The National Revenue Strategy 2030 abolishes simplified business taxation and requires income disclosure for both businesses and individuals to combat tax evasion. The changes will come into force from 2024 to ensure a more transparent and fair tax system.
On December 27, 2023, the Cabinet of Ministers agreed on the National Revenue Strategy until 2030 developed by the Ministry of Finance.
The Ministry of Finance began developing a roadmap for reforming the fiscal system at the end of March 2023. This was a condition of the Memorandum of Economic and Financial Policy with the IMF regarding the new extended financing program for Ukraine. The four-year program provides funding of approximately $15.6 billion.
In 2024, assistance from the IMF will amount to $3.6 billion. In general, Ukraine’s budget is 50% dependent on financial assistance from partners.
State budget revenues for 2024 were set at UAH 1.8 trillion, expenses - UAH 3.4 trillion.
Almost all of the revenue will be spent on defense - UAH 1.7 trillion. Separately, expenditures are provided for the military-industrial complex: UAH 43 billion each for the production of UAVs and the production of ammunition and weapons.
“We will introduce the administration system that exists in the European Union. We have no alternatives. And, frankly, we have no desire to defend this system - except for one desire so that there is no hole in the budget. So that we can finance the army is the basic instinct that, in fact, guides us,” Chairman of the Parliamentary Committee on Finance, Tax and Customs Policy Daniil Getmantsev explained the reform on January 3 during a press conference at the Center for Economic Strategy (CES).
As part of the National Revenue Strategy, in addition to harmonizing domestic legislation with European standards, Ukraine must reduce the share of the shadow sector. The IMF currently estimates the shadow sector at 30%.
BusinessCensor found out what tax European integration means for businesses and employees, and whether there are corruption risks in the National Revenue Strategy that could lead to the opposite result - an increase in the shadow sector of the economy.
What awaits the “simplified people”
One of the main directions of the National Revenue Strategy is reforming the simplified taxation system (STS). As noted, the simplified tax system is used by about 1.7 million taxpayers, who generated about 0.9% of GDP in the period 2020-2022.
In groups 1 and 2, the majority are representatives of retail and wholesale trade, as well as individual entrepreneurs involved in car repair. They form two-thirds of the participants and the volume as a whole.
Directions for reforming the simplified taxation system:
For legal entities, the tax rate will increase to 18% within 3 years. After the end of the transition period, legal entities will be prohibited from using the simplified taxation system.
For private entrepreneurs who are in groups 2 and 3, they will be transferred to a single 2nd and rates will be introduced - from 3% to 17% of income, depending on the type of activity.
The list of activities allowed to participate in group 1 of the simplified tax system will be revised in order to reduce it to include high-margin types of business.
The approach to taxation will also be revised: the fixed tax amount will be abolished and exclusively tax will be applied to the actual income received.
For farms (individuals) that remain in the fourth group of the simplified tax system, the tax base will be expanded from the year in which land taxation based on its mass assessment will be introduced.
All “simplified” people will be required to use PPO and keep records of the origin of goods.
Representatives of the “Council of Cities ZakhistiFOP” note that the National Revenue Strategy is aimed at strengthening control over micro-businesses. Although the greatest losses of budget revenues occur in the taxation of large businesses, due to their use of the simplified tax system.
Businesses choose a simplified taxation system due to the complexity of tax legislation and the risks of doing business on the general taxation system. But instead of simplifying the general taxation system, the Strategy complicates the conditions for the simplified tax system.
The approach on which the National Revenue Strategy is based is socially dangerous. The simplified taxation system is considered solely as a source of budget revenue, and not employment.
“The total number of individual entrepreneurs and the workers they hire is currently more than 2.5 million people. No sector of the economy will be able to absorb such a quantity of labor,” notes Boris Emeldesh, president of the All-Ukrainian Professional Association of Entrepreneurs, member of the supervisory board “Council of Cities ZashchitiFOP”.
What will happen to preferential treatment for IT?
The National Revenue Strategy states that in group 3 there is an industry shift towards private entrepreneurs providing IT and other professional services. This is due to the special legal regime “Diya.City”, which was proposed to the IT industry on February 8, 2022.
