By TII News Service

WASHINGTON DC, DEC 02, 2019: THE International Monetary Fund (IMF) recently criticized Ukraine's proposed Distributed Profit Tax (DPT) as being a bad policy, detrimental to the country. DPT, which is also referred to as Exit Capital Tax (ECT), has been designed to substitute the current Corporate Profit Tax (CPT), according to SR captioned ‘Ukraine:Technical Assistance Report-Distributed Profit Tax; Voluntary Disclosure of Assets; and BEPs Implementation’.

In the International Monetary Fund (IMF) Staff Report dated Nov 25, 2019, it was stated that the issues that concern DPT proponents could be addressed under CPT. The report noted that the DPT would risk a a sizable loss in tax revenue on a sustained basis, conservatively estimated at 1.7 percent of GDP (2020-21). This is the experience in countries (Estonia, North-Macedonia, and Georgia) that have adopted the DPT. The revenue loss is probably underestimated because the calculation assumes optimistically that businesses would distribute half of their profits and does not consider spillover effects on the Personal Income Tax (PIT), whereby high-income individuals may incorporate to obtain the benefits of a DPT: i.e., deferral of the tax and a lower rate.

The report further contended that the DPT plan does not offer credible options for compensatory measures for absorbing the loss of tax revenue: an increase of VAT or cutting public expenditures will adversely impact on low-income households, while imposing an asset tax on businesses seems particularly inefficient. The report also considered to be regressive, the tax break that the DPT implies, for the incidence of the CPT is mostly on shareholders. Moreover, the claim that the DPT increases private investment cannot be taken for granted; there is no evidence to that effect in countries that have adopted it.

As mentioned in the report, the DPT is not simpler. In fact, it introduces several complications as deemed dividend distributions must be verified, transaction by transaction, with reference to complex transfer pricing methods. Thus, it does not minimize taxpayers’ interaction with the SFS and puts severe stress on its institutional weaknesses (e.g., transfer pricing enforcement). As regards Base Erosion and Profit Shifting (BEPS) by Ukraine, the report examined ongoing implementation of 15 action points and given a slew of recommendations for implementation of each action point.