Tax evasion costs Ukraine $7.7 billion per year, according to the State Tax Service.
Envelope wages and value-added tax evasion are the most common schemes, according to Oleksiy Lyubchenko, the tax service chief.
More than half of lost tax revenue in 2020, $4.3 billion, was lost because employers paid salaries in cash. “Only 38% of household expenditures are recorded through a fiscal check, paying appropriate taxes and fees,” Lyubchenko said in a statement on March 29.
Businesses dodging VAT on goods and services evaded $1.5 billion in taxes.
Overall, the country’s underground economy remains immense, with up to 60% of individuals and businesses dodging taxes, according to tax experts.
Rather than imposing stricter controls, the tax service chief believes that building trust between taxpayers and the state will be the most effective way to tackle the country’s shadow economy.
For the state to gain taxpayer’s trust, the tax system should meet three basic conditions, which are fairness, transparency and convenience, and it should be beneficial to pay taxes, he said.
Despite years of efforts to address it, tax evasion remains a complicated issue in the country, according to Vladimir Dubrovskiy, an economist at the Center for Social and Economic Research.
Taxes in Ukraine are relatively high: 41.5% per employee. The unified social contribution obliges employers to pay 22% of the gross salary of each employee, while personal income tax demands another 19.5%.
This is a normal tax rate in developed countries like Germany, but not in developing countries like Ukraine, where the “burdensome taxation” is harmful to the country’s gross domestic product, Dubrovskiy said.
“It provides very strong incentives for avoidance and evasion,” he told the Kyiv Post.
And while social contribution and personal income taxes are high, property tax remains low and is “poorly collected,” Dubrovskiy said. In many Western countries, property taxes provide the backbone of local budgets, often accounting for more than half of tax revenues. But in Ukraine, property tax contribution is worth only 3% of revenues.
Dubrovskiy believes Ukraine needs to reduce the social contribution tax and increase real estate taxes.
Ukraine collected $38.5 billion in 2020. Value–added tax accounted for 37% of the state’s revenues, while corporate income and personal income taxes — for 21%.
In 2020, the state budget approached $50 billion. The missing amount was financed by borrowing.
