Three places from dead last – 181st out of 183rd – in the World Bank’s ranking for ease of paying taxes, Ukraine is no pleasure cruise for the armies of auditors, accountants and tax consultants that companies hire to slash through the red tape jungle that is the nation’s tax system.
The complex organization of Ukraine’s tax rules is not the only headache for Ukraine’s businesses. Experts say that the State Tax Administration is also once again trying to bend already mind-bending tax rules in order to fill depleted state coffers.
In one recent and shocking example from this autumn, Ukraine’s state tax authority issued an instruction for its inspectors to prohibit companies from carrying forward losses incurred in 2010 any further than the first quarter of 2011.
This violates both international standards, which allow such losses to be carried forward for up to seven years, and Ukrainian legislation. Experts say that the cumulative losses for businesses in Ukraine could swell into billions of U.S. dollars.
The decision sparked a flurry of activity in an attempt to change the government’s mind. Business leaders, both local and foreign, as well as representatives of international financial institutions and even the diplomatic corps met with government officials.
A change in policy has yet to happen. But Thomas Otten, head of Otten Consulting, which works with a German government funded group that advises Ukraine’s government on finance on tax issues, believes that the numerous lawsuits against the tax administration that have been filed by companies should soon bear fruit. “I think the issue will be solved soon,” he said.
But even if this issue is resolved, operating with the tax administration is likely to remain a major problem for companies. A World Bank oversight panel focused on reforming the state tax system found that the three main problems were a shortage of modern technologies, unwillingness to work with taxpayers and an invasive approach toward personal information.
The government has recently stepped up what it describes as a fight against tax evasion, asking banks to collect additional information about account holders.
Joop van Lunteren, a member of the oversight panel and Dutch tax expert, explained that this is useless. He pointed out that Ukrainian authorities are collecting more information about taxpayers, but continue to trail in global rankings of ease in doing business and paying taxes.
“On the one hand, the administration here pays lip service to this principle. On the other hand, it shows through many of its policies that it is still stuck in a culture where you want to collect as much information on the taxpayers as possible, based on the idea that this will allow you to eliminate tax evasion,” van Lunteren said. “Now, if you look at the facts, you see this doesn’t make sense.”
Why can’t Ukraine follow the lead of nearby Poland, which in the past two decades has managed to establish itself as one of the most promising and stable economies in Europe? Some say blame lies on the specific nature of Ukraine, which is bigger and harder to reform than the likes of the small Baltic nations or Georgia.
“One can look towards the Polish example. I’ve heard Bulgaria has also made a lot of progress. And it started perhaps even further behind Ukraine,” van Lunteren said.
According to experts, Ukraine’s fall in global investment and ease of doing business rankings is, in part, due to much faster improvements in other countries.
Mats Hennriksson of the Swedish tax authority said the road ahead for Ukraine remains long. “The idea of changing the mindset of the tax officers is still remote,” Hennriksson said.
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
