Does the ‘simplified tax system’ really equal widespread abuse?
An article by Volodymyr Dubrovskyi, Senior Economist at CASE Ukraine, for Liga.net,
Key points:
The most common criticism levelled at the simplified tax system by the government and the IMF is the use of sole traders in place of formal employment relationships, particularly in the IT sector. However, the scale of this problem is greatly exaggerated. According to estimates by economists at CASE and ISET, there are around 30,000 such ‘pseudo-sole traders’ — less than 2% of the total number of entrepreneurs on the simplified tax system. The estimated budget losses amount to up to 10 billion UAH, whereas those from the shadow economy run into the hundreds of billions. Despite this, the National Revenue Strategy proposes a radical solution: to raise the single tax rate to 17% of turnover for intellectual services. The idea is to make sole traders ‘economically unviable’. But in reality, the ‘sole trader instead of hiring’ scheme will persist anyway, as the Unified Social Tax is significantly higher. Instead, Ukraine loses its competitiveness for talent: people prefer to pay a similar tax in Poland, where public services and security are noticeably better. This further exacerbates the risks of a brain drain.
Why is there a difference in taxation at all?
A freelancer or sole trader has no social security benefits: sick pay, holiday pay, unemployment insurance, pension schemes, etc. They bear the full risk and are constantly looking for new clients. An employee, on the other hand, has protection and stability. Tax breaks for sole traders are compensation for the lack of a social security package. Therefore, there has not been, and could not have been, a mass shift to sole proprietorship among ‘ordinary workers’.
What solution exists without abolishing the simplified tax system?
The Verkhovna Rada already has draft law No. 13507, which proposes an internationally recognised mechanism — not a tax increase, but criteria for weeding out pseudo-sole proprietors. Key principles:
- decisions on reclassification — only through the courts
- the ‘could this be a business/legal entity?’ test is applied
- reclassification — only if at least 7 out of 9 criteria are met simultaneously
This protects genuine entrepreneurs and targets only the schemes.
Why aren’t these “ILO criteria”?
The mechanism in the draft law is often confused with the criteria of the International Labour Organisation, which are used to protect employees. But these are different things: the ILO is about the right to safe work, the draft law is about preventing tax schemes. In Ukraine, there are no cases of people being ‘forced’ to become sole traders; on the contrary, there are instances where employers even provide sole traders with a benefits package.
What does Ukraine actually need?
In the long term: personal income tax → 10%, abolition of the unified social tax, pension reform and modernisation of property tax. In the short term: close the loophole for pseudo-sole traders without undermining the simplified tax system, and pass Bill No. 13507 in its unamended form.
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