There was a fascinating story in the Kyiv Post yesterday (and yes, it always surprise me quite what it's possible to find on the Internet). The Ukraine is, of course, one of the so-called 'flat tax' states. It's had a 13% flat tax since 2004. But all is not well.
First of all, the rate is going up to 15% in 2007. Second, and more importantly, as the paper says:
As a result of Ukraine's still complicated and cumbersome tax system - often cited as a major reason why foreign investors avoid the country - specialists say that employers continue to declare lower official salaries to the authorities for tax purposes while paying their employees higher salaries under the table.
Which somewhat shatters two myths. The first is that flat taxes simplify things, and the second is that they end tax avoidance. Far from it, it seems. The explanation is obvious:
According to Ukraine's tax legislation, employers currently pay 36 percent of their employees' salaries to a social fund used for pensions, workers compensation, etc. In addition, employers contribute to a social insurance fund, the rate of which varies from 0.67 percent to 2.5 percent.
As a result, employers currently pay up to 51 percent of their employees' salaries [in direct taxes], and starting in January, that rate will be as high as 53 percent, according to Ksenya Lyapina, the head of the Council of Entrepreneurs under the Cabinet of Ministers.
"Therefore, they [employers] prefer to pay low salaries officially, and market-based salaries in envelopes," she said, adding that the 2 percent tax increase is unlikely to affect what people are paid in the workplace.
"It's well known that people really have incomes double those that are declared," she said.
So, no flat tax miracle there then. Which is exactly as I predicted in my report on flat taxes for the ACCA.
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Your analysis of the tax and competitive situation in Ukraine is incomplete and might mislead readers.
I hope the following information helps clarify matters. You are correct that the Ukraine imposes payroll taxes of 36% down from 41% a few years ago. However certain people are exempt from payroll taxes. All international executives working in the Ukraine who are not Ukrainian citizens are exempted. All Ukrainian entrepreneurs are also exempted. It is a very common and accepted practice to engage staff through a personal service company. So foriegn companies doing business in the Ukraine can easily arrange matters so the effective tax rate is 13%. The Ukraine offers a highly educated and motivated workforce. I believe education standards in the Ukraine match or exceed those in the UK. It is certainly much easier to recruit skilled staff in the Ukraine than in the UK. I hope this helps.
Paul
As far as I can see the only help this provides is in confirming that the Ukraine is 1) not offering anything like a flat tax 2) it encourages tax abuse by those most able to pay and 3) I wonder how you compare educational attainment.
Candidly, what I think you prove is that the Ukraine is running a wholly unjust tax system designed to help all those with wealth avoid all obligations they have to the state which provides them with the licence to earn their income. That’s a sure sign of a failing state.
Richard