National Revenue Strategy: Is it money for army or destruction of small business?
The National Revenue Strategy until 2030 abolishes the simplified taxation system for businesses and bank secrecy for both legal entities and individuals. We have analyzed what will be implemented in 2024.
On December 27, 2023, the Cabinet of Ministers approved the National Revenue Strategy until 2030 developed by the Ministry of Finance.
The Ministry of Finance began developing a roadmap for reforming the fiscal system at the end of March 2023. This was a condition of the Memorandum of Economic and Financial Policies with the IMF on a new Extended Fund Facility program for Ukraine. The four-year program provides funding of about $15.6 billion.
In 2024, IMF assistance will amount to $3.6 billion. Overall, Ukraine's budget depends on financial assistance from partners up to 50%.
The state budget revenues for 2024 are set at UAH 1.8 trillion, while expenditures are UAH 3.4 trillion.
Almost all of the revenues - UAH 1.7 trillion - will be spent on defense. Separate expenditures are planned for the defense industry: UAH 43 billion each for the production of UAVs and ammunition and weapons.
"We will introduce a system of administration that is used in the European Union. We have no alternatives. And, frankly, we have no desire to defend this system, except for the desire to avoid a hole in the budget. To be able to finance the army - this is the basic instinct that actually drives us," explained the reform Danylo Hetmantsev, chairman of the Parliamentary Committee on Finance, Taxation and Customs Policy, at a press conference at the Center for Economic Strategy (CES) on January 3.
As part of the National Revenue Strategy, in addition to harmonizing domestic legislation with European standards, Ukraine should reduce its share of the shadow sector. Currently, the IMF estimates the shadow sector at 30%.
Business Censor found out what tax European integration means for businesses and employees, and whether the National Revenue Strategy contains corruption risks that could lead to the opposite result - an increase in the shadow economy.
What awaits the STS taxpayer
One of the main directions of the National Revenue Strategy is to reform the simplified taxation system (STS). As noted, the STS is used by about 1.7 million taxpayers who generated about 0.9% of GDP in 2020-2022.
In Groups 1 and 2, the majority are representatives of retail and wholesale trade, as well as individual entrepreneurs involved in car repair. They account for two-thirds of the participants and the total volume.
Directions for reforming the simplified taxation system:
- For legal entities, the tax rate will increase to 18% within 3 years. After the end of the transition period, legal entities will be restricted from being on the simplified taxation system.
- Individual entrepreneurs in Groups 2 and 3 will be transferred to the unified Group 2 and tax rates will be introduced - from 3% to 17% of income, depending on the type of activity.
- The list of activities allowed for participation in the 1st group of the STS will be revised to reduce the number of high-margin businesses. The approach to taxation will also be revised: the fixed tax rate will be abolished and only the tax on actual income will be applied.
- For farm businesses (individuals) that will remain under the fourth group of the STS, the tax base will be expanded from the year in which the taxation of land based on its mass assessment will be introduced.
- All STS taxpayers will be required to use cash registers and keep records of the origin of goods.
Representatives of the "Council of Cities Protect IEs (Individual Entrepreneurs)" note that the National Revenue Strategy is aimed at strengthening control over microbusinesses. However, the largest losses of budget revenues occur in the taxation of large businesses, due to their use of the simplified taxation system.
Businesses choose the simplified taxation system because of the complexity of tax legislation and the risks of doing business under the general taxation system. However, instead of simplifying the general taxation system, the Strategy complicates the conditions for the STS.
The approach on which the National Revenue Strategy is based is socially dangerous. The simplified taxation system is viewed solely as a source of budget revenues, not employment.
"The total number of individual entrepreneurs and their employees is currently more than 2.5 million people. No other sector of the economy can absorb this amount of labor," emphasizes Borys Emeldesh, President of the All-Ukrainian Professional Association of Entrepreneurs, a member of the Supervisory Board of the Council of Cities Protect IEs (Individual Entrepreneurs).
What will happen to the preferential regime for IT
The National Revenue Strategy states that there is a sectoral shift in Group 3 towards individual entrepreneurs providing IT and other professional services. This is due to the special legal regime "Diia.City" that was offered to the IT industry on February 8, 2022.
During a press conference at the CES, Minister of Finance Serhii Marchenko assured that the program for the IT sector will not be cut. "We have to be consistent: if we have already introduced certain tax regimes, we have to give them time to be implemented," Marchenko said.
Diia.City resident companies that pay income tax on a general basis (18%) have a revenue limit of UAH 40 million per year.
Starting in 2024, the expenses of Diia.City residents paying the single tax should not exceed 50%, and starting from 2025 - 20%.
