Among investor worries, Ukraine’s current tax rates aren’t at the top of the list. Ukraine started lowering tax rates in 2015, bringing them closer in line with those of other European states.
Instead, it’s the administration of taxes, and the corruption that has gone along with it, that are bigger concerns.
Ukraine has been improving its ranking in indexes that track how many people pay their taxes over the past six years. One joint PwC and World Bank study gauges how easy it is for a standard medium-sized company to pay its taxes — since 2011, Ukraine has moved from 181st to 84th place among 190 economies, the biggest leap in recent years.
Ukraine’s tax rates have been lowered, but complaints remain about corruption. (Stella Shabliovska)
The tax burden on business was significantly reduced when, starting from 2016, the government halved the social contribution payment from an average 41 percent to 22 percent of a worker’s official salary.
Despite pressures to lower taxes even further to stimulate economic activity, Ukraine’s key creditor, the International Monetary Fund, warns against major tax cuts, which it says “would lead to substantial revenue losses.”
Vladimir Kotenko, an EY Ukraine partner specializing in taxes, said that Ukraine’s tax rates are relatively low compared to the rest of Europe.
“But the tax rates should be considered in the context of how much they hinder or promote business activities, or if they exert no influence at all,” Kotenko said. Other impediments like political instability and the lack of rule of law are likely to be a greater deterrent to investors.
Fiscal climate
Nearly half of all complaints received by the Ukraine Business Ombudsman Council in 2016 involved disputes with tax authorities. Tax inspections, delays in obtaining value-added tax refunds, and criminal proceedings launched by the State Fiscal Service remained.
Characterized by the International Monetary Fund as overstaffed, inefficient and lacking accountability, the State Fiscal Service is notorious for its corruption, including the recent arrest of its former chief, Roman Nasirov, on charges of defrauding the state of $74 million. Nasirov denies the charges.
Other issues include contradictory, bureucratic and ambiguous tax legislation. The electronic tax reporting system does not work effectively, while fiscal authorities perform complex audits on businesses. The fiscal service also demands that businesspeople pay taxes in advance to meet quotas.
In April, improvement came with the launch of the automatic value added tax refunds. It’s working already. According to Oleksandr Minin, a senior partner at tax consulting firm KM Partners, “the level of tension with the tax authorities has decreased.”
Before, many firms had to wait months for a VAT refund, with businesses eventually paying bribes to get their money back.
The list of VAT refund requests can now be found on the Finance Ministry’s website. Minin said the number of serious complaints has gone down. “It’s not perfect, there are some drawbacks,” he said. “But the attempt to build transparency generates trust.”
The government is also preparing to reorganize the State Fiscal Service.
The institution was downsized by 20 percent, and the group’s audit service was partly centralized at the oblast level. However, the government has yet to establish a new management structure.
But a recent poll conducted by the European Business Association suggests that the business community is inching towards positivity. The poll registered an average of 2.58 out of 5 on a scale of how satisfied people were with tax authorities. That’s low, but it’s the highest ever since the scale was first introduced in 2011.
Business expectations
To make Ukraine’s tax system more business friendly, EBA experts call for introducing personal liability of tax auditors and inspectors for investigations that they conduct, and the introduction of a politically unbiased body for probing financial crimes.
Kotenko, however, says that State Fiscal Service reform alone will not make Ukraine’s tax system less of a disincentive to foreign investment.
Kotenko espouses a familiar tax adage: broaden the tax base. But in Ukraine’s case, that needs to be done by deshadowing the economy, reducing government spending and greater progressivity income, sales and property taxes, based on the ability to pay.
The less government spends, he argued, the less taxes it needs, reducing the incentive for local officials to extort money to meet budget quotas.
“Unless the state’s financing needs fall, it’s unlikely that the fiscal pressure will decrease,” Kotenko said. “These two pipes are linked.”
