Manage part of your taxes: new mechanism may work in Ukraine
The ability to dispose of part of one's own taxes is one of the most effective tools of democracy, which is not yet available to Ukrainians. But the relevant bills are already under consideration by the People's Deputies. How they should work is in our text.
What is the problem?
Public organizations without community support
For years, various activists have been drivers of social change. Their activities take place in various spheres — from helping people with disabilities and building animal shelters to advocating citizens' rights and freedoms at the international level.
As of 2020, 46% of Ukrainians believed that the public sector exists for a reason and benefits the country. The full-scale russia's invasion exposed this issue even more. During the war, non-profit organizations' activities became visible: they bring humanitarian aid, provide the Armed Forces with equipment, help displaced people find a new home, and rescue people from the occupied territories. And they are supported by society.
Even then, in 2020, 30% of citizens were ready to support organizations that benefit society with part of their taxes, although such a function is not yet available to Ukrainians.
The state distributes taxes, and people cannot choose which industries to send their money to. The state determines how tax revenues are distributed, and this happens not only in Ukraine. Meanwhile, despite partial support from the government and contributions from citizens, NGOs still need additional funding to implement their own tasks.
At the same time, the largest taxpayers in Ukraine are not oligarchs or large enterprises. The largest contribution to the state treasury is made by those Ukrainians who go to work, receive a salary and spend the money they earn. However, this contribution is not always tangible for them.
For example, the employer (who is our tax agent) pays 18% of the salary to the treasury and another 1.5% to the military levy. But separately — a single social contribution (not from salary). And after these deductions, we receive our "net" salary. About a quarter of it goes to the treasury through government surcharges when we buy anything in a store or pay for utilities. However, we cannot directly decide what our taxes will go to.
What is the solution?
Taxes you control
Draft laws 7500 and 7501 on introducing a percentage deduction mechanism, which will give citizens the right to dispose of up to 2% of the tax they have already paid, directing the funds to benefit non-profit organizations, are under consideration in the Verkhovna Rada. Such a mechanism will help solve both problems: people will be able to decide where to give part of their tax, and NGOs will receive funding from citizens who trust them.
Thus, thanks to additional support, non-profit organizations, including volunteer, charitable, public, and religious organizations, will be able to quickly and flexibly solve problems the state is very slow to address.
According to preliminary calculations, if in Ukraine, at least 5% of those who have the right to make deductions will use the mechanism, then an amount of 161 million hryvnias will be collected. This will greatly help organizations implement socially beneficial projects to solve problems and meet the needs of our society, including rebuilding Ukraine after the victory in the war.
"The idea of the interest deduction mechanism already has support in the Verkhovna Rada. Ukraine has two superpowers — civil society, which pulls Ukraine forward in development, and a culture of support developing at breakneck speed. The percentage deduction mechanism is a tool of direct people's power when everyone can direct a part of their tax according to their worldview to the organization they trust the most," People's Deputy of Ukraine Roman Hryshchuk says.
How does it work?
Verified recipient organizations and digitization
Citizens will be able to transfer 2% of already paid personal income tax to the NGOs they want to support. It can be a religious, charitable, or public organization.
The initiative is planned to be implemented online, through the taxpayer's electronic account, so digitization will make the process convenient and fast.
Only verified organizations that meet certain criteria, such as signs of non-profitability, absence of tax arrears, etc., will receive funds from taxes.
In order to use the right to direct 2% of the paid tax to non-profit organizations, you will need:
- choose from the approved list of organizations one or two whose activities you want to support;
- enter the taxpayer's personal electronic account (alternative: submitting a paper application to the State Tax Service or submitting an application using the Diya application);
- submit an electronic application for referral in your personal account;
- one organization — 2% of the tax paid, or two organizations – 1% each.
Who has already done so?
The mechanism already works successfully in many European countries: Lithuania, Poland, Hungary, Italy, Slovakia, Romania, and Moldova. By the way, in Italy, the interest deduction mechanism was introduced back in 1985.
The experience of neighboring Poland shows a more than satisfactory result. In 2012, 11 million Poles used the percentage deduction mechanism and directed 1% of their tax to public organizations, which is 457 million zlotys, which the organizations used to solve social problems.
The percentage deduction mechanism is not only about financial support for NGOs; it is direct proof of how the tool of direct democracy will work in Ukraine: citizens will have the right to dispose of the share of taxes entrusted to them by the state to directly influence the improvement of the country.
