Tax Structure Reformation and Overcoming Corruption in Ukraine

by Meifan Honcharuk
Tuesday, April 4, 2023
Tax Structure Reformation and Overcoming Corruption in Ukraine

Ukraine is preparing a draft law for the implementation of tax reform within the framework of its obligations to the IMF

The tax rates currently operating in Ukraine are so unfavourable for each of the market participants that it is easier for entrepreneurs to avoid them than to pay. This is a direct path to the rooting of corruption and, as a result, the reason for the reluctance of foreign businessmen to invest in Ukraine. Ukraine, as a country at war, should currently create a base for post-war recovery because when grants and loans from the IMF, WB, EU and other international partners run out, Ukraine will have to rely only on its own resources. First of all, on the private sector. For example, the international resource of the postwar Marshall Plan for European countries was only 3% of the GDP.

That is why today, Ukraine needs to implement tax reform, the terms of which were discussed on March 27 during the Ukrainian Tax Reform And Anti-corruption Summit.

Tasks of tax reform:

  • Reduction of VAT;
  • Fixation of conditions and monitoring of legal incentives for tax benefits;
  • Anti-corruption tools;
  • Transparency of law enforcement and judicial systems;
  • Provision of conditions for stable development of private business;
  • Simplification of procedures for obtaining permits for the purchase of land plots and construction;
  • The establishment of the state institute for financing business projects.

In order to reduce the tax burden on entrepreneurs and investors, Ukraine should establish a tax rate favourable to all market participants and expand the tax base. This, in turn, will help entrepreneurs save for larger-scale investments, salary increases and bring the business out of the shadows. On the scale of the entire country, it will become a tool for performing 2 tasks at once: replenishing the budget of Ukraine and creating incentives for economic growth.

"Taxes affect the level of corruption in the country, and the reform of the tax system should ensure the expansion of the tax base because with an increase in the interest rate of taxes, the country's stock market will fall. That is, the key element for the tax system is the lowest rate with the widest tax base and the smallest source of income that is taxed," American economist Arthur Laffer.

Today, the income tax in Ukraine is 18%. For example, in Bulgaria it is 10%, in Hungary 9%. Under such tax conditions, Ukraine is not competitive. The author of the tax reform project, Rostislav Shurma, proposes a change in the rate:

  • Income tax of citizens 10%;
  • Corporate income tax 10%;
  • VAT 10%;
  • The single social contribution to the Pension Fund is 0% (instead of 22%).

Currently, Shurma and his team, together with BlackRock, JPMorgan and McKinsey are preparing a structured model for financing foreign investment projects in Ukraine. This model will help Ukraine to attract "tens of billions of dollars of capital".

"But already in the medium-term perspective, we can expect positive results of the reform: rapid business development, acceleration of GDP growth, accumulation of domestic investment resources," said Maryan Zablotskyi, a member of the Tax Committee of the Verkhovna Rada of Ukraine.

Thomas Sargent, the speaker of the summit and winner of the Nobel prize in economics, for example, spoke about the economic evolution of other countries during the last decades. It is notable that the United States, Great Britain, and Bulgaria were able to achieve economic stability precisely after wars, crises, and political depressions. Large-scale reforms of the fiscal, tax and financial and credit systems made these states reliable participants in the international market.

Rostyslav Shurma said that at first the IMF was quite critical of the reform that Ukraine is currently developing and planning to implement. After all, reducing the tax from 30% to 10% (using the example of Bulgaria) will lead to an "inevitable failure in terms of income". Now the position of the IMF has changed, and the introduction of Shurma-Zablotsky's tax reform has become a condition of the Fund for Ukraine to receive a $15.6 billion tranche for the further post-war reconstruction of Ukraine.

"The plan for such reconstruction also includes a radical simplification of land procedures for the construction of factories and their connection to power grids. And also the creation of the Ukrainian Development Fund, which was presented to the ambassadors of the G7 countries last week. Many experts said that the IMF would never agree to tax reform. And now, it has become Ukraine's obligation to the International Monetary Fund. We are intensifying work on a specific draft law. I'm sure everything will work out for us," Maryan Zablotskyi

Separately, it is worth outlining not only the methods and bonuses of the future tax system but also its structure. For example, in the USA it is complex and different for each state, due to which excessive resource is spent on its maintenance. To avoid this, Ukraine minimises human involvement in system regulation, and automation and digitisation come to the fore.

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