It’s often estimated that at least a quarter of Ukraine’s economy is in the shadows.
Danil Getmantsev believes it’s closer to half.
For nearly two years, the head of the parliament’s finance and tax committee has been leading the country’s effort to plug the holes in legislation that allow for tax evasion.
“It’s a system that worked for 28 years, and it’s resisting change,” Getmantsev says. “The resistance is so colossal, we couldn’t have imagined it when we were starting.”
A number of things have been done and are about to bear fruit.
A broad fiscalization law, passed in 2020, will oblige most small businesses to use cash registers — a move that would eliminate under-the-table retail. Sales of Ukrainian assets via offshore firms are now taxed in Ukraine. A tax amnesty is under way.
Other changes remain to be launched.
Among them are the government’s efforts to raise extraction fees for natural resources, resisted by oligarchs, and to end the enormous market of smuggled and counterfeit goods.
If all of it comes through, it will massively help Ukraine’s budget. Getmantsev and the Finance Ministry estimated that the changes, paired with the control from law enforcement, can bring the state budget an extra $1.6 billion a year from excise duties, and $2.2 billion a year in other taxes, including from oligarch-dominated businesses.
De-shadowing the economy will add at least 2% to the annual gross domestic product growth, according to Getmantsev. Ukraine’s GDP was estimated to be only $142 billion in 2020 and is forecast to grow by 4% in 2021.
At first, though, the changes will make many people unhappy, Getmantsev acknowledges. Some of them are small entrepreneurs that protest fiscalization. Some are oligarchs that wield TV channels and flocks of lawmakers.
‘Everyone must pay’
Getmantsev, a former lawyer and law professor, was elected to parliament on President Volodymyr Zelensky’s party ticket in 2019 and has headed the finance and taxes committee ever since.
His job is to advocate for often-painful tax changes and push them through parliament. He has become the face of Zelensky’s administration’s sweeping effort to de-shadow the economy.
Advanced economies in the European Union are 10–20% in the shadow, according to a 2019 estimation by the International Monetary Fund. In Ukraine, various estimates put it at 27–40%.
But Getmantsev, who spent almost two years trying to de-shadow it, guesses that it’s 50%.
He has a simple solution that is proving very hard to apply.
“Everyone must pay all the taxes they are due,” he says. “There must be no exceptions or benefits that root from corruption. A state that doesn’t steal has the right to demand that taxes are paid.”
But those who profit from low or unpaid taxes don’t want their ride to end.
One of the tax changes’ most powerful opponents is the country’s richest oligarch, Rinat Akhmetov. The next bill to land in Getmantsev’s committee can cost Akhmetov dearly.
Big prize
A package of tax changes prepared by the Finance Ministry will be the most important piece of legislation that the parliament will consider in the coming months. The Servant of the People faction wants to pass it before the end of the current session in mid-July.
The most discussed clauses in the draft law concern raising iron ore extraction fees and the introduction of excise duties for green energy.
These two proposed changes made Ukrainian media dub the draft “the anti-Akhmetov bill.” The oligarch’s companies extract 60% of iron ore in Ukraine and produce about a quarter of all green energy in the country.
Hearing this moniker, Getmantsev shakes his head in slight annoyance.
“It’s not an anti-Akhmetov bill,” he says. “In fact, it’s a pro-Akhmetov bill.”
How so? In the long run, he argues, “equal rules for all” will make Ukraine a more attractive jurisdiction for doing business. It means that the value of any assets of Ukrainian oligarchs located in Ukraine will grow, making them richer.
“If we moved the enterprises owned by our oligarchs to Poland, they would automatically be worth 10 times more than now,” he says.
So any business, including oligarch-owned, will win from the changes the government proposes, he argues.
It might prove hard to make Akhmetov see it this way. Just from the raised iron ore fees, which would be tied to the market price instead of production cost, the oligarch may have to pay an extra $11 million to the budget every year.
“We must persuade business that we don’t have a special focus on one oligarch, but that everyone is equal,” he says.
As an example of equality, he reminds that at the same time the government seeks to introduce a painful change for farmers, raising their income tax twice. It will still be tied to the amount of land a farmer has.
There is resistance.
“Agricultural producers have a huge lobby in the parliament,” says Getmantsev.
So does Akhmetov. Ukrainian media estimated that he influences dozens of lawmakers, including in the Servant of the People faction, based on how they vote. His representatives have denied meddling in politics.
“The problem with the oligarchy is that they don’t debate whether a proposed solution is right or wrong. They just have a financial interest and they defend it on every level — through politics and the media,” he says.
Apart from quashing solutions, oligarch meddling has a longer-term detriment.
Oligarchy-based economies are weaker because there is no normal competition.
“In a free competitive environment, to survive as a business, you have to work your brain and be innovative,” Getmantsev says. “But when you can protect your profits by picking up the phone and calling a minister or a lawmaker, or deploying your TV station — you stop thinking about how to work better. That’s why economies based on oligarchy are doomed.”
Plugging holes
The tax changes that the parliament aims to pass this summer will anger more than just oligarchs and farmers.
Among other things, the proposed changes will end a scheme where developers use individuals who pose as legal sellers of apartments in order to save on the taxes and pay the state 6% instead of 18%. From now on, a person will be able to sell only two apartments per year at the reduced tax rate. Selling the third and so on will incur the full amount.
Another change awaits people who drive cars worth more than $80,000 — they will have to pay a “luxury tax” annually. It’s amount is tied to the government-defined minimal salary, and now constitutes $900.
