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Increase of Minimum Wage Is a Double-Edged Sword


Galyna Melnyk, lawyer at Ilyashev & Partners Law Firm
Source: Ukrainian News

Increase of minimum wages in Ukraine may have a negative impact on the domestic economy as it is connected with a large number of different indices.

The declared Government’s intention to significantly increase the minimum wage (MW) may have a quite negative impact on the legal environment and the Ukrainian economy as a whole, much greater than the positive effect of raising social standards.

Initially, it is worth noting that a minimum wage in the Ukrainian legislation is connected with many indices. They are not only payments in the form of taxes and fees, penalties for various offenses, and cost of administrative services. In general, the minimum wage is used as an indicator for the regulation of many spheres of life – from regulation of elections (e.g. minimum wage defines the amount of cash collateral of the candidate) – to calculation of thresholds of administrative and criminal liability (e.g. minimum wage is used in measuring the extent of damage for defining the seriousness of the offense).

The number of laws and regulations, in which minimum wage is used, reaches several thousand. The increase in the absolute amount of the minimum wage should be preceded by a detailed analysis of whether all requirements of such acts will be justified and feasible taking into account the new minimum wage. Introduction of the new minimum wage in such short period is unlikely to give enough time for a comprehensive analysis of the vast array of laws.

It is obvious that increase in the minimum wage is aimed inter alia at promoting fiscal revenue to the budget from the private sector of economy. In addition to increasing the minimum base for personal income tax, unified social tax, military tax, change of the amount of minimum wage will also affect a number of other mandatory payments. It is the real estate tax and the fee for parking of transport vehicles (which are calculated as a percentage of the minimum wage per square meter), and the fixed rates of single tax for the payers of the first and second groups (10 and 20% of the minimum wage, respectively). It will also essentially increase the absolute amount of fine for failure to submit the controlled transactions report by a taxpayer (currently it is 300 minimum wages).

The Ukrainian business used to respond to increase in the fiscal burden by withdrawal into the shadows. In this case, e.g. it may be nominal registration of workers on part-time work to reduce expenses for the official salary, complete refusal of the official registration of the employee without any registration of labor relations, formal replacement of labor relations by relations with individual entrepreneurs (which is now a fairly common practice).

However, increase in minimum wage will increase the state expenditures for wages in the public sector, particularly as regards the individuals, for whom wages in relation to the minimum wage are fixed by law (e.g. judges, civil servants).

The positive changes for taxpayers in the field of taxation caused by increase in the minimum wage, in particular, include the following. Firstly, increase of the threshold of purchases of goods, works and services from non-profit organizations, in which income tax payers are permitted not to adjust the financial result for the full amount of such purchase (50 minimum wages). Secondly, increase in the amount of tax-free personal income from sale of certain types of self-produced animal products (100 minimum wages per year). Thirdly, increase in the amount of average market value of transport vehicle for which the owner is obliged to pay the motor vehicle tax (750 minimum wages).

In conclusion it should be said that increase of minimum wage is a rather controversial step, which raises many questions both to the legislator and to the Ukrainian economy as a whole.

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