The government of Ukraine is prepared to swiftly implement additional tax measures as needed, considering an increase in the standard value-added tax (VAT) rate as the most effective potential source of extra revenue at this stage, as stated in a published memorandum on economic and financial policy regarding the 5th review of the EFT program with the IMF.
"At this stage, we remain highly susceptible to potential shocks, and our maneuvering space within the current resource package is severely limited. Therefore, to ensure budget execution, we will respond to revenue shortfalls or new spending needs by raising taxes," the document notes.
In addition to optimizing tax benefits, the government promises to enhance revenue mobilization by developing a comprehensive post-war package of measures for reforming CO2 emission taxation, analyzing and assessing taxation in extractive industries, and establishing principles for taxing virtual assets in line with EU regulations. "Work in several of these areas has already begun and will be supported by technical assistance from the IMF and other development partners," the memorandum states.
According to it, work is also ongoing to develop legislation on the taxation of medical marijuana.
"In the future, when conditions permit, we will consider reforms that will make the tax system fairer (for example, through a more progressive personal income tax). Additionally, according to the National Revenue Strategy, we plan to conduct a comprehensive reform of the simplified taxation system to limit opportunities for abuse," the document states.
The government clarifies that the reform of the "simplified taxation" system will aim to minimize opportunities for medium and large businesses to legally evade taxes or conceal taxable sales volumes of goods and services, including those illegally imported or produced, and will also seek to make the use of the "simplified taxation" system for salary payments economically unreasonable.
At the same time, it reminds that such "simplified taxation" reforms require administrative reforms, including ensuring the confidentiality of tax data in the State Tax Service systems and providing tax authorities access to information about the volumes of funds in taxpayers' bank accounts.
As noted in the memorandum, work is underway on a draft law to introduce reporting requirements for digital platform operators and international data exchange, which will allow the State Tax Service to obtain data from digital platform operators and international bodies regarding the income of individuals earning income without registering as private entrepreneurs or using the "simplified taxation" system. This draft law will be submitted to parliament by the end of April 2025, marking a new structural milestone in the program.
In turn, IMF experts in the documents related to the updated results of the 5th review of the EFF program consider a new tax increase likely, given that the trimmed "resource" law, compared to the original draft, left significantly less room in the 2025 budget to absorb potential shocks, especially after significant domestic borrowings expected by the end of 2024.
"Therefore, if unforeseen spending needs arise and/or revenues begin to lag, the authorities have committed to introducing additional tax measures that will keep the deficit manageable and offset the impact of any shock on the debt," the Fund indicated, also considering an increase in the standard VAT rate to be the most sensible, as it is effective, has a broader base that can encompass the informal sector, and fully contributes to the general fund of the state budget.
According to the IMF, reforms aimed at stimulating the mobilization of domestic revenues under the National Revenue Strategy are a top priority.
"The authorities have confirmed their commitment to optimizing the so-called simplified tax system, which currently provides ample opportunities for tax evasion, in the medium term," the Fund noted.
Simultaneously, efforts to combat tax evasion and enhance the integrity of the State Tax Service and the State Customs Service will need to be intensified, which is necessary not only for mobilizing more resources but also for increasing fairness, efficiency, and public support for the tax system, the IMF added.
The documents state that Ukraine has committed to achieving a primary surplus target of 0.5% to 1.5% of GDP in the medium term after the war, which corresponds to restoring fiscal and debt sustainability.
"Thus, revenues, especially taxes, will need to remain elevated in the post-war period. Additionally, any borrowings should be conducted on sufficiently concessional terms, and access to the international market should be resumed cautiously and later," the IMF notes.