December 25, 2015, Vol. 2, Issue 4 A Taxing Situation The quest to raise and spend less than $40 billion in 2016 To subscribe to the Kyiv Post go to subscribe.kyivpost.com or contact Svitlana Kolesnikova at [email protected] or +38 044 591 33 44 Editors’ Note Contents By the time this Legal Quarterly went to the printer on Dec. 21, the fate of Ukraine’s tax code 4 Opinion: and budget for 2016 was uncertain. Attempts were made to reconcile versions of Finance American Brian Bonner explains Minister Natalie Jaresko and another one promoted by lawmakers Nina Yuzhanina and why he likes aspects of his country’s tax system and how it Tetiana Ostrikova. can help Ukraine The Kyiv Post has not read the tax and budget proposals in detail and we doubt many peo- Ukraine’s cigarette prices and ple have done so. This is one of the problems with Ukraine’s perpetual crisis management. 8 taxes are low, contributing to A well-run country would not be debating next year’s tax code and budget this close to New heavy smoking and early death Year’s Eve. However, even the United States shuts down its government on occasion because of partisan gridlock. By comparison, Ukraine’s state budget is small – less than $40 billion 12 A staggering amount of Ukraine’s compared to America’s $4 trillion yearly. But Ukraine’s public spending amounts to more economy is untaxed, robbing the than 40 percent of Ukraine’s expected gross domestic product next year of $94 billion. nation’s future. Transparency, policy and the public’s right to know suffer when legislation gets rammed 15 Ukraine’s top 25 taxpayers through at the last minute. Often, the public doesn’t fi nd out until later the effect of new 16 Directory of Legal Services laws. Absent effective budget watchdogs, the public often takes the side of the offi cials they 20 Ukraine’s pension system offers trust. The International Monetary Fund, Ukraine’s fi scal referee, sides with the version put worst of both worlds: high taxes forward by Finance Minister Natalie Jaresko because it would limit defi cit spending to 3.7 and low benefi ts percent of GDP. Since Ukraine still needs IMF and Western loans, adopting the Jaresko plan Transparency comes to Ukraine’s would seem to be the logical choice. But hopefully, if the crisis atmosphere ends, Ukraine’s 23 real estate, land transactions leaders will get around to constructing a durable, progressive tax code in which voluntary compliance is high, everybody pays their fair share and the money is well-spent. 25 A tale of two taxpayers 26 Interview: Lawmaker Tetiana Ostrikova explains her tax, budget plan 28 IT industry worries about proposed tax hikes Brian Bonner Allison Quinn Euan MacDonald Olga Rudenko Mark Rachkevych 30 Medicine VAT will stay low Kyiv Post Kyiv Post Kyiv Post Kyiv Post Kyiv Post 32 VAT remains source of Chief Editor Editor Editor Editor Editor controversy, fraud in Ukraine All of our contacts are available online at http://www.kyivpost.com/contacts/ 33 Interview: Slovakia’s Ivan Miklos touts fl at- tax benefi ts 33 Interview: Arthur Laffer brings conservative December 25, 2015, Vol. 2, Issue 4 Спеціалізоване видання «Kyiv Post Legal Quarterly» advice to Ukraine видається ТОВ «Паблік-Медіа». © Kyiv Post, 2015 Наклад — 7 000 прим. Розповсюджується безкоштовно. 34 A comparison of two plans The material published in the Kyiv Post Legal Quarterly may Матерiали, надрукованi у виданні «Kyiv Post Legal not be reproduced without the written consent of the publish- Quarterly» є власнiстю видавництва, захищенi er. All material in the Kyiv Post Legal Quarterly is protected by мiжнародним та українським законодавством i Ukrainian and international laws. не можуть бути вiдтворенi у будь-якiй формi без письмового дозволу Видавця. Думки, висловленi у The views expressed in the Kyiv Post Legal Quarterly are not дописах можуть не завжди співпадати з поглядами видавця, який не бере на себе вiдповiдальнiсть за necessarily the views of the publisher nor does the publisher наслiдки публiкацiй. carry any responsibility for those views. Засновник — ТОВ «Паблік-Медіа» Головний редактор — Брайан Боннер Publisher: Mohammad Zahoor Відповідальна за випуск — Наталія Бугайова Chief Executive Offi cer: Nataliya Bugayova Адреса видавця та засновника співпадають: Chief Editor: Brian Bonner Україна, м. Київ, 01004, вул. Пушкінська, 31А, 6й пов. Sales Director: Alyona Nevmerzhytska Реєстрацiйне свiдоцтво — Sales Managers: Elena Symonenko, Yulia Kovalenko Кв № 20588-10388Р від 18.03.2014 Надруковано — ТОВ «Новий друк», Cover: As of Dec. 21, Ukraine’s politicians Designers: Vladyslav Zakharenko, Jurij Ternicki 02660, Київ, вулиця Магнітогорська, 1, Project Team: Olena Goncharova, Oksana Grytsenko, Isobel тел.: +38 044 537 24 00 still had not agreed on a budget for 2016. To Koshiw, Denys Krasnikov, Vlad Lavrov, Yuliana Romanyshyn, Замовлення № 15-3168 