The idea of switching to Withdrawn Capital Tax can destroy the country’s tax system
As reported by “L&B”, the Verkhovna Rada registered a presidential bill which proposes to introduce a tax on the withdrawn capital (WCT) instead of the profit tax. Despite assurances that the innovation will improve the investment attractiveness, experts have a slightly different assessment of the document.
Thus, Danylo Hetmantsev, the President of the Association of Tax Advisors, Expert at TaxLink, holder of habilitation degree in law. is convinced that the idea of switching to WCT is pernicious. Moreover, it can destroy the country’s tax system. When he shared his opinion on the Draft “On Amendments to the Tax Code of Ukraine regarding the Withdrawn Capital Tax” (№ 8557), he noted that more than UAH 80 billion income tax revenues can be offset as if from indirect taxes (excise taxes), rent and other payments that will be borne by all citizens.
He saw no point in replacing a complex, structured system of profit taxation, which reflects the economic essence of business activity (and, therefore, this is more equitable), which operates successfully all over the world, to taxation of economic results by external, formal grounds.
Also D. Hetmantsev states that the new tax violates immediately the principle of equality, and the principle of equity taxation. After all, the reformers provide benefits for legal entities to the detriment of private entrepreneurs who work within the common taxation system.
In his opinion, “it would be logical to provide support for tax benefits only for certain industries, locomotives of the entire economy within the current tax, as is the case in normal developed countries”. And without questionable experiments, sharp steps with unpredictable prospects.
At the same time, D. Hetmantsev recalled that neither in Estonia, nor in Georgia, where such a tax was introduced, one cannot hear about the economic miracle and the billions of investments. Instead, there are well-known examples of developed economies, where the introduction of WCT is not even discussed.
So, according to the expert, the benefits of innovation, if any, will be for some individuals, especially large enterprises. Especially those who are now members of the TOP-100 tax payers.
There are also a lot of comments made by the ATA experts on the content of the project. For example, losses on profit tax of prior periods, double taxation of the same transactions (and also different rates), the register of WCT payers, etc. A huge number of questions arise in the analysis of objects of taxation.
In addition, with the introduction of a new tax, Ukraine actually becomes a low-tax jurisdiction. After all, the transfer of income to a company registered in a country with such a level of taxation as proposed is a profit shifting, according to BEPS.
The attempts by bill developers to close the loopholes to avoid taxation are rather unsuccessful. On the one hand, it is stipulated that expenses in the interests of a shareholder or another individual are taxed by the WCT. However, with a “second hand” they, as D. Hetmantsev observes, give an additional opportunity to withdraw money through “unrelated” payers of a single tax. In the end, he recalls, there is an indispensable tax planning tool – cession, as well as a variety of other financial instruments.
Therefore, according to the expert, on the one hand, the WCT is a mandatory payment, that means it exists on all formal grounds, and on the other – it can be not paid easily, that is, it is not.
The fact that “around tax-conscious activists” are trying to make the idea of the WCT very attractive, the expert relates with the intentions of the Head of State to get some image-based bonuses for his election campaign. At the same time, he can understand subconsciously that the next year’s budget will not be fulfilled by him.
And although the SFS and the Finance Ministry have traditionally opposed WCT, a normal Facebook user sees only a vivid wrapper that hid the obviously harmful idea.
President of the Association of Tax Advisors, TaxLink Expert, Doctor in Law
– What is the use to reform something that does not require any reforms and to completely “break” the tax, which already works quite well and was “worked out” with such difficulty for 25 years? If you want to exempt from taxation on the enterprise profits in terms of income that are reinvested or are in turnover, why not do it within the current profit tax?
The administration of the WCT is indeed greatly simplified. It would be even simpler for us to introduce a poll tax instead of a personal income tax and a tax on windows instead of a property tax. However, is it really that the simplicity of administration is an all-over-all purpose of changes in the tax system? It is undoubtedly important, but in any case, it should not prevail fiscal goals and equity of taxation, eliminating the content of the tax as such.