Books on Ukraine
Update No: 357 -
A very fiscal problem
Backed by a dominant governing coalition,
President Viktor Yanukovich, who took
power this year from the pro-west Viktor
Yushchenko, says he has the authority and
the will to deliver a tax code that will
be good for business and for the state
budget. His government hopes the tax base
will increase, boosting budget revenues
instead of deepening a current fiscal
deficit, which is expected to hit 5.5 per
cent of GDP this year.
If the government succeeds, it could be a
huge boost for a nation kept financially
afloat thanks to a $15bn IMF standby loan.
Finances remain stretched after GDP
plummeted 15 per cent during 2009’s global
recession, but between 40-50 per cent of
business activity hides in the shadow
economy. In the recession-battered
country, encouraging citizens and
companies to pay up is challenging.
A new tax regime is what is needed
The Baltic states did it. Slovakia did it.
Even Russia did it. Now Ukraine is close
to adopting a tax code that it claims will
cut corruption and red tape - and be
recognised as one of the most liberal in
The proof of the pudding will be in the
eating. First the new laws must be
adopted. Then they must be implemented.
And once implemented they must be
enforced. Liberal tax regimes have helped
created fair business conditions in the
Baltic states and Slovakia. But in Russia,
the benefits have, to put it mildly, been
Borys Kolesnikov, deputy prime minister,
asseverates that his government was
serious about attracting massive
investment and boosting domestic
businesses by establishing “one of the
most liberal tax codes”.
If the legislation is adopted this autumn
as planned, corporate profit tax rates
would be cut from a current 25 per cent to
16 per cent by 2014. Small businesses
would get a five-year exemption, with 10
years for light industry and hotels.
Value added tax would be gradually cut
from 20 per cent to 17 per cent by 2014.
VAT would no longer be charged upon
export-oriented grain transactions, or for
legal and business consulting services.
Personal income tax would remain in the
15-17 per cent range.
Still problems ahead
It all sounds great. But still fresh in
the memory is this newish government’s
first botched attempt at tax reforms. The
original draft tax code pushed earlier
this summer was declared “liberal”. But
when it was made public, many were shocked
to find it would have made taxpayers
defenceless in disputes with notoriously
unruly and corrupt tax inspectors.
Kolesnikov says that with lower taxes,
ordinary citizens and oligarchs alike will
have to pay their fair share. It will no
longer be acceptable to hide profits
offshore, adds Kolesnikov, himself a big
businessman and confidant of Ukraine’s
richest oligarch, Rinat Akhmetov.
But if Ukraine fails to win over the trust
of business and citizens, if taxpayers
fail to show up, then the country could
become even more dependent on IMF aid.
The precedents are tough. Tax reforms
succeeded in the Baltic states and central
Europe because they were introduced in
line with a range of fundamental reforms
designed to modernise economies, cement
the rule of law and prepare for European
Union membership. The improvements are not
universal and there is still back-sliding
- but in general the reforms have held.
In Russia, tax reform, notably the 13 per
cent flat rate, simplified a complex
system and stimulated tax payments. But,
in the absence of other legal and economic
changes, it has not transformed the tax
service. Claims of corruption and
maladministration abound. It will be a
huge challenge for Ukraine’s government to
implement tax reform to the level required
of future EU members. But can it do better