The Ukrainian parliament on March 30 approved the first reading of a tax amnesty bill in a historic move to fight widespread tax evasion which costs the country $7.7 billion a year.
If the bill is signed into law, those who dodged taxes will have one year to come clean with a voluntary one-time declaration of assets, starting on July 1. The state asks them to share information about their earnings in exchange for tax forgiveness.
Overall, this law concerns taxpayers who earned money honestly and, for some reason, forgot to declare it rather than criminals, according to Constantin Solyar, a partner at law firm Asters.
“It doesn’t allow to legalize (bribes) or other illegal incomes,” Solyar said
Fighting cash, tax evasion
If the bill is passed in the second reading, tax evaders can have a fresh start.
“The implied message the government is sending is ‘let’s start anew, you pay taxes and we forget about the old penalties,’” Solyar said.
After submitting a declaration, those who evaded taxes will only have to pay a one-time fee of 5% on their income for assets in Ukrainian banks and 9% on their assets kept abroad. They won’t have to pay the fines they currently owe to the state.
This bill also aims to reduce hand-in-hand cash transactions to fight shadow economy, which remains immense: Up to 60% of people and businesses dodge taxes in the country, according to tax experts.
Over $4.3 billion were lost in tax revenues in 2020 because employers paid undeclared salaries in cash and evaded $1.5 billion in value-added tax on goods and services.
Taxes in Ukraine are relatively high: 41.5% per employee, including 22% on the gross salary of each employee, which the employer pays, and 19.5% of personal income tax.
The new legislation is part of the “BEPS law” (Base Erosion and Profit Shifting) adopted in July 2020 to fight offshoring by tracking and taxing profits earned by Ukrainian citizens worldwide.
Ukrainian business owners had to declare their companies, trusts and partnerships abroad. In exchange, they were offered to pay fewer taxes on their assets starting on Jan. 1.
Mixed feelings
Solyar also thinks that, while Ukrainians should trust authorities, the state should also provide a clean tax collection system.
“Some taxpayers believe that declaring their wealth makes them an easy target for criminals or corrupt officials,” he said.
Many people considering amnesty may decide to remain in the shadow because they think hiding their taxes from law enforcement is less risky given the weak rule of law in Ukraine. That’s why the new bill provides anonymity to taxpayers. Registration can go through a notary to keep the taxpayers’ identities confidential, according to Solyar.
However, Goesta Ljungman, the resident representative of the International Monetary Fund, expressed mixed feelings over the tax amnesty in an interview with news agency Interfax-Ukraine on March 30.
“We are skeptical about tax amnesties in general,” because they often hurt tax collection in the long run — people may decide not to pay taxes, expecting another amnesty in the future.
“It is also absolutely crucial that the amnesty is not allowed to be used as a vehicle to launder proceeds from crime and corruption,” Ljungman said.