How the personal income taxation model will change
According to the authors of the National Revenue Strategy, the reform of the simplified taxation system will form the basis for the next reform of personal income taxation. The gradual abandonment of the simplified system will change the current conditions when it is more profitable for companies to hire individual entrepreneurs with a tax rate of 5% than to conclude employment contracts with a personal income tax rate of 18% and a military fee of 1.5%.
The National Revenue Strategy introduces two key innovations in the PIT (personal income tax) field. The first is a progressive taxation scale for individuals with incomes above a certain level and a revision of PIT benefits.
The second one concerns the possible taxation of income on the cards of individuals. This caused the most widespread discussion on social media. Following the publicity, the Ministry of Finance explained that the measures to tax income on personal cards are not included in the text of the National Revenue Strategy.
Indeed, clause 4.3.1 of the Strategy only states that "all income of individuals received outside of business activities, except for those directly provided for by the Tax Code, will be subject to taxation at the general personal income tax rate." This means the standard 19.5%, with an 18% personal income tax rate and a 1.5% military fee.
But the fact that the tax authorities are going to get access to bank accounts is directly stated in paragraph 4.2.3(b): "Implementation of measures aimed at ensuring the safe use of data and access to information on the amount and turnover of taxpayers' funds in their bank accounts." By security, it means depersonalization of data, when the tax authorities will not be able to see the person behind the tax number.
During a press conference at the CES, Minister of Finance Serhii Marchenko said that personal data protection is a fundamental element of the National Revenue Strategy.
"We are not going to introduce any measures regarding the simplified system and personal income tax until data protection and security are introduced, depersonalization of fiscal authorities is ensured. This will undermine the credibility of this Strategy and our plans," said Serhii Marchenko.
The declared de-shadowing of personal income is important for the economy, believes Ihor Diadiura, former Deputy Minister of Economy for Digital Development, Digital Transformation and Digitalization.
"But I don't like the destruction of banking secrecy," said Ihor Diadiura at the CES discussion of the Strategy, "I worked in a bank in defense. I look at what happened with Kyivstar, where the best team is there. That's why I don't really believe in data protection." In his opinion, it is necessary to follow the constitutional path.
The Tax Code of Ukraine stipulates that income from which personal income tax was not withheld must be declared. However, the fine for failure to file a declaration is only a formal one - UAH 340. Therefore, the number of submitted declarations is insignificant: in 2022, the figure was only 190 thousand.
Ihor Diadiura believes that the fine should be raised and banking institutions should be given access to verify declarations. "Banks should be allowed to work with their clients. My friend! I found a million here, and you haven't even filed a declaration. This can be done right now," the expert emphasizes.
Can banks keep banking secrecy
During the discussion of the Strategy, Deputy Minister of Finance Svitlana Vorobei noted that granting banks the status of tax agents is one of the solutions. Ukrainian banks already have such experience as part of the e-Resident project. The status obliges banking institutions to actually perform the functions of an accountant and report to the state for a non-resident of Ukraine who has decided to register as an individual entrepreneur from anywhere in the world.
However, it should be noted that the Ministry of Digital Transformation started closed beta testing of the e-Resident program only at the end of December 2023. Therefore, there is no data yet on how this preferential tax regime works and whether banks effectively perform the functions of tax agents.
At the same time, Svitlana Vorobei emphasizes that there is no banking secrecy in Europe. "For the tax authorities, there is the issue of protecting information and treating it professionally, i.e. not allowing access to information to be used to create unreasonable pressure on business. I'm trying to be tolerant, but you understand what I'm talking about," the Deputy Minister of Finance hinted at the corruption risk.
The direct transfer of data from bank accounts after depersonalization seems to be a settled issue. According to the National Revenue Strategy, tax administration is planned to be transferred to the Ministry of Finance, where a separate IT structure will be created. The administrator of the IT platform will be determined in 2024.
The IT platform even envisages the abolition of the institution of registration of an individual entrepreneur. The status of an individual entrepreneur will be acquired by an individual automatically upon opening a bank account with the status "for business activities". Upon closing the account, its owner will automatically lose the status of an entrepreneur.
How risky taxpayers will be identified
The launch of the automated risk management system (RMS) is the basis of the control system declared in the National Revenue Strategy. The RMS will be integrated into the IT platform of the Ministry of Finance.
The system should analyze the behavior of taxpayers and, based on this, determine the risk level of each taxpayer. However, it is not yet known what the criteria for the riskiness of taxpayers will be.
"This is the risk-oriented approach that everyone has been talking about, but which has never been implemented. This approach is already being implemented in 2023 in the State Tax Service and partially in the Customs Service," says Danylo Hetmantsev.
