Proposal for regulating the payment of personal income tax at the location of separate divisions of legal entities

In order to form an effective local self-government capable of effectively exercising its own and delegated powers, it is important to provide it with appropriate resources, in particular, financial ones.

During 2014, the Cabinet of Ministers of Ukraine initiated, and the initiative was supported by The Verkhovna Rada of Ukraine, amendments to the Tax and Budget Codes of Ukraine and other legislative acts of Ukraine, which began financial growth of local budget revenues due to redistribution of personal income tax rate in favor of local government budgets, which started financial decentralization.

This type of tax and its significant size has become one of the main and important sources of filling local budgets and allowed local councils of united communities to exercise the vast majority of their own and delegated powers, in particular in education, health (primary care), social protection, provision of administrative services, etc.

However, in the process of monitoring budget revenues of mandatory payments, local governments are faced with many cases when taxpayers located in the community do not properly fulfill their tax obligations. Individual taxpayers who have separate divisions (branches, representative offices, etc.) pay personal income tax not at the place of their actual location and the relevant economic activity, but at the place of registration and territorial location of the central structure.

The importance of settling the issue of personal income tax has been repeatedly raised by representatives of local councils of united territorial communities, all-Ukrainian associations of local governments since 2017, but the problem remains unresolved and acute for the relevant local budgets, as they will not receive significant funds that could be directed to community development. Following consultations with stakeholders on decentralization reform, participants and experts of the Good Governance Program have prepared a proposal to regulate the payment of this tax at the location of separate divisions of legal entities, which is available by the link.

The contact person for advising on the proposal and its potential implementation is Olena Fomina, Good Governance Program Manager, email: of@aspeninstitutekyiv.org.

The Good Governance program is being developed with the support of a grant from Luminate and National Endowment for Democracy.