Opening statement by Prime Minister Arseniy Yatsenyuk at the session of the Cabinet of Ministers of Ukraine on August 6, 2014

Dear representatives of business associations, civil society! On behalf of the Government I would like to thank you for an opportunity today not just to hear, but to see the plan of economic growth, which the Ukrainian Government offers. We believe that in September the Parliament should adopt the Law "On economic growth", which provides for tax reform, which provides for the reform of the unified social tax, which provides for the abolition of the tax police. And this is the first package necessary for Ukraine to start developing.

There is a number of economic models in the world. The economic model existing in Ukraine nowadays is everyone is given a fish, however this fish smells bad, frozen for several times, looks like a Soviet-style hake. We invite everyone to get a fishing rod with a good coil and a large fishhook, which will enable to catch a large and high-quality fish.

I am not going to touch upon the whole range of problems the tax system of Ukraine is characterized with. Everyone is aware, we hold the 164-th ranking position in the Doing Business in Ukraine, between Nigeria and other good, promising and economically effective countries.

What are the principal flaws of the current Ukrainian tax system? The first is the number of taxes, the second is the system of tax administration, the third is the rates. So, we offer a comprehensive plan of changes in the tax system.

So, firstly, I would like to start with the number of taxes. Today, Ukraine has 22 obligatory payments, more precisely, 22 classic taxes paid by Ukrainian entrepreneurs. The Government proposes to reduce the number of taxes from 22 to 9.

Now I want to focus specifically on each of taxes, on its role, place, and which one we are going to cancel and which one to transform.

Which one are we going to cancel? We are going to cancel a number of rudiments, first of all, it's a fee for the performing certain types of business activities. This is what you see in many stores, many business entities hang such a piece of paper, on which is written - patent. 123,000 taxpayers use completely inefficiently their time, thus, we believe that this tax should be abolished.

The Government is to cancel fee as a surcharge for natural gas for consumers of all forms of ownership. It's hundreds of taxpayers who just stop paying this fee.

We are to cancel the fee for oil and gas transportation as well as for parking vehicles, the so-called tourism tax, viticulture, horticulture and hop growing.

We shall qualitatively alter the excise tax. The excise tax should include a classic excise tax and additional fees, which by their nature are bound to the excise tax. Thus, the excise tax is a tax on luxury. Under the new excise tax, we introduce the classic luxury tax, we transfer there the first registration of a vehicle, environmental tax and fuel charge for an extra charge for electricity tariff."

The Government also proposes to eliminate the fee for the use of forest resources and embody it in the classical environmental tax”.

Now, which part of taxes is to be transformed and summarized? We shall qualitatively modify the excise tax. Now the excise tax should include: the very classic excise duty and additional payments, which by their nature are bound to the excise tax. So, what does the excise mean? This is a tax on luxury. Right?

Thus, under the new excise tax, we introduce the classic luxury tax. We mean that it will include the first registration of a vehicle, as well as the environmental tax on fuel, and fee on electricity tariff.

The second block is the environmental tax. We eliminate the fee for the use of forest resources, and it is brought into the classical environmental tax.

Thirdly, the rental fee. You know that the Government has increased royalties on the most profitable sectors of the Ukrainian economy - gas and oil, ore and other minerals. We transform the rental fee and propose to bring the fee for special use of water, fee for use of mineral resources, as well as for the use of radio frequency resource of Ukraine into a single rental payment and establish a new system and the tax base.

As for the property tax and land fee. We are going towards the classical European model, which has a single tax - a tax on real estate, which will provide for both taxation of land and property, on which there are these plots of land.

Finally - a single tax, we will leave it as a classic single tax, while bringing the fixed agricultural tax into the single tax system.

In the framework of our discussion today, we also present the Law "On Budget decentralization" and I would like to highlight that we pass a significant portion of financial resources to regions. Therefore, such two basic taxes as the tax on property and respectively the single tax once it was called the agricultural tax - gores exclusively to the competence and budgets of local communities.

Now, I would like to hold a debate on the income tax.

