At the end of last year, the government of Ukraine made a presentation of the National Income Strategy of the country until 2030, which became the object of a heated discussion in society. One of the most discussed initiatives within this strategy was the possible elimination of the simplified taxation system and, accordingly, the future fate of Ukrainian FOPs.
The reasons why the government wants to reform the simplified tax 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 years The simplified system provides for an optional regime that allows taxpayers to receive benefits both from simplifications in the implementation of legislation and administrative duties, and from a reduction in the tax burden.
In accordance with the first or second group of the simplified taxation regime, the tax burden does not depend on the amount of income received and in any case does not take into account the amount of profit. The government believes that the system of simplified taxation, especially in the conditions of war, is not optimal for Ukraine. From the government's point of view, this system is at risk of tax revenues for the state budget, as its optionality means that taxpayers with large profits have an incentive to choose this system, which leads to a reduction in their tax liability.
The possibility of underestimating tax liabilities in combination with the lack of accounting for the movement of goods, a large volume of cash payments and the lack of documentary evidence 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 amounts of cash settlements with end consumers.
The government argues that the significant volume of trade in counterfeit and contraband goods through an extensive network of FOPs affects honest business, which falls into unequal competitive conditions, forcing it to also turn to "simplified" or a combination with the general taxation system. This is especially dangerous in the context of the state's provision of equal conditions for taxation of labor and informal employment. In particular, "simplified" 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 formalizing standard employment relations.
The government's National Revenue Strategy until 2030 provides for the reform of the simplified taxation system. For three years, during the transition period, the rates of the single tax for legal entities of the third group will rise 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" people, it will be mandatory to use registers of settlement transactions, and the threshold for registration as a VAT payer will apply to everyone.
Experts from the Kyiv School of Economics positively evaluate government 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 "simplification" to optimize taxes.
Arzinger's senior lawyer, Denys Ersoy, believes that the reforms of 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, an initiative to increase the single tax rate for service businesses, which in most cases do not have significant costs, may be considered a smart move. However, some measures can only increase the administrative burden on conscientious taxpayers and undermine the concept of a simplified tax system. In particular, we are talking about strengthening the rules of commodity accounting and establishing a single threshold for registration as a VAT payer.
Incorrect implementation of commodity accounting rules for all "simplified" may lead to increased pressure from tax authorities on small businesses and private entrepreneurs. In addition, if a low single threshold for registration as a VAT payer is introduced, VAT administration may become a new challenge for many "simpletons".
The managing partner of the law firm "Winner" Ihor Yasko expresses a radically negative attitude towards the government's initiatives regarding "simpliciters" and FOP. According to him, the changes proposed by the Revenue Strategy are actually aimed at the elimination of small and medium-sized businesses, which can lead to an increase in the influence of large corporations. It is about an attempt to solve the problem of concealment of turnover by big business at the expense of the virtuous business of "simpliciters". According to Yask, this may lead to the country losing part of its entrepreneurs, as work as an FOP may become unprofitable.