During a press conference at the CES, Finance Minister Sergei Marchenko assured that the program for the IT sector will not be reduced. “We must be consistent: if certain tax regimes have already been introduced, we must give them time to be implemented,” Marchenko said.
Resident companies of Diya.City, paying income tax on a general basis - 18%, have an income limit of UAH 40 million per year.
From 2024, expenses of Diya.City residents who pay a single tax should not exceed 50%, and from 2025 - 20%.
How will the taxation model for individuals' income change?
According to the authors of the National Income Strategy, the reform of the simplified taxation system will become the basis for the next reform - the taxation of personal income. The gradual abandonment of the simplified system will change the existing conditions, when it is more profitable for companies to hire individual entrepreneurs with a tax rate of 5% than to enter into employment contracts with a personal income tax tax rate of 18% and a military tax of 1.5%.
The National Revenue Strategy introduces two key innovations in the field of personal income tax. The first is a progressive taxation scale for persons whose income exceeds the established level, and a revision of personal income tax benefits.
The second concerns the possible taxation of income on individual cards. This caused the most widespread discussion on social networks. After the publicity, the Ministry of Finance explained that measures for taxation of income on an individual’s card are not included in the text of the National Revenue Strategy.
Indeed, paragraph 4.3.1 of the Strategy only states that “all income of individuals received outside of business activities, except for those directly provided for by the Tax Code, will be subject to taxation at the general income tax rate for individuals.” This means the standard 19.5% - a personal income tax rate of 18% and a military tax of 1.5%.
But the fact that tax officials are going to gain access to bank accounts is directly indicated by paragraph 4.2.3(b): “Implementation of measures aimed at the security of data use and access to information about the volume and turnover of taxpayers’ funds in their bank accounts.” Security means depersonalization of data, when tax authorities will not see which person is behind the tax number.
During a press conference at the CES, Finance Minister Sergei Marchenko said that the protection of personal data is a fundamental element of the National Revenue Strategy.
“Until data protection and security are introduced, depersonalization of the work of fiscal authorities, we are not going to introduce any measures on a simplified system and on personal income tax. Because this will undermine confidence in this Strategy, undermine confidence in our plans,” said Sergei Marchenko.
The declared shadowization of personal income is important for the economy, says former Deputy Minister of Economy for Digital Development, Digital Transformations and Digitalization Igor Dyadyura.
“But I don’t like the destruction of banking secrecy,” Igor Dyadyura said at a discussion of the Strategy at the Central Economic System. “I worked in a bank in defense. I look at what happened with Kyivstar, where the best team is. Therefore, I don’t really believe in data protection.” In his opinion, it is necessary to follow the constitutional path.
The Tax Code of Ukraine stipulates that income from which personal income tax was not withheld when calculating must be declared. But the fine for failure to submit a declaration is formal - 340 UAH. Therefore, the number of declarations filed is insignificant: in 2022 the figure was only 190 thousand.
Igor Dyadyura believes that it is worth raising the amount of the fine and providing banking institutions with access to verify declarations. “Banks need to be allowed to work with their clients. Friend! You found a million here, and you didn’t even file a declaration. This can be done now,” the expert notes.
Can they keep banking secrets?
When discussing the Strategy, Deputy Minister of Finance Svetlana Vorobey noted that granting banks the status of tax agents is one of the solution options. Ukrainian banks already have such experience within the framework of the e-Resident project. The status obliges banking institutions to actually perform the functions of an accountant and report to the state for a non-resident of Ukraine who has decided to register a sole proprietor from anywhere in the world.
However, we would like to remind you that the Ministry of Digital Transformation began closed beta testing of the e-Resident electronic residency program only at the end of December 2023. Therefore, there is no data yet on how this preferential tax regime works and whether banks effectively perform the functions of tax agents.
At the same time, Svetlana Vorobey notes that there is no banking secrecy in Europe. “For tax authorities, there is the issue of protecting information and a professional attitude towards information, that is, preventing access to information from being used to create unjustified pressure on business. I try to express myself tolerantly, but you understand what I’m talking about,” the Deputy Minister of Finance hinted at the corruption risk.
Direct transfer of data from bank accounts after depersonalization looks like a resolved issue. According to the National Revenue Strategy, tax administration is planned to be transferred to the Ministry of Finance, where a separate IT structure will be created. The administrator of the IT platform will be determined during 2024.
