Policy Papers

  • 02.04.2017

    Corporate Profit Tax vs. Exit Capital Tax: Analysis and recommendations


    Executive Summary

    A Corporate Profit Tax (CPT) System fairly normal by international standards is currently in operation in Ukraine. However, there is discussion whether this system should be replaced by a Exit Capital Tax (ECT), following the example set by Estonia in 2000.

    Under the current CPT system, the tax base is constituted by the adjusted financial profits of companies, taxed at a rate of 18% plus a further personal income tax of 5% plus military contribution of 1.5% on dividends disbursed to private persons. With a tax base and tax rate that are fully within the range of normal international practice, this system is unlikely to have particularly harmful effects on investment, however, the taxation of retained profits may reduce available equity for financing investments. Fiscally, the CPT in 2016 only provided 7.7% of consolidated fiscal revenues, corresponding to 2.5% of GDP, very low in international comparison. The low revenues appear due to massive losses accrued by taxpayers in previous years, legal tax avoidance instruments such as FX debts, transfer pricing and other optimisation schemes and due to large enforcement problems of the tax, originating in widespread manipulation of financial statements by companies and inadequate institutional capacity of the State Fiscal Service of Ukraine. Indeed, the compliance burden with the present system is relatively high due to large documentation needs and audits often focusing on formal issues rather than the financial accounting of the audited companies.

    The proposed ECT system involves changing the tax base to transactions involving dividends or other forms of “capital exit” from the tax system. Under the unofficial draft law on the ECT,1 taxable transactions shall be taxed at 15% for dividends or 20% for other forms of capital exit such as surcharges on transfer prices or inflated interest rates for credits from related parties that effectively constitute attempted tax avoidance. This system is significantly different from the present CPT system as the tax base is made up of transactions with non-ECT payers rather than the much more complex tax base rested in financial accounts. Most key anti-avoidance concepts such as transfer pricing control remain relevant in the new tax base, but the treatment of these concepts is now transaction-based instead of affecting adjustments to the financial result as before.

    Economic effects on investment and economic growth from introducing an ECT system would probably be limited. The present system does not generate large tax revenues and hence can have little negative impact on investments. Accelerated depreciation of equipment investments has been recently introduced in the present CPT system. However, the fiscal effect of the ECT is likely to be negative in the short run due to tax deferral in the system, necessitating a comprehensive strategy for financing this reform if it is to be undertaken. In the long run, however, an ECT system appears able to generate fiscal revenues as well as a CPT and, due to reduced enforcement, would contribute to a significant decrease of administrative burden both on the sides of companies and tax authorities.

    Introduction of an ECT system can lead to an overall systematic improvement in the long run, but this improvement is not expected to be radical. Crucially, negative short-run fiscal implications of the reform must be fully compensated to avoid clearly negative spillover effects in the short run. And reform of the tax system does not at all alleviate the much more important need for a comprehensive overhaul of tax administration, especially the institutional capacity and soundness of the SFS.

    Attached file  (790.6 kb)
Powered by

© 2020
The Institute
for Economic Research
and Policy Consulting
Reytarska 8/5-,
01054 Kyiv, Ukraine
+ 38 044 278-63-42
+ 38 044 278-63-60
+ 38 044 278-63-36
Use of site materials is allowed on condition of reference (for the internet publishing - links) on