Throughout several years of work we have even had an idea to abolish the income tax at all, as today a system of taxation of the income tax implies payment of this tax based on the final principle. Real earnings and payments to the budget do not correspond to reality. We offer the following approach - what is being said for dozens of years in Ukraine, and what never happened. It envisages unification of accounting and tax audit. Put it into a simple language - we offer to cancel tax registration for income tax and transfer the audit of the payment and accrual of the income tax solely on the basis of accounting data.

However, there will be three exceptions, and I personally have studied the issue as for such exceptions in Europe. Now the difference between the tax and accounting equals 49 points. We shall leave only three specific regulatory functions that will affect the calculation of the income tax - amortization, provisioning and financial transactions.

And we have to do it solely with the view that, unfortunately, international accounting standards give such a broad definition of these three points that all countries tend to regulate corresponding three categories by separate legislation.

Thus, the income tax - for the first time in the history of Ukraine will be accrued and paid solely on the basis of accounting data.

What does it mean for employers? What problem we’ve got? We’ve got a problem in identifying the costs with the classic ones, bearing by any business entities, but which the Tax Service makes impossible to include, for example: business trip, education, car travel, that is something that is directly related with the activities of a business entity. But now, according to the tax accounting, nobody considers them as the costs, and thus fictitiously inflating the taxable income.

The further block is very controversial as anything controversial – this is an agricultural reform. We propose to discuss two models of VAT reforming in the agricultural sector. The first criterion - all those with annual revenue amount less than UAH 20 million. They all remain on the current system of VAT taxation as well as those who possess no more than 3 thousand ha of land. All others switched to the general system of taxation.

Now, to make you understand, I explain this number. In general, this means that 90% of all businesses operating in the agricultural sector remain on the preferential tax system, 10% switch to the general taxation. We know that there is a very serious agricultural lobby in the Parliament, so for this purpose we are ready to discuss with MPs, which system of payment for business entities in the agricultural sector we choose.

As for agriculture I would like to note that the change in the system and tax regime shall change the state support for enterprises of the agro industry. In 2015, I believe that the main element of support of agricultural enterprises, first of all, should be a compensation of interest rates on loans received. This is the most transparent and effective mechanism. By the end of this year we should have up to UAH 0.5 billion for compensation of interest rates. In the next year we will provide a more significant amount of money in order to compensate for interest expenses related to attraction of loans.

The second block referring to the tax reform implies salaries. Everyone knows that a lion’s share of wages in Ukraine is paid “in envelopes”. The shadow economy, the shadow wages, aftermath - the absence of pensions, social benefits and allowances. It also entails the lack of funds in the state budget. We have analyzed the difference between the taxation systems in Ukraine and the European Union. Look at the numbers. The overall burden on the wage funds in the EU member states amounts about 36%, in Ukraine this number rises up to 55%. The load on payroll in Ukraine exceeds by 20% the showings of more competitive and stronger markets. These are the markets of the European Union.

This presentation demonstrates the tax burden on wages in all the EU countries of the EU. What are we offering to you? We will be offering certain models, and you’ll see, which one stipulates for the approaches in taxation salaries to be changed qualitatively and radically. There are several options, and they are submitted for the consideration. I'll try to explain the basics.

So, now we have salary, it contains two payments: 41% is the unified social tax and the income tax for physical persons - 17%.

What is our proposition? We propose to establish a fixed payment for an employee – it is the minimum wage, which equals 41%. Everything higher than the minimal salary is offered to tax at 15% instead of 41%. Almost three-fold reduction of the unified social tax. it is the first pattern.

 There is another pattern - we fix taxation of the minimum wage as 37%, by this we reduce the basis by 4%, but all the sums which exceed minimum salary are the subject for taxation in the amount of 19%, instead of 15%.

Perhaps, it is somewhat difficult for non-experts, so I will try to explain in simple figures for an ordinary person.

Just look, we have taken an average salary in Ukraine which amounts three minimum salaries – UAH 3650. Under the current procedures, the total amount of payments to the budget makes up UAH 2162. Therefrom, UAH 1467 goes for payment of the unified social tax and UAH 527 is the income tax for physical persons.

 Applying the pattern the Government offers, the payments which are due to be send to the budgets out of this sum (UAH 3650) reduce practically by UAH 700, and it means the incomes of ordinary citizens will grow by UAH 700.

