Ukraine is poised to approve a new military tax law that will triple the duty on personal income and expand the pool of legally taxable finances for individuals and banks.
Ukrainian parliamentarians adopted Bill 11416d in the first reading – it will increase military taxes for various categories, adopt submitting tax statements monthly instead of quarterly, and impose windfall tax for banks again. Ukraine’s MP Yaroslav Zheleznyak announced the new legislation on Telegram on Tuesday.
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Lawmakers hope the higher taxes will mobilize revenues to address both higher defense expenses and budget deficits as Russia’s full-scale invasion of Ukraine extends into its third year. Ukraine’s defense spending increased to 40.5% of GDP compared to 34% of GDP in 2021. Meanwhile, the tax revenues remained at the same level as in 2021, according to the OpenBudget website.
Higher taxes are also one of the requirements that Ukraine agreed to during negotiations with the International Monetary Fund, making continued support dependent on the change. The IMF has given $8.7 billion in loans to Ukraine since 2022 and has pledged to provide another $6.9 billion, out of a total of $15.6 billion, in the 48-month EFF arrangement with the IMF.
“The 2025 Budget needs to respect financing constraints and debt sustainability objectives, and determined domestic revenue mobilization efforts are critical,” the IMF wrote in a press release last week after the fifth review of the Extended Fund Facility (EFF) Arrangement.
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Though the first proposals from the Ministry of Finance planned to bring Hr.140 billion ($3.5 billion) to cover an extra Hr.500 billion ($12.5 billion) of deficit for defense in 2024, lawmakers’ amendments decreased the possible tax revenues to Hr.58 billion ($1.4 billion) in 2024.
Second version of tax bill includes several new sources for military revenue
The new tax bill increases the military tax on personal income from 1.5% to 5%.
Enterprises with Sole Proprietorship (FOP in Ukraine) previously had taxes from their revenues only, or taxes tied to the minimum wage, depending on the tax group they chose. The new bill will now force them to pay military tax as well – something they have not done before.
The tax groups regulate not only the amount of tax paid, but also the business sole proprietors can run and the maximum amount of income they can earn. Different groups can pay taxes based on their total revenues, minimum wages, or the living wage that the government established legitimately.
This is why the Ministry of Finance prepared different types of tax increases depending on the group the FOP chose.
The first sole proprietor (FOP) group can work in retail sales and its taxes is tied to the minimum level of expenses in Ukraine. The second group can also provide services and open restaurants, while the fourth one works in agricultural business. The Ministry of Finance wants taxpayers to pay a military tax of 5% of the minimum wage during the reporting period – as of 2024, it is Hr.710 ($18).
But the third sole proprietor group will have another tax rate because it is the most common among freelancers and employees who work in companies that want to avoid paying the usual taxes from people’s salaries. The bill wants them to pay a 1% military tax from their revenues – it will not be tied to any minimum wages.
Lawmakers also canceled the VAT from postal parcels that the Finance Ministry proposed in the first proposal.
The bill will impose advance tax payments from gas, diesel and LNG sellers. Companies selling fuel B2C will be expected to pay taxes from profits upfront.
If the law comes into effect, a windfall tax of 50% will also be imposed on banks for the year 2024, and a corporate tax of 25% for non-banking financial institutions (excluding insurers) will apply.
Original proposal included more tax revenue but was seen as too costly
In the most recent proposed legislation, lawmakers refused to include military taxes from goods, including a 15% tax on first car purchases and a 5% tax from telecommunications services that were proposed in the original law. Producers and importers of beverages with sugar would have been forced to pay an excise tax – €0.1 per 1 liter.
The Ministry of Finance scrapped a proposal of a 1% military tax from corporate revenues at the request of Ukraine’s business associations. This tax proposal discriminated against the existing VAT regime, Oleksandra Betlii, of the Institute of Economic Policy and Development, told the Kyiv Post.
The bill promised to bring Hr.137 billion ($3 billion), Ekonomichna Pravda estimated. That was a decrease from the initial drafts of the legislation that included Hr.350 billion ($7.8 billion) in revenue.
Lawmakers will review the bill for the second round of amendments approximately in the middle of October, Zheleznyak wrote.
Lawmakers have remained loyal to the idea of 5% military tax from personal income in a proposal voted in parliament, despite the fact that it is a risky solution, according to the analysts Kyiv Post spoke to.
“While I find it fine to impose military tax for Entrepreneurs with Sole Proprietorship, five percentage points from official personal income is too much – it will indeed cause a shadow economy increase,” warned one Ukrainian fiscal policy expert participating in discussion with The Minister of Finance, who requested anonymity to discuss sensitive information, to Kyiv Post.
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