Tax changes in Ukraine: let the poor pay

We expect an increase in taxes already this week.

Last Thursday, the specialized committee of the parliament approved for consideration the government draft of the so-called resource law No. 11416-d.

As a result, we have the following changes to tax legislation:

• increase from 1.5 to 5% of the military levy for individuals;
• establishing a military levy at the level of 10% of the minimum wage for individual entrepreneurs — payers of the single tax of groups I, II and IV;
• establishing a military levy at the level of 1% of income for individual entrepreneurs — taxpayers of the uniform tax of group III;
• advance payments of gas station networks for each point where sales are conducted.

As you can see, in the end, the search for additional money for our country's budget literally ended without bringing anything meaningful. All of the above will bring a little more than UAH 30 billion this year, and UAH 127 billion next year. We will remind that the Ministry of Finance of Ukraine started this conversation with the need for additional tax revenues of UAH 125 billion by the end of 2024 and UAH 340 billion for the whole of 2025.

Actually, the final design of changes in the tax system in general raises the question of their necessity.

When at the end of July, the Minister of Finance of Ukraine Marchenko stunned everyone with the statement that a hole of UAH 500 billion had formed in the budget, there were already a lot of questions.

Half a trillion, even with our unusually large financial indicators, is quite a large sum. Last year, we spent exactly that much on financing the entire field of medicine and education combined.

With constant external support and against the background of regular reports of the Ministry of Finance of Ukraine on "tax over-executions", in the middle of the year a hole appears in the budget of our country of such a size that it is difficult not to refrain from asking about the sufficiency of competent personnel in the Ministry of Finance of Ukraine. The shock was so great, in fact, that many self-professed experts, as well as very real financial experts, questioned the validity of this figure altogether.

The official explanation is the internal redistribution of funds by the Ministry of Defense of Ukraine, as a result of which the money intended for the provision of the military was spent on the purchase of weapons. And in this matter, questions regarding financial planning in the Ministry of Defense of Ukraine are already emerging, but their time has not come. Although it is worth noting that, upon a more realistic examination of the situation, it turns out that the poor planning of the Ministry of Defense of Ukraine led to an additional need of UAH 182 billion, the rest is not a new deficit for us... But even this amount of money is not small.

What do we have at the exit, after all these alarmist statements? As a result, we received a plan whose goal is to collect an additional UAH 30 billion, which was officially supported by the Ministry of Finance of Ukraine at the tax committee.

Under such circumstances, even the biggest skeptics will believe in the conspiracy theory of the insidious "Rothschild" entrepreneurs, who simply want to raise taxes for Ukrainians out of spite.

Of course, this is not the case, and the monetary filling of our budget is the guarantee of our survival, and not only during, but also after the war. Thus, despite all the questions about the managerial and arithmetical abilities of the main administrators of budget funds, it was naive to hope that the war would not affect the taxation system. However, the final of the tax "reform" is quite disappointing.

It is already clear that the financial support of partners will decrease over time, as well as that additional funding for the recovery of Ukraine will be needed for years. And this means that the solution should be created and implemented for years. Instead, the Ministry of Finance of Ukraine chooses the opposite approach, namely, to implement tax changes every year in very small amounts. After all, as early as 2025, an obvious fact will be revealed to us, namely that an additional 125 billion UAH will not be enough to cover the need for 340 billion, and we will need new changes. It is worth noting that changing the tax system every year is a very bad strategy, which definitely does not please and does not inspire business and investors, but we have no other strategy in view of today's circumstances.

Minister Marchenko's reluctance to work has never been as demonstrative as it is now.

Even more disappointing is the design of these tax changes, because in the end the main tax burden will fall on micro-businesses and the wages of ordinary employees. And these are definitely not the first places that the government should pay attention to in order to take funds from there.

We have already written that the increase in the tax rate from 1.5 to 5% for individuals deserves at least some quick analysis of the risks and benefits of making this decision, because it is a very painful norm for white businesses. An example to understand the scale: the employee currently receives 14.5 thousand UAH, which means that his salary is equal to 18 thousand, and the military tax at 1.5% is 270 UAH. If the tax rate is increased to 5%, then instead of 270, we will receive 900 UAH. For each officially employed employee. Such significant changes cannot affect the amount of money that the employee receives in the end after deducting all taxes, because labor costs are traditionally the largest item of production expenses and the first item of savings. Thus, in the end, either the increase in salaries will stop, or the "shadow" will begin to grow, or more likely, both the first and the second together.

This is a significant risk. We are taking this risk for the sake of UAH 30 billion. At the same time, the government fundamentally refuses alternatives in the form of implementing, as last year, taxation of extremely large profits of banks, which would give the budget a reasonable 27.3 billion UAH.

In order to make the refusal look more polite, the Ministry of Finance of Ukraine and the National Bank of Ukraine (NBU) of Ukraine offer a "reasonable alternative", namely, they suggest that the banks would rather buy domestic state loan bonds from the government for these extremely large profits.

