Valeria Tarasenko of Dentons Kyiv discusses the Ukrainian government’s tax policy changes in response to the Russian invasion.
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: war and tax.
Since February 24 Russia's invasion of Ukraine has created Europe's largest refugee crisis since World War II, with more than 10 million people being forced to leave their homes and countless casualties among those who remained.
As of our recording today, April 20, the war is ongoing with Russian forces refocusing their efforts in the east of the country after failing to capture Kyiv and losing their Black Sea flagship. The Ukrainian people have mounted a fierce resistance to the invasion, and against long odds the government in Kyiv continues to operate and make tax policy.
Tax Notes reporter Sarah Paez will join us in a minute to tell us about her guest, who spoke about the tax changes made in response to the invasion and what the future might hold.
Sarah, welcome back to the podcast.
Sarah Paez: Thanks. It's great to be back.
David D. Stewart: Now, I understand you recently spoke with someone about Ukraine's tax situation before and during the war. Could you tell us about your guest?
Sarah Paez: Sure. I spoke with Valeria Tarasenko. She's a tax advisor with Dentons, which is a multinational law firm with offices in Ukraine. Prior to the war she was based in Kyiv, but has since relocated to Austria with her family to escape the fighting. Valeria has over 15 years of tax experience advising Ukrainian companies on cross-border tax structuring and tax-saving solutions, tax dispute resolutions, and tax litigation and resolution of cross-border tax controversy.
David D. Stewart: What sort of topics did you talk about?
Sarah Paez: Well, we discussed some of the major changes to the Ukrainian tax system during the war, including large reductions in the corporate income tax rate and VAT and excise taxes on fuel. Valeria also told me about a relatively new tax regime created by the Ukrainian government to encourage the success of the IT services sector in Ukraine. It's been a boon for the IT industry during a war in which most sectors have been hit very hard economically. Finally, we looked ahead at some of the pending and possible future tax changes that could influence Ukraine's post-war economy.
David D. Stewart: All right, let's go to that interview.
Sarah Paez: Hi, Valeria. Welcome to the Tax Notes Talk podcast. It's so great to have you here.
Valeria Tarasenko: Oh, thank you.
Sarah Paez: I just wanted to sort of lead in with the Russian invasion of Ukraine. Ukraine has been plunged into this war, so could you tell us a little bit about what the Ukrainian tax system has been like during wartime?
Valeria Tarasenko: Yes, you're right, unfortunately caused by the Russian invasion, it heated the Ukrainian economy a lot, and we have to adapt to function in wartime. Of course, our Ukrainian government made a lot of adjustments to organize and support Ukrainian business and tried to introduce some tax system that would work both for the state and for the business. Nowadays we are not speaking about some profits, we are speaking about the survival of the business.
The key message, which Ukrainian government addressed to all businesses and population, is the businesses have to maintain workplaces for Ukrainians and hopefully create new workplaces for Ukrainians which relocated from the eastern part to central and western Ukraine, where it's more or less safe to operate business.
Sarah Paez: Well, with that, what are some of the changes that Ukrainian businesses have seen specifically in their corporate income tax?
Valeria Tarasenko: Starting from April 1 Parliament adopted the law which reduced 18 percent corporate income tax and the 20 percent VAT to only a single 2 percent tax, which is calculated based on the revenue the company had in the previous quarter. So, only one tax is left, it's a 2 percent revenue tax, which is obviously very low.
But it's totally voluntary. It's not that every business is obliged to transfer to this system. Any business which feels that taxes will be low under this 2 percent single tax, they can voluntarily transfer to the payment of this single tax.
Other companies, if it doesn't fit with their business operations, for example, their businesses have not been hurt by this war situation in Ukraine, they can continue paying regular taxes as is described during the regular time, not wartime. But according to statistics, I saw that a lot of Ukrainian companies, middle-sized and large businesses, have already transferred to the payment of this 2 percent revenue tax.
The only disadvantage this 2 percent revenue tax has is the taxes have to be paid in advance. You are calculating this 2 percent tax based on the results of the previous month and pay tax in advance. If businesses can afford this, of course they transfer. If not, some businesses prefer to stay on the regular system.
Secondly, this system allows exemption from VAT, which make goods, supplies, and services provided by Ukrainian companies, or imported from outside, cheaper by 20 percent, because we have 20 percent VAT in Ukraine.
Plus, the reporting system is also very simplified, so it's a very simple procedure to submit tax returns and pay for the new taxes.
