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Personal income tax
The 1997 tax reform failed to improve the outdated personal income tax norms, except for a reduction in the top marginal tax rate from 50% to 40% (in 2003 the effective tax rate levied on personal income exceeding approximately USD 300 per month was 40%). Thus, most of the 1992 norms governing personal taxation continued in effect until 2003, except for a reform introduced in 1998. This reform, however, was enacted solely with the aim of stimulating small businesses and entrepreneurial activities. This controversial reform introduced a “single taxregime” for private entrepreneurs, with simplified tax reporting and a very low flat tax payment (which substitute most other taxes otherwise payable). Leaving aside the intention of this reform, it is clear that it failed to set clear anti-abuse (or anti-avoidance) rules, with many businesses rushing to re-register their employees as private entrepreneurs (under a civil rather than labour relationship) to benefit from thesystem by abusing it.
Finally, the long-awaited 2004 tax reform will completely overhaul the Ukrainian personal income tax system. In fact, from 2004 Ukraine will introduce a flat personal income tax rate of 13% (taxing most personal income with few exceptions at this rate). This flat tax rate will be increased to 15% from 1 January 2007. The core element of this reform lies in the significant reduction of the tax burden on individuals. It also attempts to streamline and simplify the compliance procedures. However, the reform has also introduced many significant changes, ranging from major changes in the criteria for qualifying as tax and non-tax resident to changes in the taxation of certain types of income. It has also introduced anti-avoidance rules to the “single tax regime” for private entrepreneurs, effectively closing the doors to the abuse of this especialtax regime. In summary, this very positive reform also establishes, or in the case more precisely confirms that Ukraine is introducing reforms with a clear trend of lowering the tax pressure, streamlining compliance and adopting global tax principles.
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Payroll taxes
Through several reforms to the various laws regulating these taxes, the overall rate of payroll taxes due by most employers decreased from 51% in 1996 to the current 37.64%. This 37.64% covers the employers contributions to the Pension Fund; Social Security Fund; Unemployment Insurance Fund; and Fund for Social Insurance of Accidents at Work (the contributions to this last fund, however, depend on the level of risk of accidents for each sector of the economy). In turn, employees are also required to contribute to the State Pension Fund; Social Security Fund; and Employment Insurance Fund (for Ukrainian national employees only), with contributions generally reaching 3%.
Although the rates might be perceived as high, Ukrainian lawmakers introduced a cap on the base subject to social contributions (maximum monthly salary per employee subject to payroll taxes). This cap has been amended several times, but it has always been maintained at reasonable levels, with both employers and employees subject to payroll taxes for 2003 only on the first UAH 2,660 of salary per employee per month. Again to ratify the trend mentioned above, it is clear that taxes are going down and compliance is becoming less burdensome.
Finally, although still on the drawing board, Ukrainian lawmakers have been debating a reduction of the rates of contributions to the various funds, and the simultaneous substitution of all the current payroll taxes with a “unified social tax”, which ought to significantly simplify the current system.
VAT
VAT was initially introduced in Ukraine in 1992 and until 1997 it functioned as a form of turnover tax. In 1997 the VAT law completely reformed emulating the main principles under which this tax operates in the European Union. At that point Ukraine introduced a VAT rate of 20% on most transaction, with certain exemptions, and obviously also the 0% (zero rate) amongst other for exports. Despite many shortcomings during the development of the innumerable reforms that have been introduced in respect of this tax, VAT is finally taking the shape of a realtax on the value added by each participant in the chain from producers to consumers. The only really significant issue that still needs to be tackled and which is causing considerable problems is the refund of VAT to exporters, something that Parliament and the Government must deal with and resolve urgently. In any case, there is also a proposal to decrease the VAT rate to 17%.
Customs
In 2002 Ukraine adopted the new Customs Code, which becomes effective from 1 January 2004. Among other changes, the Customs Code introduced a new concept of customs value that complies with GATT/WTO requirements. In particular, customs value shall include license and other fees for the use of intellectual property that the buyer must pay, either directly or indirectly, as a condition of sale of the goods if such fees were not included to transaction value. This new Customs is a significant step in WTO accession, which is planned for 2004.