Ukraine to raise taxes amid $12 billion defense shortfall

Hayday identified three realistic sources for funding: printing money, financial repression, and increasing taxes/reducing spending.

“Printing money is clearly the worst tool, a last-resort measure that became more likely the longer funding decisions were delayed,” he said. “Mild financial repression for banks can be expected, as an additional 220 billion UAH ($5.3 billion) in government bonds need to be placed.”

The remaining source of funds will come from taxes. Hayday outlined three main tax groups:

“Milking Cows”

Three-quarters of the additional revenue will come from two sources:

• A 1% military tax on the income of legal entities under the general tax system (essentially a turnover tax).
• An increased military tax of 5% on personal income.

“This group may also include a 5% military tax on mobile communication and advance payments on profit tax for fuel networks, related to tank volumes,” he said. Despite the metaphor of “milking cows,” which Hayday admits is blunt, this group represents sources where the government expects to collect taxes easily and predictably.

Luxury consumption or imports

• A 15% military tax on the value of the first registration of vehicles in Ukraine.
• A 30% military tax on jewelry sales.
• A 5% military tax on the sale of real estate by individuals.
• VAT refunds for imported goods up to EUR 150 ($163).

Fairness for small businesses

• A 1% military tax on income for the third group.
• A 5% tax on two minimum wages (currently 800 UAH, or $19.3) for other groups.

Hayday indicated that these measures are expected to generate only 1 billion UAH ($24 million) per month. “The main goal is to introduce some military tax for the simplified taxation group, which previously did not pay it, amid the increase in military tax for hired workers and the general tax system,” he said.

Interestingly, the government did not implement a higher military tax rate for simplified taxation, which had been previously discussed as a creative way to reduce abuses of the simplified tax system.

The Ukrainian Parliament recently passed the 2024 state budget law with a deficit of 1.57 trillion UAH ($38 billion), or 20.6% of the projected GDP. The budget revenues are set at 1.77 trillion UAH ($43 billion) (excluding potential grants), with expenditures at 3.36 trillion UAH ($81.5 billion) based on an average exchange rate of 40.7 UAH/$1.

In late May 2024, Danylo Hetmantsev, Chairman of the Parliamentary Committee on Finance, Taxation, and Customs Policy, announced that the government plans to raise certain taxes to fill the budget gap, with at least 300 billion UAH ($7 billion) needed for army financing in 2024.

Ukrainian MP Yaroslav Zheleznyak revealed on July 18 that the government would consider a bill to increase taxes by 140 billion UAH ($3.4 billion). The government then approved a budget amendment law increasing expenditures by 500 billion UAH ($12 billion) and introducing tax changes amounting to 140 billion UAH ($3.4 billion).

Source: NV.