“The place of payment of personal income tax in Ukraine – legal history and current practice” – the results of the study

October 11, 2021

The Center for Public Finance Analysis and Public Administration at Kyiv School of Economics, together with SKL International / Decentralization Support Project conducted a study “The place of payment of personal income tax in Ukraine – legal history and current practice”.

The personal income tax (PIT) is the largest source in the structure of local budget revenues and thus one of the key tools for financing local expenditures, in particular for providing day-to-day services and for the maintenance of social and communal infrastructure used by citizens.

In Ukraine, the tax agent for the payment of personal income tax is the employer, who pays it for a taxpayer – his employee. It is the company who is responsible for transferring PIT for its employees to the local governments in which they work.

However, currently the system of distribution of PIT in the regions has a significant drawback: due to unclear legislation, companies and institutions can choose to which budget to transfer PIT for their employees – whether at their actual place of work or at the place of registration of the company or its regional or regional office. As a result, the local communities in which the workers live do not receive a significant part of revenues – although such employees use the local infrastructure.

In 2021, the issue of reforming approaches to the payment of personal income tax by businesses has significantly intensified. The Government’s Action Plan for 2021 instructs the Ministry of Finance to develop amendments to the current legislation on personal income tax, in particular on the redistribution of tax payments between the budgets of local communities, at the place of registration of residence of an individual taxpayer. A number of bills have also been registered in the parliament, proposing various options for changes in the way PIT is distributed to local government budgets.

The purpose of the study, conducted by the Center for Public Finance Analysis, was to find out how often the largest companies pay PIT to the budget of a community other than the one in which their employee works, and under what conditions companies can / are willing to readjust PIT to those communities. in which their employees work.

The study surveyed the 25 largest taxpayers and government agencies that have the largest regional branch structure. The total number of employees in the companies and institutions surveyed – about 650 thousand people, the total amount of paid personal income tax for the year up to 10 billion UAH.

The results of the study revealed two typical and one atypical model of PIT payment for their employees among Ukrainian companies:

  • payment of personal income tax at the place of actual work of the employee (19 respondents)
  • PIT payment in a place other than the place of actual work of employees (5 respondents)
  • payment at the place of actual residence of employees (1 respondent)

According to the results of the study, the payment of personal income tax at the place of residence of the employee is complicated by several factors.

“The first is the lack of sufficient IT capacity / readiness of companies’ IT systems for such accounting of employee data, and its connection with the formation of tax reporting. Not all tax inspections can work with databases: they do not have the technical support, trained human resources, – explains Darina Marchak, author of the study and head of the Center for Public Finance Analysis and Public Administration KSE. – Secondly, these are penalties from the tax authorities for changing the place of payment of personal income tax for an employee. Among other significant obstacles, companies mention the problem of information processing by the State Tax Service / SCSU and the problem of insufficient technical support of the authorities, in particular the problem of weak servers. One of the companies complains that reports for the State Tax Service and the Pension Fund are already being uploaded to state resources for several days. Finally, in order to transfer PIT to a separate / new local budget, the company must register with the relevant local tax authority. This is an unnecessary bureaucratic procedure, which complicates the process of paying taxes for the company. “

That is why, according to respondents, the introduction of payment of personal income tax at the place of registration of the employee will lead to a significant increase in time spent on maintenance and transfer to the budget of personal income tax

Even greater are the warnings of companies to introduce the payment of personal income tax at the place of actual residence of employees. According to the study, companies do not have formal tools for collecting information about the employee’s current place of residence. After the legislative abolition of the institution of residence, the employee has the full right not to provide such information to the company. Therefore, an employee can be registered in one place (even a settlement) and actually live and, accordingly, work in another; the employee may not notify / untimely notify the employer of the change of place of registration. In case of transfer of PIT for an employee to the wrong address, the company as a tax agent will bear the risk of penalties.

In case of transfer of PIT for an employee to the wrong address, the company as a tax agent will bear the risk of penalties. At the same time, it will not have any legal documents / levers to confirm its position.

Finally, companies’ HR and personnel systems are not technically ready to automatically recalculate PIT at the employee’s place of registration. To establish such reporting, businesses need to make significant investments

Another important factor to consider when reforming is that companies sometimes use PIT as a tool to “bargain” with local authorities. In particular, the problem for some companies is the extremely low working conditions of employees, who depend on local authorities, and the unwillingness to go to a business meeting to address these issues. PIT transfer has become a powerful tool for the company to “negotiate” and increase the motivation of local authorities in this matter. For example, ensure the availability of heating, sanitation (the presence of a working toilet in the room) or the availability of Internet access in public places that the company rents from local authorities to equip offices.

That is why, in order to establish a “fair” system of transferring PIT to local budgets, it is necessary not only to amend the law, obliging companies to pay PIT at the place of actual work of the employee, but also to take a set of other actions – otherwise this step will to significantly increase the administrative burden on businesses as tax agents.

In particular, taking into account the international experience, the function of distribution of the personal income tax between local budgets should lie not at the enterprise, and at the state, at the expense of use of IT tools of GNS, DKSU. In turn, to facilitate this process, the tax returns filed by companies when paying personal income tax must be supplemented by a territory code (for example, COATUU, for which the employee actually works / lives). Alternatively, some companies are proposing to create a single state base in which individual tax codes and addresses of actual residence would be compared. Relevant changes should also be recorded at the level of the Tax Code.

Also, the Tax Code should eliminate the conflict, which allows employers to freely interpret the concept of “separate unit”, and thus – to choose the method of payment of personal income tax per employee.

For an additional insight into how PIT is allocated in European countries and the situation in Ukraine, read the article of Tony Levitas.