6 features to consider when changing taxation during martial law

Amendments to the Tax Code of Ukraine to increase budget revenues through new requirements for businesses and individuals are inevitable. The relevant draft law has recently been adopted as a basis and is being actively prepared for the second reading.

This is the draft Law No. 11416-d dated 30.08.2024 «On Amendments to the Tax Code of Ukraine on Peculiarities of Taxation during the Period of Martial Law», which, in particular, provides for:

• increasing the rate of military duty to income from 1.5% to 5%;
• establishing the obligation to pay the military fee in the amount of 1% of income by single tax payers of the third group;
• setting the military fee for individual entrepreneurs - single tax payers of the first, second and fourth groups at 10% of the minimum wage.
• Setting the basic corporate income tax rate for the purposes of taxing the profits of non-bank financial institutions (except for insurers) at 25%;
• improvement of the proposed model for determining the amount of advance payments for the purposes of corporate income taxation of enterprises engaged in retail fuel trade;
• monthly reporting on the amount of income accrued (paid) in favor of individual taxpayers and the amount of tax withheld from them, as well as the amount of the accrued single contribution.

Given the importance of the amendments, the Ukrainian National Bar Association's Committee on Customs and Tax Law has analyzed the document and made some comments on it.

First, the introduction of advance payments and an increase in military duty rates could have a significant impact on the financial condition of small and medium-sized businesses. For entrepreneurs, especially those operating on the single tax system, the payment of advance payments increases the current tax burden on a monthly basis. In times of economic instability and war, businesses may face liquidity problems, as advance payments require taxes to be paid in advance, even if there was little or no income that month.

Second, the project complicates tax administration and reporting. The transition to monthly reporting for all taxpayers creates an additional burden for both businesses and tax authorities. Small businesses do not always have the resources to keep regular and timely accounting records. This can lead to an increase in the number of tax errors or late submission of reports, which in turn can lead to penalties.

Thirdly, there is a threat of uncertainty in long-term planning for businesses The draft law does not take into account the possibility of adjusting tax rates or rules depending on the economic situation. Since advance payments require tax to be paid in advance, businesses may face a situation where they have to pay taxes based on expected income rather than actual income. This can lead to financial difficulties in times of lower revenues and instability.

Fourth, there is a risk of irrational use of resources by the tax authorities. Increasing the frequency of reporting leads to a significant increase in the administrative burden on the tax authorities. This may divert tax authorities' resources from more important areas, such as controlling tax evasion or combating shadow schemes. As a result, the introduction of monthly reporting may be less effective than it seems at first glance, given that such frequent audits may overload the system.

Fifth, it creates conditions for excessive pressure on entrepreneurs operating in war-affected regions. For entrepreneurs in the regions that have suffered the greatest losses due to the fighting, additional tax liabilities may be excessive. They will have to pay advance payments even if their business is operating intermittently or is recovering from the destruction. Under these circumstances, additional taxes may make it difficult for businesses in the affected regions to recover, especially for small businesses.

Sixth, the flexibility in paying the military tax for individual entrepreneurs is limited. Although entrepreneurs can pay the military tax in advance, the possibility of advance payments «until the end of the year» may not take into account economic dynamics or changes in income during the year. Businesses, especially in wartime, may face sharp fluctuations in income, making fixed advance payments inconvenient and risky.

These comments have been sent to the Verkhovna Rada Committee on Finance, Taxation and Customs Policy to be taken into account when preparing Draft Law No. 11416-d for the second reading.