So, our proposal implies the reform of the unified social tax – which means taxation of the minimum wage at the fixed rate, while everything exceeding this fixed sum shall be taxed at the level of 15%.

We will face serious problems, dear colleagues connected with the fact that the Pension Fund and other funds will be affected, as when there is growth somewhere in other parts it can be reduction, and vice versa, if someone sees improvement the other sees reduction. Thus, the Pension Fund, social insurance agencies and other social funds won’t receive the appropriate funds. Hence, we propose to follow the example of all European countries, by the way here you can see in the reform options how the revenues are reduced. Look, please, there are 6 patterns of them here.

I have this slide here. According to the current model our revenues make up 189 billion, following the two patterns we offer for considering there will be 143 and 141. It means approximately UAH 50 billion will be lost as contributions to the trust funds.

What is our offer? We suggest to follow the principle of social justice – it implies changing the system of taxation of incomes of physical persons. The one who earns more should pay more. The one who earns less should pay less.

So we are going to legalize and deshadow wages, we reduce threefold the load on the payroll, but those who earn a fortune fulfill their social function – they pay taxes and by those taxes we compensate the hole that will appear in the budget for pensions and other social allowances.

Just pay attention to the patterns we offer in taxation of incomes of physical persons. 

In the first model we offer a 15% tax for the sum up to 10 minimum wages, and 25% - exceeding 17 minimum wages. Additional revenues will be approximately UAH 3.5 billion.

Six other models contain only different rates and numbers. Therefore, I appeal to all the entrepreneurs in the process of consideration to choose the optimal model of these six models of taxation of incomes of physical persons.

Also, the Government proposes to unify rates for passive incomes of physical persons. Now there is a number of them, and if rates are different everyone tries to escape from taxation, it is understandable.

We consider a single rate should be applied to passive incomes, it is 15%, except dividends, as they are subject to income tax and we cannot afford double taxation. So, a special taxation procedure is to be applied to dividends alone.

The next block refers to tax administration. This is why we rank 164 in the global business rating. Our State Fiscal Service offers to radically change approaches in tax administration, they propose a single reporting period - all reports are to be submitted quarterly.

The second, we will go along the way of reducing not only the amount of reports but payments as well.

The third is “a single window” reporting system and the State Fiscal Service will introduce “a single window” report system.

Strictly speaking, members of the Government and dear invited, this is the first block of our tax and economic reform. I’ll sum up again: there were 22 taxes, becomes 9, the payment of income tax was conducted on the basis of tax reports, now we abolish it and we shall pay as we deserve on the basis of financial reports. A series of taxes and fees shall be upgraded and transformed by us, we shall radically improve administration and the system of payment of taxes and fees. Regarding the unified social tax, we plan to reduce threefold the burden on the payroll, to deshadow salaries and introduce a principle of fair taxation of incomes of citizens. If you earn less – you pay less taxes, earn more – pay more taxes.

As I already said, in the framework of our financial decentralization we shall pass a number of taxes and fees, two basic ones: a property tax and a single tax to local budgets. On Tuesday the Government will submit a bill on fiscal decentralization. We appeal to the members of Parliament on Tuesday to support this bill. What it envisages? It contains the principle of the transfer rights to budgetary autonomy to the regions. Want to make more money? You obtain such an opportunity. You will get the tools in the shape of taxes collected in the local budget. The better you work the more you earn, the worse you work on you position, the less you earn and will be fired, as all of you have been elected in the local authorities. Therefore, when we were engaged in the discussion on power decentralization, our position was as follows: we give powers, we give resources, but we give away responsibility as well.

Our reform package includes 5 blocks: budgetary autonomy, the formation of financial and economically capable communities, fiscal decentralization, new approaches in the system of fiscal equalization and sending a part of national taxes to the local budget.

What does it mean? Local councils are now free to make their budgets, not waiting for a decision of the Central Government.

The second. The Law "On Association of territorial communities" is in the Parliament. We do not repeat mistakes that were made ten years ago, when an administrative-territorial reform was designed under pressure and force. Our law envisages the following: if you wish to unite independently – just do it. If you gathered together and became stronger you will have more money, more resources and a stronger economy. Therefore, we have encouraged economically the regions and territories to unite.