Within the framework of the IT platform, it is even planned to abolish the institution of registration of an individual entrepreneur. The status of an individual entrepreneur will be acquired by an individual automatically from the opening of a bank account with the status “for conducting business activities.” With the closure of the account, its owner will automatically lose his entrepreneur status.
How will risky taxpayers be identified?
The launch of an automated risk management system (RMS) is the basis of the control system declared by the National Revenue Strategy. The RMS will be integrated into the IT platform of the Ministry of Finance.
The system must study the behavior of taxpayers and, based on this, establish the risk level of each. But what exactly will be the risk criteria for taxpayers is still unknown.
“This is the risk-based approach that everyone talked about, but which was never implemented. So, just this approach, it is already being implemented during 2023 in the state tax service, partly in the customs service,” says Daniil Getmantsev.
On October 1, 2023, documentary checks were restored for manufacturers of excisable products, gambling businesses and financial companies. And from December 1, the list included payers who, at the end of 2021, meet, for example, criteria such as: the level of income tax payment is more than 50% less than the industry, and the level of VAT payment is more than 50% less than the level of payment in the industry; accounts receivable exceed accounts payable by more than 2 times.
“Tax control for taxpayers who have a positive tax history should be one, but for risky ones it should be strict. Checks of all taxpayers from the letter A to lunch should become a thing of the past,” Daniil Getmantsev explains the logic.
By the same logic, an automated system for monitoring the compliance of a tax invoice with risk assessment criteria - SMKOR - already operates. BusinessCensor wrote that in 2023, SMKOR will monthly block tax invoices of about 25 thousand Ukrainian companies, that is, every tenth business. In December 2023, the number of companies whose tax invoices were blocked exceeded 29 thousand.
Nina Yuzhanina, people's deputy, member of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, compared the RMS and the SMKOR.
“The purpose of the RMS is to strengthen voluntary compliance by taxpayers with the requirements of tax legislation, which is already alarming.
The RMS is headed by the expert commission of the State Tax Service - a collegial body that will manage the risk management process, reporting to the chairman of the State Tax Service (does this commission remind you of anything?).
The basis of the RMS are tax officials at all levels, who will generate and analyze locally accumulated risks (and this is the human factor and, of course, corruption),” notes Nina Yuzhanina.
Yuzhanina also notes that the creation of an automated tax risk management system is considered only as an auxiliary tool in the work of the RMS. Full automation of processes is not even declared as a preventative against corruption.
What corruption risks does the National Revenue Strategy have?
The National Revenue Strategy plans to “strengthen the integrity” of the tax authorities. For example, the implementation of the Anti-Corruption Program of the State Tax Service.
The report of the Anti-Corruption Program for the first half of 2023 shows that out of 42 specified points for preventing corruption risks, the State Tax Service successfully completed 37.
For example, measures were taken to control the territorial bodies of the State Tax Service by conducting inspections, in particular to identify the private interests of officials. Although there are many complaints from VAT payers specifically about territorial commissions.
The report of the National Agency for the Prevention of Corruption (NACP) for 2023 notes that previous attempts to adjust the procedure for blocking VAT invoices did not bring effective results and did not solve the problems with registering invoices for businesses, while leaving the possibility of corrupt practices on the part of tax authorities.
Miroslav Laba, an expert at the analytical center of the Union of Ukrainian Entrepreneurs, notes that many points of the Strategy are unfulfilled tasks of previous events, concepts, strategies, and the like. And the reform of the State Tax Service and State Customs Service, which began back in 2010, is only a change in the structure and names of departments, but not a change in the quality of work of these two services.
“Before giving customs and tax officers additional powers, these services must switch to qualitatively new methods of work that exclude incompetence and corruption,” says Miroslav Laba.
It is because of corruption that the shadow market for cigarettes grew to 25% at the end of 2023, with mandatory accounting of goods and sales. Therefore, only after reforming the tax and customs authorities and involving the illegal sector in taxation, it is advisable to introduce measures to increase the tax burden on legal businesses.
During 2024, a long-term Digital Development Plan of the State Tax Service until 2030 will be drawn up in accordance with the National Revenue Strategy.
The declared result of the implementation of the six-year Strategy is a 27% increase in GDP.
