Tax Service to Have the Final Say

On December 4, the government and opposition returned to the issue of individual income taxes, seeking the understanding of the press and society. Tax Administration Deputy Chief Maksym Stepanov yet again publicized the specifics of the application of the Individual Income Tax Law, emphasizing the fact that it makes all Ukrainians equal regardless of the size of their incomes, since it introduces a flat tax of 13% in 2004 and 15% in 2007. He also underscored the newly introduced notions of the so-called social privilege and tax credit. For his part, Our Ukraine faction coordinator cum Reforms and Order Party leader Viktor Pynzenyk warned about the tax surprises of the new budget, claiming that tax burden will become heavier in 2004.

The Ukrainian taxpayers will see for themselves who was right in this dispute, when they balance their incomes and spending in their tax declarations next year. Incidentally, the tax service experts have forecast that next year the number of tax declarations (this year 1.8 million Ukrainians submitted them) will increase significantly in connection with the introduction of tax credits. The taxpayers will be able to subtract from their taxable income the amount of costs of medical care and medicine, education, and purchase of dwellings using mortgages. In this light the tax credit does not threaten to spoil the relations between the citizens and the state, but only for the time being, since no one has yet seen the instructions that the tax service will append to this law. As is often the case here, they can give laws a diametrically opposite meaning.

The so-called social privilege is a somewhat more complex matter. Currently, the individual income tax rates range from 10 to 40%. The nontaxable minimum is UAH 17 per month. A 20% tax rate is used for incomes over UAH 17, and 30% for incomes over UAH 1,020. Citizens with incomes over UAH 1700 pay 40% in taxes. Under the new law, social privileges are granted to taxpayers whose income from sources on Ukrainian territory does not exceed the minimum living wage for working age citizens by 1.4 times. Stepanov believes this amount will come to UAH 540. But this amount will not be exempt from taxes. It only gives the taxpayer the right to reduce the taxable amount. Meanwhile, the minimum wage will be tax exempt. In 2004, it will come to UAH 205. However, even this rule will take effect gradually and not immediately. In 2004, 30% of the taxable amount in the minimum wage of UAH 205 will be tax exempt. In 2005 this figure will reach 50%, 80% in 2006, and 100% in 2007. Thus, this year the taxable amount in the incomes of underprivileged citizens will be reduced by UAH 61.50. As a result, only UAH 18.655 of taxes will be levied at an income of UAH 205. Meanwhile, currently UAH 41 in taxes is levied on such an income. Although a minor thing, it is always a pleasure. Moreover, this refutes certain allegations of the opposition.

Simultaneously, the tax service has prepared some surprises for the taxpayers. However, they mostly concern those who attempt to bypass the law even if using legal means. For example, if the accountant at an enterprise is registered as an individual entrepreneur, receives his pay in the form of payment for services, and pays taxes using the simplified system of taxation, then, in case such services are provided regularly, the tax service will view such services as part of employment relations and not contractual relations. As a result, the accountant will also have to pay an income tax on general terms. Notably, the term “regularly” has not yet been defined at the legislative level. However, the tax service has promised to soon fill in this loophole.

INCIDENTALLY

The Ukrainian government has proposed that the parliament endorse the minimum living wage for 2004 at the level of UAH 358.49.