The Tax Code as a means of destroying the press

Oleksy Pohoryelov, General Director of the Ukrainian Association of Press Publishers has published a highly critical assessment of the ramifications of the new Tax Code for the press.

He writes that the consequence of the new tax rules which came into effect on 1 January 2010 will be the closure of many publishing companies and a further wave of unemployment.

The new restrictions in the Code, he says, will force newspapers and journals to reduce the amount of work given to freelance journalists, photographers and other specialists. This will reduce the number of different points of view and therefore diversity of information.

Publications will also be less able to buy authors’ rights (articles, photos, etc) from foreign companies or authors since they will be prohibited from counting in their expenditure the cost of such rights purchased from non-residents.

The attempts to increase the amount of taxes levied will thus lead to the destruction of a part of the publishing industry raising the question of whether in fact the aim of getting more money will be achieved.

Oleksy Pohoryelov points out that the consequences will not be so disastrous for all publishers, with large publishing companies much less affected than small ones. He predicts a move towards large-scale publishing companies, while the percentage of small companies will decrease.

Any business, the author stresses, has specific features which should be taken into consideration when organizing tax regulation. This, unfortunately, has not happened with the case of publishers.

The media fulfil many important functions from education to entertainment. Unlike other channels of information, the printed press and online publications are a main source of analytical information with only texts making it possible to understand and digest economic figures, political programmes and other important information. The role of the press in forming public opinion is thus vital, with this being especially important in times of crisis.

The watchdog role of the press is crucial in controlling the work of officialdom, politicians and businessmen. It is the State’s duty to ensure access and high quality of the printed press for the entire population regardless of their income and where they live.

The harmful elements in the Tax Code for the printed press

This is first and foremost, the author says, that independent journalists, both freelance and employed in one publication, will suffer.

The Tax Code prevents publishers from paying for the services of independent specialists working on a single tax, while freelance journalists, photographers, editors and others will be forced to go onto a general system of taxation, this reducing the number of authorial materials which the editorial offices will be able, for the same amount of money, to buy.

The Code stops businesses from adding as expenses payment for work, services and other material and non-material assessments from individuals paying the single tax. This effectively means that thousands of journalists, photographers, designers and others in the publishing industry with narrow specialization will not be able to sell their services even though they are, from the Tax Code’s point of view, self-employed and paying tax according to the simplified system of taxation. They will thus be forced to go over to the general system of taxation.

Since publishers, marketing and other companies will now not buy material from freelance journalists who had up till now worked as small entrepreneurs, the simple taxation system is closed to them.

The author gives detailed breakdowns of specific possibilities and scenarios.  They all significantly increase the tax load on the individual and expenses for the publishing industry, which, he points out, has by no means recovered from the financial crisis.

He writes that the tax load on freelance journalists and other self-employed people engaged in creative professions, is ten times greater.

If a year ago a journalist working on the single tax and earning around 4 thousand UAH a month effectively paid 5% of his income, now, working according to a civil contract, he would have to pay the State 50%.

The problem is exacerbated by the lack of options. Most publishing companies are not in a position to take such journalists on as members of staff. Furthermore, some have narrow areas of specialization and need to be able to offer their material to a range of publications.

A second consequence was mentioned above – that publishers will not be able to buy authors’ rights (articles, photos, etc) from foreign companies or authors.  According to Article 140 § 1.2.1 of the Code, they are not able to count as expenses royalties paid a non-resident for intellectual property, aside from literary works, above 4% of profits from the sale of their production.

The author points out that at present such expenses form between 40 and 70% of all money spent. For publications working according to a licence, this is as a rule 40-50% of their expenses. .

This innovation, therefore, supposedly aimed at countering the removal of money abroad, will in fact lead to the closure of any publications working on licence. He adds that it is strange that the related field of television does not have such restrictions and asks whether before EURO 2010 all foreign publications and publishing companies publishing journalists on licence will close.

There is an exception, set out in Article 140 § 1.2 with literary works – that is, articles – having no restrictions on them. This does not, however, apply to illustrations or photos with these articles, or the purchase of the right to use a trademark services in Ukraine.

The legislators also failed to think about the development of the printed media and rapid increase in the number of Internet publications. The exemption from VAT for printed press does not apply to Internet publications. He calls this the third major failing in the Code which discriminates against one form of media outlet over another.

The results of the Tax Code for the publishing industry and budget

The Ukrainian Association of Press Publishers predicts a reduction in the taxes paid due to a new wave of staff reductions.

A six percent reduction in VAT;

A 6 percent reduction in tax on profits

The Tax Code, it believes will lead to:

the closure of up to 12% of publishing companies / publications

the dismissal of up to 10% of staff who managed to survive the economic crisis.

The author notes that over the last year several bills have been passed reducing the media’s options for earning money through advertising.

Over the last six months the Ukrainian Association of Press Publishers has sent more than 10 of its own or collective appeals with proposals for rectifying the above-mentioned failings. These were not taken into account (due to haste and lack of professionalism when the Code was being adopted),

The Association is adamant that the following amendments to the Tax Code are vital:

1)          An expanded list of types of activity which can be carried out by individuals on the single tax, with their pay being counted as the enterprises expenses. This will make it possible for publishers, etc, to freely buy the work of journalists, photographers etc .

2)            exclude restrictions on buying photographs, illustrations, trade marks, services and other forms of intellectual property abroad. ;

3)           extend benefits for printed publications to their Internet versions, making new media more accessible to the reader.

4)           establish that tax inspections of media outlets and publishing companies can only take place according to a fixed plan approved by the State Tax Inspectorate, and published by it. After all it is specifically the media, given their important social function and role as watchdogs of democracy that become the target of pressure from politicians, officials and oligarchs.   Therefore publishing companies need additional protection from administrative levers of pressure.

The most possibilities for abuse in this sphere arise when new normative acts are introduced, before procedure has been developed and there is no consistent practice for application of the changed legislation. For this reason, the text of the Code should be supplemented with a ban on unplanned checks for the printed press, at least for a specified period, until clear and comprehensible interpretation and practice has been established.

Heavily abridged from the original article