IMF advises Ukraine to avoid exceptional 50% tax on banks in 2024

The International Monetary Fund recommended against imposing a one-off 50% levy on banks in 2024.

Ukraine imposed a similar tax at the end of 2023.

Imposing a 50% tax on bank profits for the second consecutive year contradicts the nature and intent of exceptional taxes, undermines trust in politics and is not an effective financial solution, Trevor Lessard, Deputy Head of the International Monetary Fund (IMF) Mission in Ukraine said Interfax-Ukraine.

He added that banks may adjust their profit policies to cope with a possible tax increase.

“For them, it’s very rational to prepare for a third time because there’s a possibility it could happen again,” Lessard said.

Instead of unexpected tax increases, Lessard suggests maintaining policies that raise taxes over the long term, in an “efficient way that generates medium-term dividends, as opposed to a one-time tax increase that leaves a gap of income in the following year. “

Ukraine’s National Revenue Strategy, adopted by the Ministry of Finance, aims at long-term reforms to collect more taxes.

“One (part of the National Revenue Strategy) is that the Ukrainian tax system is fundamentally unfair in terms of who pays taxes and who doesn’t, how much they pay, and this dynamic has socio-political as well as economic consequences. So the people who are currently paying taxes aren’t actually willing to pay more until the non-payers start contributing at least a little bit,” Lessard said.

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Lessard argues that Ukraine should increase the value added tax (VAT) rate and implement the Carbon Border Adjustment Mechanism (CBAM) to avoid paying high export taxes due to CO2 emissions.

On July 18, Ukraine’s Finance Ministry submitted a draft law following consultation with business leaders, but its ambitions were dramatically cut.

The first version of the long-awaited law aimed to raise up to Hr 125 billion ($3 billion) in new tax revenue by the end of 2024. But pressure from Ukrainian businesses and cuts by lawmakers have left Ukraine with the prospect. to raise a mere Hr. 21 billion ($512 million) in tax revenue this year – 83% less than originally planned.

Much of the debate among all stakeholders centers on which major tax to increase – the military levy or the VAT.

The tax is paid out of the wages of employees – this lowers the net profit of the business, but also lowers consumption and inflation. This is a pressing issue for Ukraine, as inflation reached 8.6% in September and is forecast to reach 9.7% in the first quarter of 2025.

But the same design has a flaw – conscientious employees and BUSINESS will pay it, but the underground economy will usually avoid it. Increasing VAT is seen as an alternative because it is a tax on final consumption on both the official and shadow side of the economy.

However, an official familiar with the tax discussions who asked to remain anonymous told the Kyiv Post:

“VAT is an indirect tax that directly influences the price, so the military tax is less inflationary. VAT is indeed paid by those who consume rather than earn. We found that a 1% increase in VAT adds about 0.7-0.8% to inflation.”

The VAT increases will push inflation higher in the first 12 months before the impact fades, according to the source.