Ukrainian Business Environment (TAXATION) Lecturer Anatolii N. Shysh The Chair of Statistics and Economic Analysis

Context ► The World Bank Group Ranking: Leaders, V4:Countries and Ukraine ► The Ukrainian Taxation System ► Taxation in Agriculture ► Expecting Changes: New Tax Code

Assumptions about the business ► Is a limited liability, taxable company, which started operations on ► Is 100% domestically owned and has 5 owners. ► Has a start-up capital of 102 times income per capita at the end of ► Performs general industrial or commercial activities. ► Does not qualify for any benefits based on the age or size of the company. ► Has 60 employees ► Has a turnover of 1,050 times income per capita. ► Has a gross margin (pretax) of 20%. ► Distributes 50% of its profits as dividends to the owners. The business:

The World Bank Group Ranking: Leaders, V4:Countries and Ukraine

Country Key Indicators of The World Bank Group Ranking ► Starting a Business ► Dealing with Construction Permits ► Employing Workers ► Registering Property ► Getting Credit ► Protecting Investors ► Paying Taxes ► Trading Across Borders ► Enforcing Contracts ► Closing a Business

WBG Ranking through Key Indicators, 2010

The Ranking of Doing Business in Ukraine (WBG version), yy.

Comparative Analysis of Paying Taxes * - Countries of Organization for Cooperation and Development

Ranking of the Ukraine in Paying Taxes – Compared to Good Practice and Selected Economies:

Number of Reforms in the World

Trend of Paying Taxes in Ukraine,

Paying Taxes in Ukraine

Tax system and administration  The Ukrainian tax system continues to develop.  A recent World Bank study concluded that Ukraine was one of the most difficult countries out of the 183 countries surveyed to pay taxes in. This is due more to the administrative burden than the underlying tax rate.  Individual tax residents are taxed on worldwide income (at 15%). Non-residents are taxed only on income from Ukrainian sources (up to 30%).  Prior to late 2009 it was relatively easy to become a Ukrainian tax resident.  Corporate profits are subject to 25% tax. Dividends are separately taxed at the shareholder level in the hands of individuals and foreign shareholders.  There is a simplified tax system for small businesses and private entrepreneurs. The VAT rate is 20% and is not fully consistent with EU legislation. With the exception of agricultural enterprises, the fiscal year is the calendar year. There is a 200% penalty for failing to deduct and remit withholding tax. Investor considerations:

Taxation System of Ukraine State Taxes (30) Local Taxes (14) Main State Taxes: √ Corporate Income (Profits) Tax √Value-Added Tax √ Value-Added Tax √Income tax for individuals √ Income tax for individuals √Payments to Pension Fund √ Payments to Pension Fund √ Excise tax and import duties √ Land tax Main Local Taxes: √ Advertising tax √ Charge for using local symbols √ Municipal Tax

Ukraine Tax Collections UAH billions - Corporate - Personal - VAT

General tax rates for enterprises in Ukraine* * — For small enterprises and private entrepreneurs, there is a simplified order of taxation, in particular, the payment of a single tax which is calculated as a percentage of turnover

Taxation of Corporations  The standard corporate tax rate is 25%.  Qualifying small companies may opt to use a simplified tax system (with very favourable tax rules).  Depreciation is based on the reducing balance method; relatively generous rates are available.  Losses may be carried forward indefinitely.  When companies pay dividends, they are generally required to pay advance corporate tax (ACT) at the 25% CPT rate. This is in addition to potential withholding taxes of up to 15%.  Taxable income expenses are based on the "first event rule". Investor considerations:

Corporate Income (Profits) Tax Since 2004 taxpayers have been permitted to adopt any depreciation rate up to the following maximum quarterly rate:

Taxation of individuals  The tax year is the calendar year.  Ukrainian tax residents are taxed on their worldwide income. Non-residents are subject to Ukrainian tax only on their Ukrainian source income.  The standard tax rate for tax residents is 15%. The standard rate is applicable to most types of income, including salary income, dividends, royalties and investment income.  Income received by non-residents as interest, royalties, dividends and (arguably) salary paid by a Ukrainian employer is taxed at 15%. Other income may be taxed at double this rate (i.e., 30%). Investor considerations:

Value Added Tax  The standard rate of VAT is 20%. The export of goods and a very limited range of services are zero-rated.  Refunds are available according to the law, but obtaining refunds is very difficult, and is a major issue for many investors. In addition, VAT-registered persons may not claim a refund during their first twelve months following registration.  Buyers must ensure that invoices they obtain comply fully with VAT rules. The tax authorities look at invoices closely, and disallow input tax credits, even if the defects in the invoice are relatively minor.  VAT returns and payments must generally be made monthly. Investor considerations:

Taxation in Agriculture

Taxation of Agricultural Enterprises VAT exemption Flat Agricultural Tax (Fixed) Usual Business Entity

Flat Agricultural Tax replaces Corporate Income (Profits) Tax Land Tax Municipal Tax Charge for Prospecting Works Charge for Commercial License Charge for Special Water Using

Flat Agricultural Tax May Use Enterprises if more than 75% of their income is derived from agricultural activities.

The Main Principles of FAT  The basis of FAT is the normative value of agricultural land  FAT is paid monthly but the amount of payment varies each quarter: 1 – 10% 2 – 10% 3 – 50% 4 – 30%

Tax rates of FAT are based on the cost of types of agricultural land

Tax Code as a part of the Program of Ukrainian Economic Reforms in

Tax Code of Ukraine More than 20 Laws and more than 50 legislative enactments, sometimes not agreed between themselves TAX CODE the only harmonized law based on EU legislation Well-ordered regulation base, stability of tax legislation Direction of changes Opposition to shadow economics and enlargement of the taxation base due to improving tax administration Stimulation of Business Activity and Economic Development: - decreasing a number of taxes: - contraction tax rates of Income Tax and VAT - simplification of administrative procedure and decreasing business environment burden Stimulation of innovative and investment activity

Corporate Income (Profits) Tax ► Scale down tax rate to 16% (2011 – 19%; 2012 – 19%; 2013 – 18%; 2014 – 18%; 2015 – 17%; 2016 – 16%) ► Determination of taxation base by the same method as in bookkeeping ► Possibility to use 5 methods of depreciation including accelerated amortization method ► Providing special investment benefits for new-organized entity Main Innovations

Value-Added Tax (VAT) ► Scale down tax rate to 17% (2011 – 20%; 2012 – 19%; 2013 – 18%; 2014 – 17%) ► Have been added to the category of VAT payers legal entities which use simplified taxation system Main Innovations

Land Tax ► Impose enhanced index to the land tax rates when agricultural enterprise do not produce food products more than three years Main Innovations

Special Tax Regimes Include legal entities which actualize investment projects more than 3 millions US dollars, and small entities - more than 500 thousands US dollars; Include legal entities which actualize investment projects more than 3 millions US dollars, and small entities - more than 500 thousands US dollars; The Tax Code provides: The Tax Code provides: Nontaxable investment project profit during 3 years Nontaxable investment project profit during 3 years Exemption from import duty for equipment and its components Exemption from import duty for equipment and its components Possibility to pay VAT for import equipment and its components in 360 days Possibility to pay VAT for import equipment and its components in 360 days Main Innovations Special taxation regime of legal entities which actualize investment projects based on energy saving, ecology safe and high technologies

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