The simplified taxation system for individual entrepreneurs must not be cancelled as this will lead to the termination or shadowing of economic activities. This opinion was unanimously expressed by experts, MPs and business representatives at a discussion held at Ukraine Crisis Media Center. “For me, the simplified taxation system is not about whether I pay taxes honestly or not, but about whether I pay them at all. And for society, I think this system is a way to legalize any business,” stressed Eduard Kurhanskyi, representative of the Assembly of public organizations of small and medium businesses of Ukraine. He noted that entrepreneurs are often willing to work consciously under a simplified system and pay more than they would under a general system “if only they can avoid dealing with the tax administration bodies.”
“Get your hands off the simplified system […]. The simplified system is the only mechanism that protects small businesses from corrupt officials and allows consumers to purchase goods and services 20-30% cheaper, ” said Oksana Prodan, MP of Ukraine (faction “Block Poroshenko”), member of the Committee of Verkhovna Rada of Ukraine on Taxation and Customs Policy. In her opinion, if the government wants to “legalize, not eliminate” small businesses, it should increase turnovers, simplify reporting and accounting on employees, reduce penalties for employees and introduce anti-corruption protections in the general tax system, as well as restore order in land and environmental taxes.
IMF does not insist on abolishing the simplified system
Experts noted that the IMF did not demand categorically to abolish the simplified tax system for granting a tranche. The main thing that interests the IMF is to see what revenues Ukraine will use to return the debt. It would be appropriate to increase the revenues through minimizing financial outflow to the offshore accounts and subsidizing certain industries. “If businesses had all conditions for development, this alone would ensure us a lot more revenues. For example, according to the calculations of our program, our exports are four-five times lower than they would be under a more liberal currency regulation. There are other possibilities, and the government should develop a comprehensive strategy instead of solving the problem of just a single business segment,” said Liubomyr Chorniy, expert of the USAID program “Leadership in economic governance.”
General system abuses prevail
Volodymyr Dubrovskyi noted that foreign experts’ experience shows that big business is transparent in their countries, whereas abuses prevail in small businesses. As to in Ukraine, the situation is quite the opposite. Most of the abuses and problems are found in the general system. Moreover, the extent of abuses with which the “simplified” system supporters are faulted is larger than the overall sales of all “simplified” system supporters put together. According to Global Financial Integrity, on an average, 10% of GDP outflow from Ukraine to the offshore accounts. A share of all SMEs comprises 15.7% of GDP, and only a few of them are taxed with the simplified system. Those cases where big business is hidden under the simplified system would not have been possible without the “protection racket.” For example, as with the workers of cash registers in the commercial network, who are SEIs registered in the names of different subjects at the same address by the very tax service. That is, the tax service knows the situation, and theoretically, they could prohibit this practice by their internal regulation. “The use of the “simplified” system for minimizing big business taxes is allowed by the authorities who are involved in this business,” stressed Oksana Prodan. “If they remain under the authorities’ ‘umbrella’, much as they are doing now, then with the cash registers or without them, they will evade taxes just as well, because they are confident in their impunity,” added Volodymyr Dubrovskyi.
Instead of abolishing the simplified taxation system, we should simplify the general system
The best way out is to simplify the general system so that it would be advantageous to entrepreneurs to switch to it. “There is no point in reforming the simplified system, until, firstly, we simplify the general tax system and protect it against arbitrariness, and, secondly, protect it against large-scale abuses,” emphasized Volodymyr Dubrovskyi. If we prevent the big businesses from hiding behind the simplified system, we should do this in such a way that we do not affect small businesses that pay taxes honestly. “Otherwise, this will backfire, and instead of revenues to the state budget, the small businesses will close, which will be a new social challenge,” added Liubomyr Chorniy.
Eduard Kurhanskyi noted that SMEs have allies in the form of city councils, and together they will be able to counterbalance the big businesses and their lobbyists in the Verkhovna Rada. For example, Ivano-Frankivsk city council supported the draft law providing for non-obligatory use of cash registers. This year more than 10 cities have decided to reduce the single tax.