The government presented the draft law but hasn’t yet submitted it to parliament. Some of the proposed changes may not make it to the final version due to resistance of the lobbyists.
Another key piece of legislation to help de-shadow the economy is the fiscalization bill, passed in 2020. After it was met with public rebuke, the government had to postpone one of its most impactful measures — the obligatory cash registers for certain groups of individual entrepreneurs, known in Ukraine by their local abbreviation, “FOP.”
There are more than 1.8 million of individual entrepreneurs in Ukraine. Many bigger businesses use FOP status to optimize taxes. Such “entrepreneurs” can sell smuggled or counterfeit goods, such as smartphones or bootleg alcohol.
The use of cash registers will ensure that tax officials know about every sale.
Getmantsev hopes that the bill will come into power in 2022 as planned, but acknowledges there is tremendous pressure to postpone or cancel it. There are ongoing street protests by people who say they are individual entrepreneurs who will be affected by the changes.
Getmantsev meets and speaks to them. He claims that smugglers fund protests but there are real entrepreneurs among them.
Opponents of fiscalization say it must be easier to stop smuggling at the border than track many thousands of small entrepreneurs that might be selling smuggled goods.
But Getmantsev says that it doesn’t work that way. The reform of the Customs Office is underway, seeking to vet and replace many of its employees, but it alone won’t fix the problem.
“Ukraine has the biggest market for smuggled goods in Europe,” he says. “It’s so easy to sell them. Even if we put a saint at the customs, he will be corrupt in a week — all because the demand for the smuggled goods is so huge.”
Fiscalization must also help with halting the sale of bootleg alcohol. Today, it is freely sold online and no excise taxes are paid.
During the interview with the Kyiv Post, Getmantsev demonstrates a 10-liter carton of vodka that his aide ordered online. It cost only $12.70. Regular vodka costs several times more.
“I didn’t risk trying it,” Getmantsev says.
Danil Getmantsev, head of the parliament’s finance and tax committee, demonstrates a 10-liter pack of bootleg vodka his aide ordered online during the interview with the Kyiv Post on May 21, 2021. There is a large market of bootleg vodka that’s costing Ukraine billions in unpaid excise taxes. (Kostyantyn Chernichkin)
This vodka is usually made at the same factories that produce the legal stuff but no one pays the excise duty on it. It’s not just found online. Even big supermarket chains sell bootleg vodka.
“There are 80,000 points where counterfeit vodka and cigarettes are sold,” Getmantsev says.
He believes that the fact that such sales go on testifies to the ineffectiveness or corruption of the State Fiscal Service. This is why Getmantsev is very enthusiastic about his new project: He asks his followers on social media to email him tips about counterfeit alcohol and cigarettes.
In the first week, he got only five reports, but that was good enough to start. Now he wants to make them into examples — push the law enforcement and State Fiscal Service to act on the tips, then publish the results.
De-shadowing salaries
After completing the fiscalization reform and halting sales of smuggled and counterfeit goods, the time will come to plug another big hole in tax revenue: salaries.
It’s unknown how many Ukrainians exactly receive salaries unofficially, in cash, but the number has to be very significant: According to the Tax Office, more than 4.1 million adult Ukrainians have not paid taxes in the last 10 years.
Among the rest, some work as “individual entrepreneurs” on contract with their employer, which cuts taxes significantly.
While tax evasion is the main reason for companies and people to go for unofficial hiring, there are others, according to Getmantsev. Young men avoiding military draft, employers seeking to be able to fine their employees, which they can’t do legally, and employees wanting to receive their salaries in dollars, all choose to work in the informal sector.
“But all of it is now becoming a thing of the past,” he says.
Individual entrepreneurs march in downtown Kyiv demanding softer taxation on Jan. 28, 2021.
The practice of hiring employees as “entrepreneurs” is one of the things the government and Getmantsev’s committee wants to end.
Many of Ukraine’s 1.8 million “individual entrepreneurs” aren’t entrepreneurs at all — they’re hired staff. Paying staff via contracts between private entrepreneurs and the company comes with a significant tax decrease. Companies pay over 41% of a regular employee’s salary in taxes and usually just 5% for FOPs.
While this practice is common in Ukraine, Getmantsev has no tolerance for it, calling it tax evasion.
A bill drafted by the Economy Ministry aims to end mass hiring of entrepreneurs as employees. It lists seven criteria of a staff employee — if a contracted FOP fits at least three of them, they must be hired as a staffer.
At the same time, Getmantsev emphasizes that salaries logically should come last in the de-shadowing of the economy.
“While we have the black holes like illegal alcohol, tobacco, gambling, smuggling, and while most of the commerce remains in the shadow — whatever sophisticated regulations we’ll do, much of the economy will remain in the shadows,” he says. “That’s why we now focus on plugging the chronic holes in our economy.”
Finally changing Ukraine’s outdated Labor Code is also in the plan.
“We will definitely pass a new labor code, but all our efforts to do so meet a colossal resistance of the unions and those who made a career in pretending to defend the rights of workers,” Getmantsev said.
Another component is underway to stimulate salaries to come out of the shadow: A draft law that offers tax deductions for citizens who voluntarily file declarations. Getmantsev himself wanted declarations to be mandatory, but this is as far as the parliament would go.
If everything that is planned comes through, it can upend Ukraine’s economy — and finally solve the issue of the “tragically low pensions” and low wages of teachers and doctors, Getmantsev says.
“In doing all this, the horizon is very far away,” he adds. “The things we do now will bear fruit in a 5–7 years’ time.” ·
