Tax Reforms Again. What Changes to Expect

What would the business like to have? A transparent and competitive environment. A convenient tax administration. A lower level of corruption in regulatory authorities and the imprisonment of corrupt tax and customs officials. Well, if this is not achievable, then in our reality, even the usual moratorium on changes to tax legislation may be considered a positive thing.

But no such luck, you will never live that long...

There is, as always, a rich supply of those willing to hang a medal “For tax reform” on their jackets. The business, dependent on these usually unproductive ambitions, is once again confused: how to work further, what to prepare for, what to plan? How to catch at least some motive for future changes in this reformist cacophony? You might say that it has always been this way, everyone is used to it, there is nothing new. Except there is: the Ukrainian government – and there is nothing wrong here – uses every opportunity to talk about the future recovery of the country, calls on investors not to stay away, to prepare their wallets, develop joint projects and invest in reconstruction. At the same time, the future tax regulation in the country of possible investments is one sheer unknown, which only scares away potential recovery actors.

On the one hand, there is Rostyslav Shurma, Andrii Yermak’s deputy and one of the three candidates for the post of prime minister, who offers the “all for 10” tax reform. In fact, not all, but key taxes — on corporate profits, value added and personal income — will have a rate of 10%. This is a significant reduction: the VAT rate is currently 20%, while personal income tax and corporate tax are 18%. It seems not bad, as if there is a chance to compete with neighboring countries for private capital. However, “10-10-10” is just a wrapper, concealing an increase in fuel excise duties “to EU levels,” an increase in the environmental tax, the spread of the “military levy” on all transactions (yes, transactions) and a draconian restriction for individual entrepreneurs, charging more than 2% of their revenues as profit. Besides, it is not clear what will happen to the simplified taxation system as such.

At the same time, after more than six months of savoring the reform by its main mastermind, there are still no details or calculations. What the taxation will look like in the end, even if the reform takes place, is still difficult to imagine, even more so in the case of revenues to the central and local budgets. Promising that fiscal losses will be offset by bringing the economy out of the shadow is not enough to get even the local taxpayer to take these proposals seriously, let alone international donors (who are traditionally very conservative in their tax views). Potential investors are also unlikely to be satisfied with the numerous lacunae on the reform map.

The logic here is simple: if the de-shadowing of the economy as a compensator suddenly does not work, the government will be forced to curtail the reform. The scale of this curtailment may be much larger than the current conditions: after all, we are talking about a country in crisis, which has lost both part of the real sector and labor force. An investor will avoid any uncertainty because this is the biggest risk of all.

The tax reform currently exists only in the form of unstructured talking points, which no one has yet formalized even into PowerPoint slides, not to mention a draft law. At the same time, the IMF already says directly that Ukraine should avoid innovations “that undermine tax revenues.” In addition, by the end of this year, we have undertaken to prepare and start the implementation of the National Revenue Strategy, which should contain clear revenue targets, bring VAT and excise taxes into compliance with EU legislation and revise the simplified tax regime.

How does all this correlate with Shurma’s reform? It does not.

How does the investor perceive it? As a clear signal that Ukraine will either faithfully implement the current four-year IMF program. But in this case there will be no tax breaks. Or they will – in which case Ukraine will lose the program and the IMF-granted immunity, whilst magnifying debt risks and coming closer to default.

As Mr. Shurma himself says, “The most difficult of discussions is underway.”…

Somewhere, obviously, outside this discussion, there is Minister of Finance Serhii Marchenko, who takes a U-turn in the tax reform, claiming that without a 4% increase in VAT and a threefold increase in the military levy (to 4.5%), even the financing of 30,000 additional payments to the army will be impossible. That is, VAT is not 20 and certainly not 10, but 24%, matching the level of Finland. Added to this is the military levy, which is 4.5% higher and charged before the personal income tax, i.e., not 19.5% (18+1.5) but 22,5% of income will be taxable. These are some real investment incentives. This is some big-time profiteering.