The third. Some of the taxes collected to the state budget will remain in the local budget.

The fourth. Now all the funds of local budgets are maintained in the Treasury and local leaders complain about the service system. We are ready to give away these funds and transfer them to the banking system of Ukraine. You collect taxes - put into your Bank, use the money as your territorial community requires.

The fifth. If you have financially strong and financially effective region and someone gives loans to you, make independent decisions on attracting loans from international financial organizations. The Government refuses to control and give permissions for adoption of relevant loans by territorial communities.

What we have in the Parliament and what is necessary to submit? Now in the Parliament are draft changes to the Constitution of the President. The Government insists on changes to the Constitution and power decentralization and handing over authority to the local communities.

The second. Today the Law On fiscal decentralization will be adopted. We appeal to the members of Parliament to vote for the bill in the first reading the next week.

The third. A bill "On the voluntary association of local communities" has been submitted to the Parliament. We request to support that as a basis and the whole.  

The fourth. The Law "On fundamentals of the state regional policy" has been also submitted to the Parliament. In the framework of our overall concept of decentralization we address the Parliament to support our initiative.

The fifth. The Government has approved the so-called reform that provides for the decentralization in the construction area. This implies the notorious State architectural and construction inspections, which became an enclave of corruption in the city of Kyiv, we will liquidate certain powers and pass them on to the local communities.

And the last document. This is the bill that is not ready yet, but we would like to hold a public discussion of this issue – it’s the law on municipal police. And such a bill should be submitted in the framework of the overall reform of the law enforcement system of Ukraine.

In the end, as a part of our tax reform, it is also a solution that is expected by the whole country, it is the creation of the Financial Investigation Service, to be exact, the elimination of the tax police of Ukraine and liquidation of 4 public authorities that carry out inspections of business entities.

The Parliament will have the law on liquidation of the tax police and creation of the financial investigation service. Currently we conduct the inspection of business entities to check how they pay taxes: the State Fiscal Service is comprised of two departments: the Department of combating money laundering and tax police subdivisions; the Ministry of Internal Affairs - two departments as well: the Main Department for combating organized crime, particularly economic crimes unit, and the Department of the State service for economic crimes; and the third law enforcement body - is the Security Service of Ukraine, the Main Department of counterintelligence protection of state interests in   economic security area.

We offer to eliminate in all these bodies the functions that are not appropriate for them. To create the civil service, namely the Financial Investigations Service of Ukraine. The facts concerning inspections of business entities impress. In general, during the year, only officially, all these three monsters conduct checks amounting 61 thousand. 61 thousand criminal proceedings are opened during a year, every hour 30 subjects of entrepreneurial activity are subjected to checks and suffer from opening criminal cases. There is no time to work, just to talk to prosecutors, police officers and investigators.

Therefore, we propose to eliminate the functions of the abovementioned three bodies, to create a unified civil service and finally put an end to bying the protection and bribery on the part of law enforcement agencies in the case with business entities. We have studied the experience of Italy, Sweden, the U.S.A., Poland and Georgia, the draft law has been submitted and I also address the MPs to vote in favor of those draft laws.

Now regarding time frames. We take a month to discuss our tax reform with business, with entrepreneurs and the entire Ukraine. The first plenary week of September and the final draft will be submitted to the Parliament on the outcomes of the discussion within the country.

You have our vision. We have described it distinctly. If there is an alternative just propose. Is there a better variant? Just demonstrate. Ready to hear criticism only in pair with proposition – just say how to make it better. We have studied the whole experience the world possess, we belive we have found an optimal economic and tax pattern.

Let’s get started. The next week we will submit an anti-corruption package and will also appeal to the Parliament to urgently vote for it. As the Head of the Government I consider the budget 2015 should be adopted and designed being based on the new taxation system, the new Budget code and the new economic model of functioning the country. There is no time left. The following week we shall consider abolition of the tax police and creation of the Financial Investigation Service, the new Budget code. In the first week of September the whole package of economic growth should be adopted by the Ukrainian Parliament. I address the Parliament’s members - we will have vacations after elections of a new Parliament are finished, and now we request everyone to return to Kyiv in order to discuss and make clear propositions to our economic growth package.

I thank the media for attention.