Editor’s Note: Our 2019 Doing Business in Ukraine magazine is out. Get a PDF version online or pick up a copy in Kyiv.
Ukraine’s government is trying to decide on making a big change in the tax system.
One of the ideas is an exit capital tax. Under such a system, companies’ revenue would not be taxed — as it currently is — unless it is withdrawn from the firm’s internal circulation, such as when shareholders or related parties receive dividends.
Such a change would be a non-traditional global approach. So far, only two countries in the world — Estonia and Georgia — have introduced the exit capital tax and kept it. Macedonia and Moldova tried an exit capital tax, but eventually returned to the standard corporate profit tax.
“It seems to be a fix for something that is not really so much of a problem,” says David Saha of Berlin Economics, a German think tank that advises governments on economic policies. “The problem for businesses is tax administration, not the nature of the corporate profit tax, which is totally normal by any international standards. And the new tax would suffer from the same problems as the corporate profit tax suffers.”
Despite that, the proponents have their arguments. If the exit tax is introduced, enterprises will receive an additional incentive for growth, as more money will be available for reinvestment. Additionally, the proposal could potentially simplify tax administration.
Proponents of the exit capital tax believe that the effectiveness of a corporate profit tax is exaggerated and see long-term benefits in replacing it.
Olha Hermanova, a tax expert and spokesperson for Ukraine’s parliamentary committee on tax and customs policy, believes that “primarily mid-sized businesses” are hoping for the exit tax. Hermanova explains that the new tax is opposed by “the European Business Association, the American Chamber of Commerce, because they unite big enterprises that transfer the funds off to their ultimate parent companies and are currently paying next to nothing (in taxes).”
Under the proposed tax plan, “the funds that they are siphoning off will be subject to the taxation of exit capital,” Hermanova said.
Gaining political support
“Essentially, what big multinational corporations can do is use transfer pricing, credit interactions and so on with their affiliates in order to shift profits into low tax jurisdictions,” he said. “And, in theory, that is still possible under the new system. And (there are) some safeguard measures that could be increased under the exit capital tax as well as… under the usual corporate profit tax.”
But the exit tax proposal appears to have some popularity: in the recent elections, 11 presidential candidates included the proposal in their electoral programs. So did President Volodymyr Zelensky. Even former President Petro Poroshenko submitted a draft law on introducing the exit capital tax into parliament a year ago, but did not have enough support in the legislature.
Zelensky could resubmit the bill, but that would most likely happen after snap parliamentary elections set for July 21.
Costly switch
Still, despite its support, implementing this tax would not be an easy task. One reason is that switching to an exit capital tax would cost Ukraine anywhere between Hr 37–47 billion ($1.4 to $1.8 billion), or 1.5 percent of the country’s gross domestic product, according to a research paper published by Saha and his colleagues Robert Kirchner and Oleksandra Betliy in January 2018.
To complicate matters, the International Monetary Fund opposes the introduction of a new tax system. Instead, it thinks the country should focus on overhauling tax administration.
Zelensky’s team has given contradictory statements.
Oleksiy Honcharuk, deputy head of the presidential administration, said in an interview with the Novoye Vremya magazine that the president’s team wants Ukraine to cooperate with the IMF and to be “a predictable country for its partners, which cooperates with international institutions, which is trusted (and) performing its undertakings rather than developing exotic scenarios.”
During the same interview, Honcharuk said that the presidential administration would work toward the quick implementation of an exit capital tax.
“(It’s) just a matter of time and certain details,” he said. “It is almost impossible to introduce by the beginning of 2020, but this does not mean that this issue should linger.”
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Ukraine by the numbers
- 14th least peaceful nation in the world
- 43rd most startup friendly nation
- 62nd best quality of life
- 64th global passport ranking
(Sources: 2019 Global Peace Index, CEO World Magazine)
