We tax you, we tax you not

Today’s FT issue features a story on upcoming changes in the Ukrainian tax system. At first sight, it seems that the country is about to adopt a fiscal approach that goes out of sync with the general CEE trend: while countries like Croatia and Poland are considering tougher environment for corporate tax payers, and Hungary has already implemented an extraordinary financial levy, Ukraine is lowering the fiscal pressure aiming to have “one of the most liberal tax codes” in Europe – all to attract foreign investors.

According to Borys Kolesnikov, Ukraine’s deputy prime-minister, as quoted by FT, “corporate profit tax will be cut from 25% to 16% by 2014. Small businesses will get a five-year tax exemption, while light industry and hotels will enjoy 10-year tax holidays”.

Considering the dire economic state of the country, such tax breaks seem too generous to be true – and unfortunately they are. We have asked our Ukrainian financial expert, Dmitry Efimov, to comment on the governmental move.

“The draft tax code presented to the Ukrainian parliament is a disgrace to the country’s government".

"In fact, the state is attempting not to lift, but to increase the tax burden on corporate and private taxpayers. To be eligible for simplified taxation, a company will need to have an annual income of no more than UAH300,000 compared to the current UAH500,000. Coupled with inflation, this measure will hit thousands of small businesses very hard”.

For some reason, FT has forgotten to mention that while tax breaks and cuts will come into force “by 2014”, the tax base for corporate taxpayers is likely to get wider starting from January 1, 2011, Efimov points out, - and it will be widened at the expense of small businesses. “Lower corporate profit tax and tax holidays are going to do nothing for an average company, as long as pension and social security together with profit tax account for around 67% of the total payroll”, he adds

So, after all, Ukraine is not out of sync with CEE tax trends but somehow such adherence to regional standards doesn’t make its citizens happier - or the country financially more attractive. And if so, why should foreign investors be bothered?

For those of you who want first-hand info on the draft reform – and are ready to demonstrate good command of Ukrainian, here is the link to the official papers.

For some reason, FT has forgotten to mention that while tax breaks and cuts will come into force “by 2014”, the tax base for corporate taxpayers is likely to get wider starting from January 1, 2011, Efimov points out, - and it will be widened at the expense of small businesses. “Lower corporate profit tax and tax holidays are going to do nothing for an average company, as long as pension and social security together with profit tax account for around 67% of the total payroll”, he adds.

So, after all, Ukraine is not out of sync with CEE tax trends but somehow such adherence to regional standards doesn’t make its citizens happy - or the country financially more attractive. And if so, why should foreign investors be bothered?

For those of you who want first-hand info on the draft reform – and are ready to demonstrate perfect command of Ukrainian, here is the link to the official papers.