Ukraine's tax collectors get paid a few hundred dollars a month but
wield tremendous power in enforcing laws to raise more than $30 billion
in annual revenue for the nation.
It's been a recipe for graft, with a
bitter aftertaste that dissuades managers and employees from entering
into official employment arrangements lest they fall under the corrupt
and typically unreasonable gaze of the fiscal police.
“They’re called the most corrupt because they interact with business the most, but still they’re the most corrupt,” Pavlo Kukhta, an expert at the Reanimation Package of Reforms told the Kyiv Post.
Azarov’s shadow
People working to streamline Ukraine’s tax system told the Kyiv Post that all their efforts would come to naught if so much of the economy remains unofficial – in the shadows, so to speak.
The large size of Ukraine’s shadow economy – perhaps half of all economic activity is off the books – has much to do with breathtakingly incompetent 1990s officials who designed impractical legislation, experts said.
Kukhta explained that former Prime Minister Mykola Azarov, now in exile in Moscow, was the architect of Ukraine’s tax policies when he ran the service from 1996 to 2002, before rising in the Finance Ministry and later as prime minister under exiled ex-President Viktor Yanukovych.
“With the way they act, they were essentially created as a kind of extraction tool,” Kukhta said. “It’s essentially a large administration that tries to go everywhere and after everyone.”
According to Vladimir Dubrovskiy, a senior economist at the Center for Social and Economic Research of Ukraine, ex-President Leonid Kuchma created the tax service as his personal enforcer before Azarov took over. But, Dubrovskiy said, Azarov failed to understand the basic principles of taxation, leading to a corrupt and absurd tax authority.
In the 1990s, for example, a combination of skyrocketing inflation and a 90 percent tax on the highest income bracket put most taxpayers in this category. This and other absurdities, Dubrovskiy said, prompted most people to avoid paying taxes.
Unofficial employees – often “paid through envelopes” – lose recourse to law if their workers’ rights are violated and cannot unionize since they officially do not work.
Ripple effect
Dubrovskiy said that systematic corruption in the tax service has made it impossible for the country’s workers to work officially.
“The tax services were not created to serve the people, they were created to serve the authorities,” Dubrovskiy said.
The tax legislation drafter added that since so many people view the tax service as a means of “confiscation” and not of serving the state, the best way to avoid scrutiny is to evade taxes.
Dubrovskiy said that enforcers were motivated to “destroy businesses” because they received bonuses based on fines they collected.
“The official public servants were stimulated to collect as much fines as possible and actually destroy business,” he said, adding that this, in turn, prompted companies to not file paperwork so as not to attract attention. “This is a kind of institutional memory that cannot fade away quickly. It’s selective enforcement of impracticable laws,” he said. “At least some of the tax departments are corrupted 100 percent.”
Bloated service
Experts like Kukhta, as well as lawmakers like Samopomich Party member Andriy Zhurzhiy, told the Kyiv Post that the workforce’s bloat ripples across Ukraine.
But Kukhta said that cuts had already succeeding in trimming half of the tax police.
“It was at 40,000 to 50,000 at its peak,” said Kukhta. “It’s been trimmed by half, and I think it might be trimmed by up to like 5,000 to 6,000, mostly to personnel sitting in Kyiv and the oblast centers.”
The service is under the Finance Ministry led by Natalie Jaresko, who has made improving tax collection and reducing corruption in the tax service her top priorities for the year.
Questions have also been raised about the head of the tax service, investment banker Roman Nasirov, who was accused by a former top deputy in September of owning two pricey London apartments that he didn’t declare. He has denied any wrongdoing.
The government civil service is, moreover, resisting change and retaining a Soviet mentality. “They treat businesses as enemies who try to hide taxes that belong to the people, the mentality is skewed,” said Kukhta.
Within the service, incentives skew tax assessors’ motivations. Inspectors still receive bonuses based on fines they collect, for example.
Centralize
Many of those drafting the legislation focus on structural changes as a means of improving the situation.
The tax service is largely decentralized, making regional office susceptible to local corrupt officials and oligarchs.
“We need more centralized organization, without these local branches and local dealings,” said Kukhta.
Zhurzhiy echoed Kukhta’s assessment of the situation.
“We need centralization,” Zhurzhiy told the Kyiv Post. “One legal authority to administer tax matters.”
Kukhta said that a patrol police-style total remake of the tax service could work, but that it would be difficult to achieve given that tax law is “harder to train than the police.”
Dubrovskiy said that he would support a complete overhaul, but that as long as “the tax service remains so lucrative, there is little sense in changing the personnel. A clean person would destroy the business.”
