Emphasis on fixing broken institutions and resolving “universally” relevant tax problems
Vladimir Kotenko, Partner, Tax & Law Leader, EY Ukraine
Optically, the things in tax arena are not that bad.
There has been significant progress with VAT refund.
One could also mention an improved performance of corporate profit tax.
Ukraine is improving its ranking in various international indexes.
Notwithstanding those limited success stories and despite climbing up those indexes, the tax situation looks rather stagnant in practical terms. By the way, local indexes, e.g. the one of the European Business Association, echo that feeling. The tax index of the European Business Association, although reached the highest mark for all periods of measuring it, remains in negative segment of the band.
There are abundant tax loopholes available to the business, which distorts competition between bona fide taxpayers and fraudsters.
The institutions responsible for tax matters do not function well. The tax authorities seem to be focusing on squeezing more taxes out of honest taxpayers, rather than fighting the tax fraud. The lawmakers are slow in delivering much expected changes. Instead, they are sneaking into the law provisions driving taxes up.
According to recent EBA poll, 70% of respondents have negatively evaluated the quality of tax legislation. One of the major concerns voiced by business is that the laws are too vague and leave much space for the arbitrariness of the tax authorities. Strong doubts that justice would be served in case of a court dispute with the authorities, aggravate that concern.
Ukraine faces multiple tax challenges, and there is no magic pill to cure them all at once. What are the things that need to be improved in legislation to make sure that there is more transparency and accountability coming from both the state as well the companies?
First thing to tackle is the large state spending requiring more and more tax revenues to fund. Until and unless there are qualitative and quantitative changes in state spending (spend more on investment and not on consumption, overall spend less or more efficiently), the tax situation is unlikely to improve materially. The government will continue doing its best to squeeze more and more taxes, and the taxpayers would be even more tempted to avoid the increased tax burden. No question, in such circumstances the major tax burden would fall on bona fide taxpayers (which is the case now).
There are easy to exploit tax evasion schemes and this distorts the competition between the transparent businesses and the tax evaders. To address this issue, Ukraine has to double its efforts in implementing anti-BEPS measures, such as legislation on controlled foreign corporations, improvements to transfer pricing regulations and some other.
Joining the network of countries, which automatically exchange the information on financial matters, is of high importance for improving the tax discipline. Wider use of electronic services in the tax sphere would also serve this purpose.
In addition, the government has finally to take measures aimed at decreasing payroll tax burden. Payroll taxes are relatively high and rising, making transparent salary payments much less attractive compared to the “shadow” schemes. The payroll tax burden is driving demand for many tax avoidance schemes. We must break this vicious circle.
Finally yet importantly, to improve the tax space Ukraine needs capable institutions across tax policy, tax compliance and tax justice domains.
The state bodies, which would be immune to political pressure (e.g. a proper anti-corruption court or alike bodies), could really make a difference. In particular, such independent state bodies would be able to smooth out the harm caused by flawed actions of the lawmakers.
Although there is no magic pill, there are surely remedies available to improve the health of the Ukrainian tax space. The trick is to choose the right, not poisonous, ones.
