A nearly bankrupt and heavily indebted government wants to bring money out of Ukraine’s massive shadow economy to finance services and benefits.
Struggling for cash, Ukraine’s government has once again turned its attention to curtailing the nation’s shadow economy in hopes of collecting more tax revenue.
In 2011, the State Tax Service estimated that up to 17 percent of revenue generated by small-to-medium businesses remains hidden to the government. In October, chief taxman Ihor Bilous said that 50 percent of salaries are paid off the books.
Ukraine has been talking about bringing the economy out of the shadows for years with little success. The recession-mired nation is expected to officially generate as little as $150 billion in gross domestic product this year.
Ex-Prime Minister Mykola Azarov, who fled with the regime of ex-President Viktor Yanukovych, promised to bring the economy out of the shadows but never did.
But now the efforts under way appear to be serious.
A draft law filed to the parliament on Nov. 27 offers a tax amnesty, or, as it is being called, “a tax compromise.”
The idea is that if a tax agency finds shortages of tax payments in the books, the company will be able to admit fault and pay only 15 percent of the amount owed to the state. No fines will be imposed. The compromise will be available for a year from the day the law comes into effect, if no other changes are made during the adoption process.
In an alternate version of the tax amnesty bill, a different group of lawmakers gives the businesses 90 days to claim additional tax liabilities on any period before April 1 and get away with paying only five percent of the amount.
Both initiatives are a step in the right direction, but are not strong enough to dent the shadow economy, lawyers say.
Volga Sheiko of Asters law firm says no law will be effective unless it establishes an obligation for businesses to come clean.
“There is no responsibility for refusing to claim updated tax reports, which makes it almost impossible to move the boulder that the shadow business is,” Sheiko told the Legal Quarterly.
Both amnesty laws are based on the premise that companies will volunteer information on tax evasion or improper payment.
What really can push the companies to come clean is establishing a system that makes paying taxes easier than evading them. “It should be easier and cheaper to conduct business openly and transparently than with use of various latent approaches,” says Oleksander Borodkin, a partner at Vasil Kisil and Partners.
A relatively easy way to make taxation simpler and cheaper would be through changing how two of the most troublesome taxes work. Value added tax and income tax are the ones that cause the most trouble.
Nataliya Osadcha of Syutkin & Partners says that “the current legislation can’t protect honest taxpayers and can’t hold responsible the companies that benefit from illegal VAT (value-added tax) returns. This situation damages honest taxpayers who have to prove in court that their deals are real.”
”We need to change the taxation system to the root and use the experience of the Western countries,” Osadcha says.
The new government does seem to understand that a complete overhaul of these taxes is needed. Leading the economy out of the shadows has been declared a top priority. In September, a tax reform law was registered in the parliament.
It seeks to reduce the number of taxes in Ukraine from 22 to nine. It will also reduce the payroll tax that eats up some 30 percent of a worker’s salary. But revisions are expected from the new Cabinet.
Some argue that a lot more is needed to make real changes.
“The offered reforms are not radical enough,” said Anna Derevyanko, head of the European Business Association, speaking at a round table in Kyiv recently.
Osadcha from Syutkin & Partners says business has high expectations. The signing of a trade deal with the European Union earlier this year signaled that improvement of the business environment is coming.
“Now is the perfect way to move out of the shadows,” she says.
