THE International Monetary Fund recommends not imposing a 50% windfall profits tax on banks in 2024.

Ukraine imposed a similar tax at the end of 2023.

Imposing a 50% tax on bank profits for a second year in a row contradicts the nature and intent of windfall taxes, undermines confidence in politics and is not an effective financial solution, said Trevor Lessard, deputy head of the mission of the International Monetary Fund (IMF). in Ukraine said Interfax-Ukraine.

He added that banks could 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 is a possibility that it will happen again,” Lessard said.

Instead of surprise tax hikes, Lessard suggests sticking to policies that raise taxes in the long term, “in an effective way that pays dividends in the medium term, as opposed to a one-time tax increase which again leaves an income gap the following year. »

Ukraine’s national tax strategy, adopted by the Ministry of Finance, aims for long-term reforms aimed at collecting more taxes.

“The first (which is part of the national tax 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 sociopolitical and economic consequences. So people who are currently paying taxes are not really willing to pay more until those who are not paying start contributing at least a little,” 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 significant export duties due to CO2 emissions .

On July 18, Ukraine’s Finance Ministry presented a draft law after consulting with business leaders, but its ambitions were significantly cut.

The first version of the long-awaited bill aimed to raise up to 125 billion rupees ($3 billion) in new tax revenue by the end of 2024. But pressure from Ukrainian businesses and budget cuts by lawmakers left Ukraine with the prospect of raising only one hour. $21 billion ($512 million) in tax revenue for this year, 83% less than initially forecast.

Much of the debate among all stakeholders is over which major tax to increase: the military levy or VAT.

Tax is paid on employees’ salaries – this reduces the company’s net profits, but also consumption and inflation. This is an urgent problem for Ukraine, as inflation reached 8.6% in September and is expected to reach 9.7% in the first quarter of 2025.

But the same design has a flaw: conscientious and companies will pay for it, but the underground economy will generally escape it. The increase in VAT is considered as an alternative, since it is a tax on final consumption of the official part and the parallel part 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 which directly influences prices, so the military levy is less inflationary. VAT is in fact paid by those who consume rather than earn. We have calculated that a 1% increase in VAT adds around 0.7-0.8% to inflation.

The VAT increases are expected to push inflation higher for the first 12 months before the impact fades, the source said.