CASE Ukraine Senior Economist Volodymyr Dubrovsky writes in his article for ‘Dzerkalo tyzhnya’ (Weekly Mirror) that the corporate tax reform is one of the most critical components of the tax reform in Ukraine, which is long and hard fought by experts, activists and numerous business associations and their coalitions for.
Ukrainian tax system, according to surveys of business, takes confidently leading places among business climate issues related to economic policy. In order to fix this situation the Reanimation Package of Reforms ‘Tax Reforms’ group was created three years ago.
According to the expert, the income tax seems to be more than problematic, especially given the significant progress in other areas: unified social tax reduction to 22% and some changes in VAT administration, including launching a single register for VAT compensations.
That is why the idea of replacing the income tax with capital transfer tax has emerged.
It is necessary to ‘reset’ (with a substantial reduction) the fiscal service in order to bring back those who desire to work honestly for a decent wage, rather than engage in extortions and incarnating plans of wheedling out ‘tax burden’.
This is the main essence of the reform. From a purely economic point of view, capital transfer tax (CTT) is good because it postpones the time of payment until you distribute dividends. This means that it leaves resources for reinvestment in the business. This gives an advantage to those who consider opportunities for profitable investments, especially for growing new companies who find it difficult to attract loans. Instead, they are paid by those unprofitable (real or fictitious) ones, who ‘eat out’ their capital.
To implement in practice a conceptually pure approach, we should use an available ‘conceptually pure’ state machine and preferably also ‘conceptually pure’ people.
Transaction costs have another important economic feature: they destroy value. Resources go to ‘nowhere’ without bringing any benefit to society. It is how the high efficiency of economies in countries with good institutions and high confidence explained in general terms. But the audit, accounting, control, reporting — these are also transaction costs, and they also reduce by itself the social welfare.
Public benefit is measured by how they will be spent more effectively if the ‘fall’ to the budget. That is, even in the best case, for example, if the state uses this money to produce bigger by half more goods than it could be produced by one whose money was confiscated (although it is difficult to imagine such a situation). To make taxpayers collectively spend a billion in order to collect to the budget a billion more means to reduce the overall wealth of the country in half.
And if the money is simply redistributed as, for example, in pension or social programs, in this hypothetical example to the each billion (received in such a manner) one should add another wasted one. And, of course, the task of the developers of the tax system is to cut such unproductive losses to a minimum.
- ‘Payments equivalent to dividends’. To allow tax authorities qualify a particular purchase as a ‘fringe benefit’.
- Control of the ‘conventional prices’ when selling goods to those who do not pay capital transfer tax (in general, simplified tax system users, but in this formulation also NGOs, individuals, etc.).
- To impose CTT on all payments to the simplified system subjects for their works and services
- There are various mechanisms to combat ‘the erosion of the corporate tax base’ which are developed and implemented in the world. Ukraine is strongly invited to join the respective programs, implement their recommendations and sign the Convention on the exchange of information in this area.
- If one consistently upholds and applies the protection mechanisms prescribed in the CTT bill, it is possible to get the same, if not greater, effect — that is a conclusion of Robert Conrad, who is a very meticulous American expert.
- In contrast to the illusive hopes for compensation via simplified tax system (with disastrous social and political consequences), it is quite real in this case to cover a ‘failure’.
- Significant reserves lie in land tax, which, at first, is being collected very badly. Local authorities still do not even know a good half of the owners of precious land pieces and do not particularly want to learn. Secondly, it is the subject of unprecedented benefits for other taxes which are provided with on an individual basis and are at the discretion of local authorities.
Thus, as the expert says, (given the brief of the features of our economy) if we focus on the ‘big fish’, some hundreds of qualified professionals (with adequate salaries) may well provide fiscal accountability of the reform. And if we add financial investigations service (it is being formed), it is possible even to increase revenues.