The administrative cost of running a business can be quite significant. In the case of individual entrepreneurs such cost could become rather prohibitive, given the limited size of economic activity of average individual entrepreneurs. For this reason, most countries decided to adopt simplified systems of accounting and taxation for these economic agents.
Ukraine is no exemption in this respect. In 1999, a Presidential Decree “On the simplified taxation, reporting and accounting scheme” became effective. The system became extremely popular; as of 1 January 2009, 1.7 m individual entrepreneurs used the system, which accounted for almost 2 m employees. Thus, from this point of view, the system is a huge success.
But unfortunately, the system has also a dark side. In particular, the system foresees a very low level of taxation and social contributions. Entrepreneurs with a yearly turnover of up to 500,000 UAH have to pay a maximum monthly tax payment of UAH 200, which is extremely low. This creates several problems. First, individual entrepreneurs face a much lower tax burden than other economic agents. Thus, this is not just a simplified, but a heavily subsidised system. Second, besides this being very unjust, the system creates incentives for tax avoidance and evasion, including fraud. Bigger companies are split into several individual entrepreneurs to reduce the tax and social contribution’s burden; fake invoices are issued to companies that can fully deduct the cost of such invoices, and so on. In short, the system is highly unjust and deprives the government of a huge amount of tax revenues and social contributions. In our view, the current system is to be identified as one of the major fiscal problems in Ukraine as of today.
What is to be done? We think that the abolition of the system is not an option, since Ukraine needs individual entrepreneurs as well as individual entrepreneurs need a simplified system of taxation. Thus, the only way ahead is to reform the current system. The main objective of the reform should be to abolish the unjust and problematic subsidisation of these agents, while maintaining a certain level of simplification, as is the case e.g. in Germany. In this paper, we put forward a number of concrete steps, which would reform the system and lead to the desired results.
