involves a transition to four main taxes at a rate of 10%, was presented by the Ukrainian Institute for the Future analytical center on Thursday.

"After the reform, we are left with a single social tax of 10% and a personal income tax of 10%," director of economic programs Anatoliy Amelin said, presenting the concept at Interfax-Ukraine on Thursday.

It also calls for a 10% retail sales tax instead of a 20% value added tax (VAT) and a 10% tax on distributed profits instead of an 18% income tax, he said.

The submitted documents clarify that a five-year transition period is provided: during which a retail sales tax will be reduced from 15% to 10% at 1 percentage point (p.p.) per year and a personal income tax from 20% to 10% at 2 p.p. in a year.

In addition, "brutization" of wages is provided for, when only the employee pays taxes on it, both the single social tax and personal income tax are charged on a single base - salary, whereas today the single social tax is accrued on the wage fund and is a tax for the employer. With "brutization," the current single social tax rate of 22% on the wage fund corresponds to an 18% rate on salary, and the 18% personal income tax corresponds to a 16% personal income tax.

In addition, the presented liberal tax reform involves reducing the number of groups in the simplified taxation system from four to two: the first is a micro-business that pays a fixed patent amount, and the second is the rest of the business (turnover up to 2,000 minimum wages + 300 minimum wages for each employee), paying only a sales tax.

Other innovations include simplification of excise tax rules for legal manufacturers and sellers, minimization of control through the elimination of excise invoices with the implementation of indirect methods of control instead, synchronization of customs duty rates in product groups - one rate for the entire product group, as well as the transfer of financial resources directly to the regions for self-sufficiency and independence of local budgets.

Amelin said that the need for such liberal reforms is due to the fact that the Ukrainian economy is on the verge of collapse due to the full-scale invasion of the Russian Federation in Ukraine: almost 30% of GDP has been lost, most of the industrial regions are under occupation or completely destroyed, business is set to migrate to other countries, and the demographic crisis continues. Referring to an Advanter study on the state of business in Ukraine, he emphasized that the tax system is one of the key obstacles to the recovery and conduct of business - 27% of surveyed businesses said that the limitation for development is high taxes and fees, as well as interference from regulatory and fiscal authorities.

According to Amelin, liberal tax reform can improve the Ukrainian economy and launch its gradual growth, as it will help increase real wages and reduce the motivation to optimize and pay salaries "in envelopes."

Expert in economic programs at the Ukrainian Institute for the Future analytical center Yana Lavryk emphasized that among the effects expected from the reform are increased confidence in the state on the part of the population and a decrease in demand for currency, accelerated GDP growth and an influx of additional investments into the economy.

According to the calculations presented, Ukraine's GDP growth, if the reform is implemented, will accelerate to 6.3% in 2025 and 8.1% in 2028 instead of 5.5% and 4.3%, respectively, without reform; by 2030, the additional effect will reach $92 billion of nominal GDP per year, and the shadow economy will shrink from 35% to 20%.

The Ukrainian Institute for the Future also believes that such a tax reform will avoid the depreciation of the hryvnia to UAH 42.5/$1 in 2027 and UAH 46.8/$1 in 2028, limiting its weakening to UAH 41/$1 and UAH 43.1/$1, respectively.

At the same time, the authors of the concept of liberal tax reform admit that its implementation will increase the state budget deficit by UAH 321 billion, or $8 billion in 2025 and by UAH 419 billion, or $10 billion in 2026 and will remain in the range of $6-8 billion annually in the next four years, which can be partially reduced due to compensators.