IMF does not support replacing corporate profit tax with exit capital tax

IMF does not support replacing corporate profit tax with exit capital tax

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The International Monetary Fund does not support a bill drafted by the President of Ukraine Petro Poroshenko that provides for 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, UNIAN reports.

“We understand that the draft bill may soon be submitted to parliament. Hence, I would like to take the opportunity to reiterate that we cannot support a movement toward a dividend distribution-based corporate tax (DDBCT). We are concerned 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 presidential administration Dmytro Shymkiv.

According to Rooden, the adoption of this bill could lead to the loss of budget revenue worth around 2% of the nation’s gross domestic product. Citing Estonia’s example, he said that after the 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 expects the DDBCT “to 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.”

“Secondly, in an attempt 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 broad range of transactions,” the letter said.
“Thirdly, there is no evidence of a corporate liquidity crunch to justify what would be an interest-free public financing program amounting to some 2% of GDP annually,” Rooden added.

The President of Ukraine Petro Poroshenko suggested a compromise with the corporate sector 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 the president, the replacement of the corporate profit tax with the new tax would help facilitate Ukraine’s economic growth and eliminate corruption schemes in the administration of taxes.
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