meet International Monetary Fund require- Daryna Shevchenko, Oleg Sukhov, Ilya Timtchenko, Oksana З приводу розміщення реклами звертайтесь: ments for loans, the state budget defi cit Torhan, Nataliya Trach, Anna Yakutenko, Alyona Zhuk +380 44 591-77-88 must be no larger than 3.7 percent of gross Photo Editor: Pavlo Podufalov Відповідальність за зміст реклами несе рекламодавець. domestic product, which is expected to be Photographers: Volodymyr Petrov, Anastasia Vlasova $94 billion next year. (Depositphotos) [KYIV POST LEGAL QUARTERLY] #04/2015 3 In many societies, the poor end up paying more of their share of income in taxes than the rich. In Ukraine, tax evasion is rampant Taxes, budgets reveal at all levels, including among the wealthiest citizens and largest businesses. a nation’s priorities, values and compassion Franklin Delano Roosevelt had it right: Taxation should be progressive, or based on the ability to pay – with the richest who benefi t the most from the economy paying the largest share. But there are limits. ost people have a hard time getting whether a society is fair, compassionate and excited about taxes and govern- just. Mment budgets. I love these discus- Taxes redistribute income – either up or sions, but not because I am a policy wonk. down or just all around. They are the mon- Show me a nation's tax code and I will ey we throw into the collective pot for pub- Brian Bonner show you its priorities – whether it favors the lic services. Elected politicians (if one is lucky [email protected] rich, the poor, promotes equal opportunities, enough to live in a democracy) decide where whether it aims to increase economic oppor- the money goes. tunities for everyone or just the select few. In If a tax code favors the rich, they will be- short, taxes and budgets reveal much about come richer, income inequality will grow and 4 #04/2015 [KYIV POST LEGAL QUARTERLY] ADVERTISEMENT the economy will become distorted in a way that works against the vast majority of people in every nation – the working classes who are poor or swimming hard to stay in the middle class. Yuriy Petrenko Too often in nations, privileges for the rich are hidden in the Partner, Spenser & Kauffmann tax code, through exemptions for certain types of economic activ- ity, lower rates for type of income (investment versus payroll) and many other tailor-made favors. Expanded grounds for use of special confiscation and ambiguity of the scope of powers of the National Agency of Ukraine for identifying, tracing and It's often done on the tax side of the ledger, because it would be management of assets may prevent due property rights protection. The debate is political suicide (one would hope) to support budgeting billions of likely to end either at the Constitutional Court of Ukraine or at the European Court dollars for billionaires or multinational corporations. of Human Rights. My country, America, never had an income tax until 1913 – al- lowing for great fortunes to amass for centuries without much go- New Special Confiscation: Despite the ing for the public good. Some people think this was a great era. I Guarantees, Property Rights Are Threatened think it was horrifi c. I am a Franklin Delano Roosevelt Democrat The package of anti-corruption laws includes the laws “On amendments to the and believe, as America's greatest president did, that the best way Criminal Code of Ukraine concerning improvements in the field of special confis- to tax is on the ability to pay – a progressive income tax in which cation in order to eliminate corruption risks of its usage”, “On Amendments to the Criminal Procedure Code of Ukraine on specific seizure of assets in order to elim- those who benefi t the most from the economy also pay the most inate its usage for corruption purpose” and the Law “On the National Agency of in taxes. Ukraine for identifying, tracing and management of assets derived from corrup- There is a limit, however. Maybe there are studies that back tion and other crimes”. me, but any time the tax burden is higher than 33 percent, people Despite the declared transparency and fight against corruption, these legislative start looking for ways to evade taxes – perhaps even 20 or 25 per- changes may have the opposite effect in view of the following. cent is the trigger for this behavior in some people. Despite the According to the new changes, there are two grounds when the property is sub- liberal in me, income tax rates above 33 percent strike me as con- ject to arrest: if a third party obtained property free of charge from the suspect, fi scatory and detrimental to the economy. accused or convicted or purchased such property at a price significantly below America in 1913, while on its way to becoming one of the market; or knew or should have known that the purpose of the transfer of proper- ty is to avoid confiscation.