Capital Transfer Tax Myths

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CASE Ukraine`s senior economist Volodymyr Dubrovsky explained the capital transfer tax myths to the ‘Novoye Vremia’ media outlet.

In Ukraine, one of the most important components of the anticorruption tax reform is the reform of corporate tax. That is, the replacement of corrupt and vulnerable corporate income tax to a capital transfer tax (CTT).

The tax deduction and control over its payment is radically simplified. There is no longer a need to check the costs of enterprises. Accounting becomes completely independent (fiscal accounting is cancelled as such). Only directly documented operations will become taxable entities, not the aleatory accrued amounts that can be challenged arbitrarily. Instead of mass audits of enterprise accounting, tax authorities will have the opportunity to focus on controlling large-scale foreign economic operations, which are responsible for withdrawing about 10% of GDP annually from Ukraine.

Business that does not relate to such operations welcomes the release of tax-exempt investment. In addition to being exempt from burdensome inspections and corrupt pressures, it is able to grow faster even in the absence of access to finance.

But the fact that the payment of the tax is postponed until the payment of dividends in favor of the owners also has another tale. According to the experience of Estonia, – the first country that introduced a similar tax (Georgia has already joined it, and Latvia has adopted a relevant reform) – state budget`s revenues during the first year (or first 2 years) drop sharply, almost doubled. Because the tax base is narrowed.

In Ukraine, it will be the same situation as in Estonia, because it never suffered from ‘offshore’ abuses of this magnitude. If Ukraine succeeds in imply CTT to the at least part of those offshore ‘flows’, one can get a good compensator.

The relatively small fiscal role of the current income tax (revenues amount to about 2.5% of GDP) means that one should not expect a catastrophe for public finances. According to preliminary estimates, the 2018 budget will lose no more than 30 UAH billion (transfer pricing (TP) – the largest channel of income`s withdrawal – not taken into account). This is an amount within the margin of budget planning error in Ukraine. Most likely, it will be overarched with an increase in other revenues.

2018 total budget losses since the introduction of corporate tax reform should be no more than UAH 30 billion. It may be much more less, if the TP effective control will start. It depends on the success of the reforming. So, it is unlikely worthy to rely on a significant effect in the first year. But a huge amount is at stake, as for ordinary people.

In particular, these additional revenues may be due to:

– Transfer of 50% of the Naftogaz net profit – UAH 25 billion;

– Ordering the land registration, which should additionally bring (not less than) UAH 5 billion in the form of land tax receipts. Such an arrangement is a necessary component of the implementation of a full-fledged land market;

– Transfer to 2018 in terms of 2017 exceeding budget revenue;

– The ‘closure’ of VAT looting schemes by means of tax invoices risk-oriented blocking system. That may bring about USD 10-12 billion;

– Special confiscations. It was put in the budget, and we will be able to get it with high probability;

– Continued reform of corporate governance of state-owned enterprises, increasing transparency of their work (as of today, only 53 of the more than 3 000 state enterprises have published their expenses in accordance with the law).

The growth of pensions and wages, and, most importantly, the reform of the district heating companies should reduce the need for subsidies to pay for housing and communal services (the budget entails an increase in costs for this article). A significant effect should follow the further introduction of the ProZorro system.

CTT introduction should be a step that will ultimately bury the ‘Azarivschina’, opening the way to a thorough anticorruption reform. It can also give our economy a powerful impetus for growth, the economist says.

October 4, 2017