IMF doesn't support replacement of corporate profit tax with exit capital tax

The International Monetary Fund (IMF) does not support the draft bill prepared by Ukrainian President Petro Poroshenko on the replacement of corporate profit tax with exit capital tax, which suggests a zero tax rate on the part of profit reinvested in a business.

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"We understand that the draft law may soon be submitted to parliament. I would therefore like to take this opportunity to, once again, reiterate that we cannot support moving to a dividend distribution-based corporate tax (DDBCT). We have serious concerns about the loss in revenues, which, in the absence of any credible offsetting measures, would further undermine one of the overarching goals of Ukraine's IMF-supported program: to ensure fiscal sustainability," the IMF mission chief for Ukraine, Ron van Rooden, said in a letter, which was shared by Deputy Head of the Ukrainian president's administration Dmytro Shymkiv.

Rooden says that the adoption of this bill could result in the loss of budget revenue worth about 2% of GDP. Citing Estonia's example, he said that after that country passed a similar law, corporate tax revenue collapsed from an average of 2% of GDP in 1995-1999 to 0.7% of GDP in 2001. "It took more than a decade to reverse this initial impact on Estonia's revenue performance," he added.

He warns that "the DDBCT would incentivize shareholders to defer profit distribution or to find ways to disguise these through overpayments of other transactions, thereby avoiding taxation altogether since dividends are distributed at the discretion of shareholders."

"Second, in trying to offset the first point, there would be no gains in simplicity, as the complexity of the necessary transfer pricing rules would make tax administration difficult (and prone to abuse), especially as transfer pricing rules should be strictly imposed on a very large universe of transactions," he said in the letter.

"Third, there is no evidence of a corporate liquidity crunch to justify what would be in essence an interest-free public financing program amounting to some 2% of GDP annually," Rooden added.

As UNIAN reported, Ukrainian President Petro Poroshenko proposed the business sector a compromise in the introduction of exit capital tax and announced his plans to re-submit the bill to the National Reforms Council for consideration. According to him, replacing corporate profit tax with the new tax will help to facilitate economic growth and eliminate corruption schemes in the administration of taxes.