Ukraine’s complicated and corrupt tax system, the architect of which is ex-Prime Minister Mykola Azarov, shows mutual distrust between people and the state.
With the last tax code adopted in 2011, Ukraine led the world in the number of taxes and duties (135) and also in the abundance of loopholes allowing to avoid paying them. Having little understanding of how these taxes are being calculated and seeing how commonly they were evaded, people started acting by the principle: “only fools and cowards pay taxes in Ukraine.”
The state retaliated through the army of some 54,000 tax collectors, where each of them serviced only 60 taxpayers in comparison to over 400 taxpayers per one tax collector in neighboring Poland, according to the World Bank. The tax administrations had broad responsibilities and often were used by those in power to pressure the defiant politicians.
This situation didn’t change much in two years after the EuroMaidan Revolution. Since autumn, the tax inspectors raided with checks several big information-technology companies, which critics called an attempt to hit one of the leading areas of Ukraine’s economy.
The official rate of shadow economy reached 47 percent in 2015, according to Economy Ministry, the experts estimate it at 60-70 percent.
So a successful tax reform has become a matter of survival for the struggling country’s economy, hit by corruption and war, the experts say.
“Without this reform the chances for quick economic transformation are almost absent,” said Volodymyr Dubrovskiy, an expert on tax reform at the Reanimation Package of Reform. “Without it business will not be able to take advantage of a free-trade zone with the European Union,” which will be launched in January.
The critical reform has already brought to scuffles in the ruling team when the Ministry of Finances and a group of pro-government lawmakers proposed the competing drafts of a new tax code.
The finance ministry offered to reduce the four main taxes, including corporate income tax, value added tax, single social contribution, and private income tax, to a 20-percent rate. It also proposed to lift all the tax preferences, shrink the number of those benefiting from the simplified tax system and raise the rates for those remaining on it.
The ministry said they used the best foreign experiences and took a principle of “flat tax rate,” which in a nutshell means: the lower the taxes, the better they are.
“The aim of this reform for us is imposing of justice, equality and simple and understandable tax rules,” Olena Makeyeva, deputy finance minister, told the Kyiv Post.
She added that government have already launched the changes in fiscal services, halving the number of tax inspections and reducing the number of tax inspectors by 30 percent.
The lawmakers, headed by Nina Yuzhanina, a former employee of President Petro Poroshenko’s firm, proposed even lower rates for value added tax (15 percent) and individual income tax (10 percent) in their bill. They claimed the ministry’s proposal favors the big Western companies rather than the middle and small domestic producers.
“Where is the facilitation? Where are the measures that would bring businesses out of shadow?” said Tetiana Ostrikova, a lawmaker from Samopomich Party and one of the co-sponsors of the deputies’ bill.
Makeyeva replied that ministry couldn’t agree on lower tax rates as it would mean a huge budget deficit and problems with country’s donors from the International Monetary Fund. The IMF requires Ukraine to keep its budget in 2016 with a deficit of no more than 3.7 percent of GDP.
“If we decrease VAT by 1 percent this is minus 12 billion,” Makeyeva said. “The country’s financial stability depends on finance ministry. We hardly managed to evade default in 2015.”
The disputes in pro-government camp over the new reform surprised the IMF, whose mission visited Ukraine in November without giving the expected tranche and promised to come back early next year. The ministry and lawmakers promised to seek a compromise.
The experts and business representatives found a number of drawbacks in both projects of a new tax code.
Kseniya Liapina, head of the State Regulatory Service, said the proposed changes into a simplified tax system, adopted in late 1990 to facilitate the work of small entrepreneurs, will destroy a small business initiative now.
Andriy Antoniuk, head of Ukraine’s Taxi Association, said they will bring into shadow the remaining 2 percent of taxi drivers who now don’t evade paying their taxes.
Tetyana Prokopchuk, vice president of policy of the American Chamber of Commerce in Ukraine, said the big companies expect from the tax reform the “transparent and predictable rules of administration.”
“But even with the ideal tax rules it’s more important how they will function,” Prokopchuk added.
Dubrovsky said the ministry’s project copied the tax reform in Slovakia thanks to Ivan Miklos, former Slovak finance minister and now advisor of Ukraine’s Minister of Finance Natalie Jaresko. But the foreign advisors didn’t count the differences between the two countries.
“But the fact that it was successful in Slovakia doesn’t necessarily mean it will work well in Ukraine,” he said.
Tymofiy Mylovanov, professor of economics at the University of Pittsburgh, said that both the ministry and the lawmakers didn’t take into account the crucial aspect for any reform — people’s trust to it.
“Business will win from the lower taxes but the ordinary people will lose. The pensioners, the science the education will suffer, the ordinary people will suffer, which may bring to social protests,” he said. “Somebody should explain on the state level why this reform is necessary and which way it actually will be done.”
Mylovanov added that the changes in taxation need to be clear, transparent, gradual and should bring to a common understanding that there is the red line in tax evasion that nobody may violate without sanctions.
“People will not start paying taxes until they see justice reinstalled,” he said.
Kyiv Post staff writer Oksana Grytsenko can be reached at [email protected]