Everything is clear to you, right? Instead of collecting UAH 27.5 billion directly to the budget, the government is asking to lend it this money at interest. This is done so that as a result, the banks will earn additional money in addition to their extremely large profits, and the government will lose money, because the loans must be returned, and also with interest. That is, instead of "plus 27.3", we are offered "minus 27.3+15%".

Of course, the National Bank of Ukraine (NBU) likes this strategy. The National Bank of Ukraine (NBU) loves everyone, but banks more than everyone. They are justifiably proud of the stability of the financial system and have focused so much on maintaining it that they no longer see the wider picture. Although it is obvious that extremely large profits in the banking system of a warring country are formed for a reason. We, of course, do not call for mass lending during the war, because financial stability is quite satisfactory to us, but when the circumstances have already developed so successfully for the banking sector, why should it not support the economy directly, namely through the budget? Unfortunately, that will not be the case.

The Ministry of Finance of Ukraine is not satisfied with this option, because it would very much like to sell as many domestic state loan bonds as possible, and the demand for them is not growing, to hell with it.

If the plan to engage in the domestic market fails, Minister Marchenko's reluctance to work will stand out even more.

Since the support of our financial life-being became the main problem for allies, political leaders in the Ministry of Finance of Ukraine have, to put it mildly, few tasks. Their main tasks today are planning, with which everything is traditionally difficult (because there is a war), and attracting money in the domestic market, with which the situation is not better and the war in the country has nothing to do with it. Political leaders in the Ministry of Finance of Ukraine have relaxed so much that the National Bank of Ukraine (NBU) takes care of the attractiveness of bonds of the domestic state loan, and with such zeal, as if new functions were added to it. In fact, it is not. But the regulator obviously understands that if the deficit is not covered by domestic borrowing, it will have to be covered by money issuance,.

Very noble, but still I would like everyone to do their job. Because not so long ago, we heard from all sides that the state has no right to interfere in the work of banks, that forcing them to buy domestic state loan bonds is a shameful practice, that in general, state banks should reduce the amount of domestic state loan bonds in their balance sheets. This is how the situation has developed. Banks, of course, will not resist —  after all, they are in the black. At least in the short term.

So everyone is happy except the average taxpayer, but to hell with them.

However, agree that it is somewhat shameful to speak so directly and tactlessly. Therefore, the trump card is being played that the International Monetary Fund (IMF) is against. Otherwise, this is a sudden change in the taxation rules in the middle of the year, which is contrary to the best practices.

Is it true? And for all other taxpayers, isn't this a drastic change in direct violation of the Tax Code of Ukraine? And last year, when the banks, without saying anything, paid tax on excess profits, was this not contrary to best practices?

There are suspicions that the International Monetary Fund (IMF) in this case, as in many others, is simply being used as a puppet (and how much can be done that way). After all, just don't tell anyone, for the Fund it is not so important from which source we will close 30 billion out of 125, the representatives of the International Monetary Fund (IMF) will be much more interested in where we will get the rest.

By the way, we should also be interested in this.

An increase in payroll taxes is a risk in conditions of uncertainty, growing expenses due to power outages, unavailability of credit resources, significant increase in pressure on business from security forces. Well, you know, if you only milk a cow and don't feed it, it doesn't live long. The results of the survey conducted by ZN.UA confirm that the average Ukrainian lives quite modestly, even if it seems that nothing much has changed in the capital of our country.

At the same time, in the first half of 2024, revenues to the general fund of the state budget from corporate income tax were twice as high as in the first half of 2023, from personal income tax — 21% more than last year, from "import VAT " — by 38.5%, from "domestic VAT" — by 49.6%. The first two taxes are money paid by businesses, the second two are money paid by people. These are not bad results for a country in which a full-scale war has been going on for the third year.

Are the authorities sure that this source will not dry up if they continue to take from it?

Were there not enough signals, including from our partners, that it is time to look for financial reserves on the "dark side of the force". In corruption rent, for example, try to find funds both in shadow structures and in the security forces that cover them. Tens of billions of UAH. bypass the state treasury thanks to offshore schemes, abuses at customs, "gray" and "black" markets. The scale of the "shadow" described by ZN.UA for years is now obvious to many people. Remember what the United States Ambassador to Ukraine Bridget Brink and Special Representative Penny Pritzker advised the government of Ukraine when this initiative to raise taxes to patch holes was just beginning. They said that our country should focus primarily not on raising taxes, but on revenues that Ukraine does not receive, although it should receive today. Unfortunately, there is no reasonable explanation why the Ukrainian government ignored this advice.

In addition, the government still does not have a basic understanding that order, planning and a predictable policy are needed in the public sphere of finance, starting from the Ministry of Finance of Ukraine and ending with managers. Our financial problems will deepen, including due to the negligence of our officials.

We are already in big trouble, because out of 125 billion UAH, we find only 30 billion, and we are still haggling over who should pay them. Let me remind you that next year we will need at least three times as much money.