Experts of an Aug. 15 roundtable in Kyiv on tax reform believe that what Ukraine's Prime Minister Arseniy Yatsenyuk presented as country's new path to a better revenue and duty system has substantial flaws.
The current Cabinet prefers State Fiscal Service head Igor Bilous’s version of the reform, which emphasizes simplification over a plan by Pavlo Sheremeta, the economy minister, who wants lower rates for some businesses.
Yatsenyuk, who presented his own plan, supported Bilous’ vision over Sheremeta’s plan.
Roundtable’s participants, however, took former academician Sheremeta’s side, although still agreeing with Bilous, an ex-investment banker, on the necessity to stimulate the nation’s economy through eliminating corruption and legitimizing the shadow economy – as large as $21.4 billion, according to Oleksandra Tomashevska, executive of Kyiv Business Support and Development Center.
Thiss tep would be critical, given the size of a 45-million nation’s budget of $27.7 billion, while Poland’s 38 million people enjoy an $88.2 billion budget. Moreover, improving the taxation model could attract more foreign investment to Ukraine.
The situation is getting hot as government is preparing the budget for the next year. The sketchy nature of Bilous’s tax reform and absence of suggestions from small business drew severe criticism from experts. “This is a populist project,” insists Taras Kozak of the New Country, a civil movement, “it is far too vague and looks more like an election program. The reform should be more thoughtfully developed.”
However, Denys Fudashkin, deputy head of Finance Ministry that collaborated with Fiscal Service’s Bilous on preparing the tax reform, urged that changes in the tax structure should be gradual in order to create a healthy budget.
The announced reduction of taxes from 22 to nine might look good on paper but it leaves most of the tax burden intact through unifying old duties. “This is a method of former prime minister (Mykola) Azarov,” says Oksana Prodan, member of parliament with Udar, liberal political party, who leads a number of business-friendly initiatives. “His government transformed ecological tax into a bureaucratic maze with numerous sections and subdivisions. This project offers to do precisely the same thing.”
The tax reform falls short of stimulating businessmen by failing to set up a sole corporate income tax. Kyiv Business Support Center’s Tomashevska argued that Ukrainian businesses do not have incentives to reveal their profit figures, given that a variety of indirect levies are added to the official rate of 18 percent, making the total size of payments higher than in neighboring Poland that has a uniform percent corporate tax.
Alleviating the tax burden is one of the pillars of the recently introduced deregulation program prepared by the Economy Ministry. But the Finance Ministry’s idea to strip major agricultural companies from their tax privileges runs into conflict with the deregulatory initiatives. “This will not harm small- and medium-scale businesses.
Fudashkin of Finance Ministry assures. Only those agricultural entities that run business on more than 3,000 hectares, which accounts for just 3.4 percent of the sector, will have their tax privileges liquidated.
Illya Neskhodovsky of the Reanimation Package of Reform policy advising center, was not as optimistic.
“The agricultural sector is the most profitable in Ukraine right now. You are offering changes that will significantly worsen financial progress of the whole industry.” Such a step would hardly stimulate foreign businesses to invest in agriculture due to increasing tax pressures, let alone war and political instability, which have damaged the economic climate of Ukraine already.
The promise to reduce state inspections from the State Fiscal Service raises further questions on whether the Ukrainian government is emphasizing quantity over quality. According to the Ukrainian Democratic Alliance for Reform’s Prodan, the fiscal service is a “bureaucratic monster” possessing more power than it needs.
On the other hand, poor control over the service’s officials, as well as their low salaries, are likely to contribute to the resurrection of corruption practices that plagued the Ukrainian economy for the last two decades.
The nation’s social care system, along with the state-run Pension Fund, are not touched by the tax reform plans at all, although it remains rather ineffective.
Such kind of social care system is unsustainable,” says Kozak of New Country, “the situation is likely to get worse if we do not liquidate numerous categories that receive these benefits, especially when it is so easy to get them.” Kozak is convinced that Ukraine has no time to fix the Pension Fund, which historically came to be known as the “pension hole.”
“Ukraine can follow Georgia’s example when it dissolved its Pension Fund completely,” Kozak said, “while pension schemes became part of the budget policy.”
Kyiv Post staff writer Oleg Naumenko can be reached at [email protected].