Sarah Paez: That's very comprehensive. Also it really sounds like the Ukrainian government is sort of giving this option to businesses in case they are really struggling.
I wanted to ask you a little bit more about excise taxes and how those might affect the import and export of goods during the war and also VAT. The VAT on the import and supply of petroleum has been reduced from 20 percent to 7 percent. Can you talk a little bit more about that and what that's offered to the Ukrainian forces and also potentially Ukrainian households?
Valeria Tarasenko: Yes, actually it means a lot because I remember, within two weeks after the invasion started, prices of petroleum went up by 50 percent, which is a lot. It means that once prices to petroleum went up, prices to other products will also go up because of logistics. Everything depends on petroleum. It was a right decision to cancel excise tax on import and supply of petroleum and petroleum-related goods, because such goods are subject to excise in Ukraine.
Plus, Parliament voted to reduce VAT on petroleum from 20 percent to 7 percent and prices on petroleum for retail customers dropped significantly. Of course, it also stopped prices on other goods, which are indirectly affected by their prices on petroleum in Ukraine, so it was absolutely the right decision.
I don't remember if I mentioned it or not — all these measures are temporary measures. It's just for the period of the war, when the government declared martial law status. Once martial law status is terminated or canceled, all these excise taxes and regular VAT rates will be applicable again.
Sarah Paez: I also wanted to ask, because you said these are temporary measures, with all these tax changes and specifically cutting taxes in a lot of situations, how is the Ukrainian government ensuring the sustainability of public revenue, specifically during wartime?
Valeria Tarasenko: It's very hard to speak about sustainability in our situation. It's a matter of survival. When the war started, the government actually declared, "Business, if you can, please pay taxes in advance." A lot of businesses did. They paid taxes in advance to support Ukraine and the state.
But now the economy is dropping, and I saw the reports from IMF that the Ukrainian GDP can shrink by 35 percent for 2022. So, of course it's very hard to speak about sustainability of public revenues, but still the government does their best to plan and to get some revenue from the taxpayers.
As I said, for businesses it's a key task to maintain workplaces for Ukrainian citizens. Unlike corporate tax, personal income tax was not changed and no tax benefit was provided for individuals or for their derived income. When Ukrainian citizens receive a salary, it will be still subject to 18 percent personal income tax, 1.5 percent military tax and social contributions. All those taxes will go to the state.
Secondly, how Ukrainian government tries to fill in the budget is it managed to issue military bonds and it successfully sold the bonds to Ukrainians. And of course, it's financing from other states and from international institutions, such as IMF. We are lending. Unfortunately we have to lend money now.
Sarah Paez: You've said before that the Ukrainian government, and by extension the Ukrainian tax system, has kind of really been in survival mode during this time. Can you talk a little bit about what the tax administration has been doing? Have they suspended any of their regular scheduled actions? Are there things they're not doing?
Valeria Tarasenko: Yes, I would say that Ukrainian tax administration is now very user friendly. They terminated and canceled all tax audits and no tax audit is permitted now. Actually all their guidelines, how to apply these new tax benefits which have been introduced into the law, they are providing explanation how you have to apply, which is allowed, which is not. I would say that they're friendly to customers, unlike it was before because their approach was always fiscal. That's first.
Secondly its temporary tax liability for violation of tax law — violation is not submission of compulsory tax returns, certain tax reporting in time, or nonpayment of taxes in time because a taxpayer didn't have the capacity to pay. Its penalties are not charged for these violations, but there is an obligation of within six months to comply with the tax requirements after the extermination or expiration of the martial law status. Now no tax penalties are charged that apply to the taxpayer, which is also certain relief because in some regions, it was very hard to comply. Even filing a tax return was hard.
Sarah Paez: What else has the tax administration done to make the war efforts easier? You talked a little bit about how the government's trying to shore up its coffers. What about in terms of donations to the war effort? What kinds of tax changes have you seen there?
Valeria Tarasenko: Yes, in every jurisdictions we have donation allowances. It's usually very small amounts. Parliament adopted the law, which allows both companies and Ukrainian citizens to deduct part of the donations, which they donated for Ukrainian humanitarian needs, to Ukrainian charity funds, or to the Ukrainian military forces. If you donate, you have to provide certain evidence and documents that you provided a donation. A part of those amounts can be deducted upon tax reporting for 2022, which can be huge amounts in comparison to what was allowed before the war.
Sarah Paez: Now, many industries have suffered during the war, as you've said, but actually IT services seem to be doing fairly OK. Can you talk a little bit about how IT services are doing and what sorts of tax incentives the government has offered to them, particularly the Diia City Law?