On October 1, 2023, documentary audits were resumed for manufacturers of excisable goods, gambling businesses, and financial companies. On December 1, the list included taxpayers who, based on the results of 2021, meet the following criteria: the level of income tax payment is more than 50% lower than the industry average, and the level of VAT payment is more than 50% lower than the industry average; accounts receivable exceeds accounts payable by more than 2 times.
"Tax control for taxpayers with a positive tax history should be one, and for risky taxpayers, it should be tough. Inspections of all taxpayers from the letter A to noon should be a thing of the past," explains Danylo Hetmantsev.
The system of automated monitoring of compliance of tax invoices with the risk assessment criteria (SMKOR) is already operating by the same logic. Business Censor wrote that in 2023, the SMKOR blocked tax invoices of about 25 thousand Ukrainian companies every month, i.e. every tenth business. In December 2023, the number of companies whose tax invoices were blocked exceeded 29 thousand.
Nina Yuzhanina, People's Deputy, member of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, compared the RMS (risk management system) and the SMKOR.
"The purpose of the RMS is to strengthen voluntary compliance by taxpayers with the requirements of tax legislation, which is already alarming.
The RMS is headed by the expert commission of the State Tax Service - a collegial body that will manage the risk management process, accountable to the head of the State Tax Service (does this commission remind you of anything?).
The basis of the RMS is the tax employees at all levels who will generate and analyze the risks that have been accumulated on the ground (and this is the human factor and, of course, corruption)," says Nina Yuzhanina.
Yuzhanina also notes that the creation of an automated tax risk management system is seen only as an auxiliary tool in the work of the RMS. Full automation of processes as a preventive measure against corruption is not even declared.
Corruption risks in the National Revenue Strategy
The National Revenue Strategy plans many measures to "strengthen the integrity" of the tax authorities. For example, the implementation of the STS Anti-Corruption Program.
The report of the Anti-Corruption Program for the first half of 2023 shows that the STS has successfully implemented 37 of the 42 points on preventing corruption risks.
For example, measures were taken to control the territorial bodies of the STS by conducting inspections, in particular to identify the private interests of officials. However, it is the territorial commissions that receive many complaints from VAT payers.
The 2023 report of the National Agency for the Prevention of Corruption (NAPC) notes that previous attempts to adjust the procedure for blocking VAT invoices did not bring effective results and did not solve the problems with the registration of invoices for business, while leaving the possibility of corrupt practices by tax authorities.
Myroslav Laba, an expert at the Union of Ukrainian Entrepreneurs think tank, notes that many of the Strategy's points are unfulfilled tasks of previous measures, concepts, strategies, etc. The reform of the State Tax Service and the State Migration Service, which began in 2010, is only a change in the structure and names of the departments, but not a change in the quality of work of these two services.
"Before giving customs and tax authorities additional powers, these services must switch to qualitatively new methods of work that eliminate incompetence and corruption," says Myroslav Laba.
Corruption is the reason why the shadow cigarette market grew to 25% at the end of 2023, despite the presence of mandatory accounting of goods and sales. Therefore, only after the tax and customs authorities are reformed and the illegal sector is brought under taxation, it is advisable to introduce measures to increase the tax burden on legal businesses.
In 2024, a long-term Digital Development Plan for the State Tax Service until 2030 will be drawn up in accordance with the National Revenue Strategy. The declared result of the six-year Strategy is a GDP growth of 27%.
Extract from the Annex to the National Revenue Strategy until 2030 "Progress indicators of the implementation of the NRSU measures (operational plan for the implementation of the strategy)"
| Executor | Name of the measures progress indicator | Execution date |
| STS (State Tax Service) | Methods for checking taxpayers' compliance with tax legislation in general and certain methods for checking the accuracy, calculation and payment of taxes and fees audit (separately for each tax and fee) have been improved | During 2023-2027 |
| Ministry of Finance; STS | Amendments were made to the legislation of Ukraine in terms of establishing rules for the use of (personalized) depersonalized information about taxpayers by tax authorities. | During 2024-2025 |
| STS | The State Tax Service gained access to banking secrecy and payment service provider secrecy on the amount and turnover of funds/electronic money on accounts | During 2025-2027, after the implementation of other measures |
| Ministry of Finance; STS | Reforming the simplified taxation system | One year after the implementation of the measures specified in the subsection "Security of data use and access to information on the amount and turnover of taxpayers' funds in their bank accounts" |
| Ministry of Finance; STS | The taxation base for farm businesses (individuals) of the fourth group of the STS has been expanded. | Starting from the year in which land taxation based on its mass evaluation is introduced |
| Ministry of Finance; STS | A progressive personal income tax rate scale was established. | One year after the implementation of the measures specified in the subsection "Security of data use and access to information on the amount and turnover of taxpayers' funds in their bank accounts" |
