You're reading: Aggressive tax collection, global slowdown erode state revenues

State revenues dropped 20 percent in July compared to last year, raising concerns that aggressive tax collection by Ukraine's authorities has pumped the country dry. While experts say this is a factor, they also highlight deteriorating macroeconomic conditions that are steadily getting worse.

According to calculations
by Kyiv-based investment bank ICU, state budget revenues fell 20.2
percent in July compared to June, and 20 percent compared to last
year. At Hr 23.5 billion ($2.9 billion) July’s income was the second
lowest this year, behind a traditionally lean January. It was also
the first time monthly revenues dropped compared to last year, when
authorities began to step up revenue collection.

The lower revenues can
partially be attributed to a weaker external environment and seasonal
corporate tax payments, which typically peak in May, August and
November, said Alexander Valchyshen, head of research at investment
bank ICU. But excessive tax collection, which has depleted businesses
resources also played a role, he added.

The situation has two
sides, confirmed Oleksandr Zholud, senior economist at Kyiv-based
think tank International Center for Policy Studies. Tax collectors
have indeed been overzealous, he said, but a general slowdown of the
economy is also making itself felt. The original government forecasts
for 2012 saw consumer prices rise 7.9 percent, Zholud explained, but
now we even have deflation, so the collection of nominal taxes is
much lower.

“On top of that,
aggressive tax collection like advance payments has limited the funds
available to businesses,” Zholud summed it up.

The European
Business Association, which gathers companies throughout Ukraine, has
long been critical of the authorities’
attempts to boost state revenues. These include pressuring companies
to buy state bonds, demanding taxes in advance and conducting an
ungrounded amount of inspections looking for reasons to issue fines.

Nonetheless, Valchyshen
believes the shortfall in revenue means the practice is unlikely to
stop, with even more pressure on businesses to pay in advance, more
fines and more inspections to find cases of tax avoidance.

“Going forward the
government would like to correct this,” he said.

Meanwhile, beyond
Ukraine’s borders, the storm clouds are once again gathering. Italy
and Spain are looking closer and closer to Greek-bailout territory,
while manufacturing, considered a top indicator of where the economy
is going by experts, is taking a plunge. Germany and France saw their
purchasing manager’s indexes fall to their lowest level since
mid-2009; eurozone unemployment is at its highest in the single
currency’s history.

September is looming large
as analysts forecast a brutal return from the summer holidays for
Europe’s leaders. According to a recent study by the International
Monetary Fund, a quarter of banking crises since 1970 erupted
precisely in that month. It was in Sept. 2008 that a 40 percent
devaluation of the hryvnia began – a crack in the dam which exploded
into a crisis that cost the country 15 percent in gross domestic
product.

The hryvnia is once again
coming under pressure. The national bank’s foreign reserves rose
slightly in July to $30.1 billion, albeit largely due to a $2 billion
eurobond placement at a rate of 9.25 percent, the highest in 12
years. A $450 million loan from the World Bank, that ministry of
finance officials say is in the works, will no doubt help.

Nonetheless, interventions
to stabilize the hyrvnia doubled in comparison to June, a research
note by investment bank Dragon Capital noted, straining the reserves
which stood at the $38.2 billion in Aug. 2011. The National Bank of
Ukraine’s decision to tighten reserve requirements for banks has also
been viewed by experts as part of the government strategy to keep the
exchange rate stable, notably by creating hyrvnia shortages on the
local market.

“Our base case view also
assumes that NBU reserves will decline to $25 billion [covering 3
months of imports] by end-2012 on foreign currency market
intervention and repayments to the IMF, and drop further to $23
billion (2.6 months) in 2013,” the investment bank wrote.

Kyiv Post staff
writer Jakub Parusinski can be reached at
[email protected]