We remind the reader that it all started with Dmytro Razumkov, who ramrodded the limit of UAH 67,000 on the salaries of civil servants as a condition for the return of salary supplements for the army. Although utterly bereft of financial sense (it can only be explained by the fact that Razumkov was stung by Yuliia Tymoshenko), the demand caused trouble: the president did not want to sign the already adopted law, and in the end everything went back to “we will return the salary supplements, but…” The current “but,” however, this time from Marchenko, is a much worse manipulation because it affects not only officials or heads of state-owned enterprises, but also all citizens since the taxation of consumption and all employers rises due to the increase in labor taxation.

Look at it through the eyes of a potential investor: here is Ukraine, where the rules of the game change more often than the weather, and you can't guess who will be the next "scapegoat" in the eternal competition between populists and manipulators. You have to invest!

Well, let's assume we manage to attract potential investors not so much with tax reform as with the reform of taxation authorities. After all, if you look at any survey of Western investors about their struggles and pains, you will not find tax rates among the top concerns, unlike regulatory pressure and corruption.

Well, such a reform is on its way and is initiated by the specialized tax committee of the parliament. It has even already been formalized in a draft law. The main focus is on the recruitment process: competitive commissions with representatives from international organizations to elect the chairman, a five-year contract and a ban on running the tax authority for more than two terms in a row, an impressively specific requirement for the candidate regarding his or her ability “to fulfill the duties based on moral qualities,” an annual audit of the tax authority itself and re-certification of employees.

Corruption is traditionally combated not by criminal proceedings, but by high salaries. The official salary of the chairman is UAH 80,500 per month, the directors of departments earn UAH 59,000, the heads of territorial divisions get UAH 52,000, the heads of departments earn UAH 48,000, and the rank-and-file inspectors have UAH 32,000. Of course, six different allowances can be added to salaries alongside bonuses, but... Let’s recall the “wish lists” seized during searches of the now ex-head of the Kyiv tax service. One of them reads: “I will earn $1 million.” For people who consider bribery a job and have an annual salary of one million dollars, all these “decent salaries” are a minor bonus to the main income. The only appropriate method of control for them is inevitable punishment in accordance with the articles of the Criminal Code, which, of course, is not provided for by the reform.

Nonetheless, the most interesting thing in this reboot of the tax code, which will definitely attract the attention of investors, is the clause about performance indicators that are “defined, measurable and achievable.” What is it if not tax collection plans, planned and unplanned inspections, the size of the tax burden, surcharges and fines? It is unlikely that we are talking about the number of users of “Taxpayer’s Office” and calls received on the “hotline.” So, fiscalization and pressure are embedded even in this completely toothless reform.

One can write many texts arguing that the tax system is only a tool for the government to achieve its economic goals, and ideally it would be worthwhile to decide on these goals and only then tailor taxation to them. That you must look at the rates of your neighbors because you cannot escape competition. And we are forced to compete fiercely for both money and people. That digitalization, improvement of administration and the fight against corruption are, in general, systematic ongoing tasks, not goals from reform to reform. Unfortunately, all this has nothing to do with any of the tax reforms we have mentioned, just as the tax-related discourse of recent months has nothing to do with investment attraction...

Just the other day, a woman from the tax service in Lviv region received a notice of suspicion from the National Anti-Corruption Bureau of Ukraine and the Specialized Anti-Corruption Prosecutor's Office because she demanded from entrepreneurs 1.5% of the sums of tax invoices for their unblocking. Somewhere around the same time, the results of a business survey “about essentials” came out, and 48% of surveyed entrepreneurs reported that they were facing the problem of blocked invoices. So, maybe, if a systemic reform is not possible, let’s forget about those darn global transformations and solve at least this problem, allowing half of the taxpayers to heave a sigh of relief. That is also a reform.

Read this article in russian and Ukrainian.