55% of companies will not be able to compensate the increase in military tax for employees

04/ 10/ 2024

This is revealed by the results of a flash survey conducted by the European Business Association among its member companies regarding the potential increase in the tax burden on employers. These changes may come into effect if draft laws №11416-d on amendments to the Tax Code regarding taxation during martial law, and №12000 on the state budget of Ukraine for 2025, are adopted. In the case of an increase in the military tax to 3% or 5%, slightly more than half (55%) of the survey participants indicated that they would not be able to compensate this difference to their employees. As a result, this will lead to a decrease in employees real income. If the military tax rises to 3%, 15% of companies are ready to fully compensate the difference at the next salary review, while 14% will provide partial compensation. Another 7% are considering full compensation in the form of an allowance until the end of the year in which martial law is lifted. If the military tax rises to 5%, fewer companies are ready to fully compensate for the decrease in real employee income – 14%, while 13% will offer partial compensation. 6% are prepared to fully compensate with an allowance until the end of the year when martial law is lifted. Other companies are considering various approaches to compensation or have yet to make a decision. According to 58% of the surveyed companies, the increase in the base for calculating the Unified Social Contribution (USC) at 22% from 15 to 20 times the minimum wage (affecting salaries up to UAH 160,000) will significantly impact company expenses. Overall, the increase in the tax burden—including the potential rise in VAT, military tax, and USC—will force 56% of the surveyed companies to cut other important expenses necessary for the companys functioning. For 11% of companies, such an increase may lead to partial reductions in production or business operations. The business community also views the idea of raising the VAT rate with great concern, as this move could, instead of combating the shadow economy, stimulate smuggling and illegal trade. When assessing the impact of raising VAT, it is essential to consider not just the fiscal effect but also the broader economic implications for Ukraine in the medium- and long-term. As an alternative to a blanket VAT increase, the business community supports the proposal to apply VAT to imported goods valued up to €500 in accompanied luggage and up to €150 for postal and express deliveries, which are currently exempt from taxation. The European Business Association once again highlights the untapped fiscal potential of the shadow economy. Any tax increases for compliant businesses should be preceded by effective measures to combat the shadow economy and tax those parts of the business sector that either do not pay taxes at all or exploit schemes for tax optimization. For reference: The flash survey was conducted from October 1 to 3, 2024, among member companies of the European Business Association. The survey involved 71 companies from various sectors of the economy. Among the participants, 79% are international companies, and 21% are Ukrainian companies; 48% are large enterprises, 44% are medium-sized, and 8% are small businesses.

In the case of an increase in the military tax to 3% or 5%, slightly more than half (55%) of the survey participants indicated that they would not be able to compensate this difference to their employees. As a result, this will lead to a decrease in employees’ real income.

If the military tax rises to 3%, 15% of companies are ready to fully compensate the difference at the next salary review, while 14% will provide partial compensation. Another 7% are considering full compensation in the form of an allowance until the end of the year in which martial law is lifted.

If the military tax rises to 5%, fewer companies are ready to fully compensate for the decrease in real employee income – 14%, while 13% will offer partial compensation. 6% are prepared to fully compensate with an allowance until the end of the year when martial law is lifted. Other companies are considering various approaches to compensation or have yet to make a decision.

According to 58% of the surveyed companies, the increase in the base for calculating the Unified Social Contribution (USC) at 22% from 15 to 20 times the minimum wage (affecting salaries up to UAH 160,000) will significantly impact company expenses.

Overall, the increase in the tax burden—including the potential rise in VAT, military tax, and USC—will force 56% of the surveyed companies to cut other important expenses necessary for the company’s functioning. For 11% of companies, such an increase may lead to partial reductions in production or business operations.

The business community also views the idea of raising the VAT rate with great concern, as this move could, instead of combating the shadow economy, stimulate smuggling and illegal trade. When assessing the impact of raising VAT, it is essential to consider not just the fiscal effect but also the broader economic implications for Ukraine in the medium- and long-term.

As an alternative to a blanket VAT increase, the business community supports the proposal to apply VAT to imported goods valued up to €500 in accompanied luggage and up to €150 for postal and express deliveries, which are currently exempt from taxation.

The European Business Association once again highlights the untapped fiscal potential of the shadow economy. Any tax increases for compliant businesses should be preceded by effective measures to combat the shadow economy and tax those parts of the business sector that either do not pay taxes at all or exploit schemes for tax optimization.

For reference:

The flash survey was conducted from October 1 to 3, 2024, among member companies of the European Business Association. The survey involved 71 companies from various sectors of the economy. Among the participants, 79% are international companies, and 21% are Ukrainian companies; 48% are large enterprises, 44% are medium-sized, and 8% are small businesses.