Tax landscape in times of war
The ongoing war in Ukraine has necessitated significant changes in the country’s taxation system. In response to economic challenges caused by the conflict, Ukraine has introduced various measures to support businesses, albeit resulting in a decrease in tax revenue. As the economic situation becomes better, Ukraine begins to reinstate pre-war taxes.
Efforts to balance revenue generation and consumer relief have centred around fuel taxation. Excise taxes were abolished, and the VAT rate for fuel was revised from 20% to 7% in 2022 to create a more competitive fuel market in turbulent times. However, starting from 1 July 2023, pre-war VAT and excise taxes on fuel were reinstated. The government expects to generate additional monthly revenues of UAH 8 b from the pre-war level of taxation on fuel. However, this will result in price increases for consumers and inflation hikes.
Recognising the need to support small and medium-sized enterprises (SMEs), Ukraine reduced the flat tax rate to 2% on turnover on the simplified tax system which regular corporate tax income payers could also use. Also, payment of the unified social contribution became voluntary for certain entrepreneurs. All taxpayers under the simplified system were exempted from tax audits. Yet, starting from 1 August 2023, these relieves will be abolished. As a result, it is expected to welcome additional tax inflows to both state and local budgets.
Since tax audits play a vital role in maintaining compliance and revenue generation, Ukraine has lifted the moratorium on tax audits for specific sectors, including excisable goods producers, gambling operators, and financial service providers. Pending audits initiated before 24 February 2022 will resume, ensuring a level playing field and effective enforcement of tax regulations.
Generally, businesses in Ukraine have expressed concerns about the tax regime during the war. The Tax Index Survey conducted by the European Business Association and EY indicates a slight deterioration in the perception of the tax system. Challenges in tax administration, tax reporting, and the quality of tax legislation have been highlighted. Addressing these concerns and fostering a favourable business environment will be crucial for Ukraine’s economic recovery.
Tax revenues have played a critical role in funding war efforts and stabilising the economy. Despite the challenges posed by the war, Ukraine has seen steady growth in tax inflows. Notably, the import VAT has been the largest source of revenue, outpacing domestic VAT. However, ensuring a robust tax base and avoiding measures that could undermine it will be essential in sustaining economic stability.
Ukraine’s tax landscape has significantly adapted to the ongoing war. The economic repercussions of the conflict, coupled with increased defence expenditures, have put immense pressure on the country’s finances. Ukraine’s economy contracted by 30% during the war’s initial year, exacerbating the budget deficit.
Tax revenues play a pivotal role in sustaining the war efforts and addressing the economic challenges. While the government has implemented measures such as revising VAT on fuel, introducing a simplified tax system for SMEs, and resuming tax audits, striking a delicate balance remains paramount. Addressing business expectations and ensuring compliance will be essential for stability and fostering a transparent business environment.