Tax Break

John Fisher, international tax consultant

What a laugh!


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Don’t mention the war!

The irony of Ukraine’s recent election of a Jewish president would not have been lost on my grandparents who fled the Odessa pogrom of 1905, but they would have been utterly bamboozled – along with millions of members of their grandson’s generation – by the news that he is a satirical comedian.

On the other hand, many would think the contrary – that a honed satirical mind provides the keenest insight into the human condition, the sine qua non for an elected leader.

For someone who has made his living out of speech, President-elect Volodymyr Zelensky was remarkably mute on the issues during the campaign. He was either saving it all up for the ‘opening night’, or – more worryingly – he didn’t have anything to say.

As ‘news’ seeps out about his intentions, it does appear that the new president intends to push ahead with Ukrainian corporate tax reform. As the reform is somewhat revolutionary, it is either a sign of great political courage, or a complete absence of new material in his act.

Volodymyr Zelensky candidate for the post of President of

The polls just kept smiling on him

Despite Zelensky’s media people improbably waving it around as one of his team’s great ideas, the Ukrainian government and parliament have been toying for some time with replacing corporate profits tax (the plain vanilla thing we recognize around the world) with a ‘tax on withdrawn capital’. In a nutshell – companies would not pay corporate tax annually on their ongoing profits, but would incur tax on the withdrawal of any funds. So, for example, dividends  paid to a foreign resident would first attract tax at the company level, that foreign resident picking up  the net dividend as taxable income in  their home country with no credit for the Ukrainian tax paid. This contrasts with the traditional situation, where withholding tax would normally ‘belong’ to the recipient and be creditable in the foreign country either according to domestic law or treaty.

The rationale of the proposal, bantered about by the outgoing administration,  is that the non-taxation of reinvested funds will make Ukrainian industry more competitive. The reality is more likely that it is because tax collection is currently fiendishly difficult, and it will be much easier to collect on a transactional basis when the money is heading out the door anyway. For a courageous newcomer with a proven sense of humor and satirical prowess,  a far superior rationale might bring the house down –  the proposed tax makes more sense than the system employed by the other 190-odd countries in the world.

Although the tax on withdrawn capital is to be imposed on the company, in economic reality it is a tax on the recipient collected through the company – as if an uncreditable withholding tax were imposed on, say, the dividend. The company effectively pays no tax, period.

As I wrote on these pages back in July 2015, it is by no means clear that companies should pay tax.  While Shylock could ask, ‘If you prick us, do we not bleed?’, joint-stock companies – like Pinocchio – do not have the same luxury. Companies are a legal fiction – the Walt Disney of the business world. As they do not have feelings (an accusation often aimed at me), they cannot suffer taxation. Taxation is paid by flesh and blood people – it is the customers who pay higher prices , the shareholders who make lower profits, and the employees who receive lower income. The company just sails on regardless – and, if it dies, does not even warrant a marked grave. There has always, therefore, been a strong movement to abolish company taxes in favour of taxes on individuals – income tax, withholding tax, value added tax. Company taxes, it is argued, distort economic performance.

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Putting Ukraine on the map

There is, of course, one colossal problem with the whole idea – it is nigh impossible to predict annual tax revenues when so much is dependent on the decisions of companies  to distribute, or not. The system has evidently worked in Estonia – a small country – but failed in others. Ukraine is a big country with a complex  economy and a population of over 42 million. It has even won the Eurovision Song Contest twice.

It will be interesting to see if this idea continues its long run, or closes soon after the new leading man takes over.

 

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2 thoughts on “What a laugh!

  1. You have a knack of making an inconsequential and ultimately boring subject readable (even if not riveting). I take my hat off to you, sir.

  2. Glad to hear that you consider tax inconsequential 🙂

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