Five months after the country adopted a new tax code, authorities, lawmakers and lawyers are debating how the law will affect both taxpayers and the government treasury.
Amendments to the code, which President Leonid Kuchma signed into law on May 22, included implementation of a 13 percent flat tax on personal income, effective Jan. 1, 2004. The flat tax replaces a system that taxed income at between 10 percent and 40 percent.
Under the new law, the government will introduce a five percent tax on the interest earned on bank deposits at the beginning of 2005, though it is possible that depositors will be taxed before 2005.
Lawmakers did not exclude interest on bank deposits from a list of taxable profits, said Dmytro Fedoruk, an attorney with the Shevchenko, Didkovskiy & Partners law firm.
Due to the legal loophole, tax authorities could begin to levy taxes on interest income at any time.
State Tax Administration Deputy Chairman Maksym Stepanov said that the law allows tax authorities to tax bank interest at 13 percent as early as 2004.
On Oct. 7, tax officials asked parliament’s banking and finance committee to clarify the law by issuing detailed instructions. Without legislative guidance, the administration felt that serious economic damage could result.
“Tax authorities tend to believe that if interest on bank deposits was not excluded from the list of taxable profits, interest should be taxed,” Fedoruk said. “As a result of this interpretation of the law, it is curious what the real purpose of postponing enforcement of the legislation on bank deposits is.”
Some lawyers are calling for amendments to the acting legislation, while others stress the importance of determining the lawmakers’ intentions before debating semantics.
“Before engaging in a discussion about the possible interpretations of the law, it’s important to note that it’s absolutely clear, and was even reported by lawmakers, that the idea was to establish a grace period for the taxation of interest earned on bank deposits until Jan. 1, 2005,” he said.
Yury Prozorov, senior adviser to the Analytical Center of the NBU Council agreed.
“Even if the parliament’s lawmakers made a mistake while preparing the final version of the law, the spirit of the law should prevail over the letter of the law,” he said. The committee would be wise to clean up the poorly drafted legislation before the end of the year, he said.
Prozorov said that while many countries charge tax on bank deposits, Ukraine is not ready for such a move.
Vitaly Migashko, chairman of NRB-Ukraina Bank, said the introduction of a 13 percent tax on bank deposits would lead to a decline in deposits.
Since 2001 there has been sharp increase in bank deposits. Depositors’ savings grew by 3.8 percent in August, reaching Hr 26.7 billion, Interfax reported Sept. 24.
Migashko said that most depositors are individuals who deposit between Hr 1,000 and Hr 5,000.
By implementing a tax on bank deposits, tax officials aim to find additional reserves to compensate for a reduction in the amount of taxes collected, Prozorov said. But, he said, Russia’s experience shows that the 13 percent tax rate should encourage more people to report their incomes, taking a bite out of the shadow economy and increasing overall tax revenue to the government.
Russian tax revenues increased markedly after the government passed a similar income tax law two years ago.
“Introducing a tax on bank deposits would undermine the trust Ukrainians have in the banking system, rather than providing additional budget revenue,” he said.
Afraid of being investigated by tax officials, depositors would pull their money out of banks, choosing to hide their savings under mattresses, and making the money unavailable for investment.
But Migashko said that with few other legitimate alternatives, such as private pension plans or investment funds, people will ultimately have no choice but to return to banks.
While it is not clear how the government’s tax policy on bank deposits will shape up, Fedoruk said that the process of ironing out the wrinkles in any new legislation is normal.
“The lack of clarity in new regulations always results in a range of interpretations that open the door to disputes between different parties,” Fedoruk said. “Such disputes merely push Ukraine farther away from a healthy business environment, which is highly desired in today’s economy.”
