At the end of last year, the Ukrainian government presented the National Revenue Strategy for the country until 2030, which became the subject of heated debate in society. One of the most discussed initiatives within the framework of this strategy was the possible elimination of the simplified taxation system and, accordingly, the future fate of Ukrainian individual entrepreneurs.
The reasons why the government seeks to reform the simplified taxation system are that about 1.7 million taxpayers use this system in Ukraine, while it provides relatively stable tax revenues, amounting to about 0.9% of GDP for the period 2020–2022. The simplified system provides for an optional regime that allows taxpayers to benefit from both simplifications in the implementation of legislation and administrative obligations, as well as a reduction in the tax burden.
In accordance with the first or second group of simplified taxation regimes, the tax burden does not depend on the amount of income received and in no case does not take into account the amount of profit. The government believes that the simplified taxation system, especially in wartime conditions, is not optimal for Ukraine. From the government's point of view, this system is at risk of tax revenues to the state budget, since its optionality means that taxpayers with large profits have an incentive to choose this system, which leads to a reduction in their tax liabilities.
The possibilities of understating tax liabilities, combined with the lack of accounting for the movement of goods, a large volume of cash payments, and the lack of documentary confirmation of the origin of goods, constitute a significant incentive for taxpayers to hide turnover or certain types of activities for the purpose of selling illegally imported or produced goods, as well as the real volumes of cash payments with end consumers.
The government argues that the significant volume of trade in counterfeit and smuggled goods through an extensive network of sole proprietorships affects bona fide businesses, which are exposed to unequal competitive conditions, forcing them to also resort to “simplification” or a combination with the general taxation system. This is especially dangerous in the context of the state’s efforts to ensure equal conditions for labor taxation and informal employment. In particular, “simplification” becomes a challenge when numerous legal entities and individuals choose the status of a self-employed person within the framework of the simplified taxation system instead of registering standard employment relationships.
The government’s National Revenue Strategy until 2030 envisages reforming the simplified taxation system. For three years, during a transition period, the single tax rates for legal entities of the third group will increase to the level of the ordinary income tax rate (18%) to encourage a gradual transition to the general taxation system. After this period, legal entities will be prohibited from remaining on the simplified taxation system.
Individual entrepreneurs will be combined into one group with the combined second and third groups, paying tax on the amount of income received based on a differentiated rate scale. For “simplified” entities, the use of settlement transaction registrars will be mandatory and the threshold for VAT registration will apply to all.
Experts from the Kyiv School of Economics positively assess the government's initiatives, pointing to their focus on increasing tax revenues. However, they also emphasize the need to put an end to abuses, in particular, the use of "simplifications" to optimize taxes.
Senior lawyer at Arzinger, Denis Ersoy, believes that the reforms to the simplified taxation system proposed in the National Revenue Strategy are aimed at increasing tax revenues in the face of significant war spending and delays in international aid.
In this context, some steps of the state seem logical, according to the expert. For example, the initiative to increase the single tax rate for service businesses, which in most cases do not have significant expenses, can be considered a reasonable step. However, some measures can only increase the administrative burden on conscientious taxpayers and undermine the concept of a simplified taxation system. In particular, we are talking about strengthening the rules of commodity accounting and establishing a single threshold for registering as a VAT payer.
Incorrect implementation of the rules of commodity accounting for all “simplified” taxpayers may lead to increased pressure from the tax authorities on small businesses and private entrepreneurs. In addition, if a low single threshold for VAT registration is introduced, VAT administration may become a new challenge for many “simplified” taxpayers.
A radically negative attitude towards government initiatives regarding “simplified entrepreneurs” and individual entrepreneurs is expressed by Igor Yasko, managing partner of the law firm “Winner”. According to him, the changes proposed by the Income Strategy are actually aimed at eliminating small and medium-sized businesses, which may lead to an increase in the influence of large corporations. This is an attempt to solve the problem of concealing turnover volumes by large businesses at the expense of the honest business of “simplified entrepreneurs”. According to Yasko, this may lead to the country losing some entrepreneurs, since working as an individual entrepreneur may become unprofitable.
