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Ukraine-based European Business Association (EBA) has protested tax hikes recently adopted by the country's parliament at first reading, arguing any additional taxation could damage the competitive environment by practically incentivizing the shadow economy.
The tax bill raises the war tax on individuals to 5% from the current 1.5%, sets higher taxes for the self-employed, retroactively doubles taxes on bank profits in 2024 to 50%, and sets taxes on the profits of other financial institutions to 25%, among other changes.
"Any additional taxation of compliant businesses, including the increase in military tax, could distort the competitive environment, as it would become economically disadvantageous to operate 'in the white'," the EBA said in a press release on Thursday. "Companies that remain in the shadow economy gain economic advantages compared to those that pay taxes."
The EBA cited data from the Institute of Socio-Economic Transformation indicating that the state budget is short about UAH 400 billion ($9.67 billion) due to the shadow sector.
"This amount corresponds to the amount of additional funds that are currently lacking in the state budget," EBA said.
The business association proposed considering additional taxation on gambling and the used car market, as well as the reduction of some government spending, as an alternative resource.
The proposal on tax hikes was widely criticized by businesses in Ukraine, with the American Chamber of Commerce in Ukraine saying it will "discriminate significantly against bona fide transparent taxpayers while encouraging tax evasion."
On Thursday, the National Bank of Ukraine Governor Andriy Pyshny said the central bank remains opposed to increasing the bank profit tax, adding that such a move could affect the further growth of lending, among other issues, as cited by Interfax.
IMF Ukraine mission Chief Gavin Gray, however, said in August a tax increase was key to maintaining the support of foreign donors and bondholders who seek greater guarantees of medium-term stability.
Before becoming law, the legislation must pass a second reading and be signed by the president.