Valeria Tarasenko: Yes. I think IT industry is the only industry which maybe in the long term will benefit from the situation because for IT specialists, you just need a laptop and that's all. You can relocate in any place, whether within Ukraine or outside Ukraine and continue working.
Yes indeed, we had a very great initiative from our president, Volodymyr Zelenskyy, which came into force starting from January 1, 2022, with so-called Diia City Law, which provides a number of tax privileges and legal privileges to companies which are working in the IT sector.
I would first speak about the key tax benefit, which the Diia City Law provides. It provides very low taxes on incomes paid to employees or IT specialists engaged by IT companies. It's only 5 percent personal income tax, 1.5 percent military tax, and very insignificant social contribution, which is around $55 per month, which is nothing. Basically, effective tax rate for IT specialists working or engaged by IT companies is 6.5 percent, which is very, very low.
I think a lot of IT specialists worldwide would prefer to work and stay and to be a tax resident of Ukraine and pay such a low tax. But to be a resident, like a company, which can fall within this Diia City regulation, it has to be a pure Ukrainian company. It has to be a legal entity registered in Ukraine and its activities have to relate to IT activity.
There is a very extensive list of activities, which is big: IT can be computer programming, cybersecurity consulting, game development, design, etc. A lot, a lot. The list is really extensive of activities. There are a minimal number of requirements, but they are very do-able, like the minimum number of employees has to be not less than nine. Average salary per month, it has to be around €1,200, which is also very affordable.
Activities, as I said, have to be IT-related. 90 percent of revenue has to be received from IT business activity. Only 10 percent can be other types of activity, like dividends, for example, like passive incomes or something like this. The founders or beneficial owners cannot be from the jurisdictions listed in the blacklist, from sanction list jurisdictions, or from Russia. That's all.
This regime is still very attractive because part of Ukraine is still more or less safe, especially the western part. A lot of Ukrainian IT specialists have been relocated to those areas and their companies also re-registered to those areas. They still can apply this Diia City, a very favorable Diia City regime.
I see that I still have requests from some international IT companies or some multinational companies, but with large IT departments, to register a legal entity in Ukraine for IT purposes. I see that a lot of job vacancies are open for IT sector as well, even now during the wartime, because of this very beneficial tax regime for the IT sector.
Sarah Paez: Do you know how many businesses have taken advantage of this law?
Valeria Tarasenko: I think every IT company operating in Ukraine has already registered before the war or tried to register now because as I said, it's very beneficial. It gives a lot of benefits to the IT sector in Ukraine.
Sarah Paez: I wanted to turn now to sort of a future look, and sometimes it's hard to sort of think about what the future could look like, but allow yourself to imagine. What tax legislation is expected in the postwar time? As you've said, many of these laws that you've gone over are going to expire once martial law ends. What's ahead for the post-war period?
Valeria Tarasenko: Yes, it's very hard to predict what changes will be, but I'm sure that after the war many changes will be introduced. It depends on the needs in Ukraine.
Firstly, we have to rebuild those areas which have been completely destroyed. We have to build new houses, new apartment buildings for those people who used to live in those regions. I'm sure there will be some special tax preferences for construction, for residential construction, for infrastructure projects. I'm sure that will be. There's no draft laws, but at least I see that a tax committee of the Ukrainian parliament had discussions that we need to figure out some model which will allow Ukraine to rebuild as soon as possible the areas which were destroyed.
Secondly, they realize that this aggression from Russia will stay even when we sign a peaceful agreement, so we as a nation and as a state have to really invest into the development of our military industry. I also expect that there will be some special regulation, maybe special law for military industry, including some tax regulation for development of this sphere as well.
One initiative, a draft of law which is already in the parliament and under consideration, is about additional taxation of multinational companies which have both operations in Ukraine and still active operations in Russia. Companies which have not withdrawn from Russia. They want to introduce a special tax, one at least now discussed, a 1.5 percent in addition to the corporate tax, ecology tax, property tax, these multinational subsidiaries bank in Ukraine.
I would say that this draft law is heavily criticized now because the criteria. It's not very clean and it can be interpreted in different ways. Subsidiaries of multinational companies which are operating in Ukraine, they're really like, "No, you must not vote for this law." But I think subject to discussion and some amendments, it will most likely be adopted within next month.
Sarah Paez: Well, thank you so much, Valeria. That was a very interesting conversation and just gave a really great rundown of what's happening in Ukraine on the tax side.
Valeria Tarasenko: Thank you.