September 2015
The investment banker Igor Mazepa believes that the tax reform should be carried out without delay; otherwise the political race will blur the central point.
All Ukrainian governments, including those not very effective, tried to carry out the tax reform. They delivered fiery speeches, repeated all the right words about improvement of the investment climate. But the good intentions bumped into one question – “for what money to feed seniors and attract the multi-million electorate?” After all, our budget commitments account for almost half of GDP (about 47% GDP in 2015). They are fearful of revising it. Actually, it was the end of all tax reforms, and “reformers” were lost in the search for “compensators” of billions of losses from decline in tax revenues.
But the monstrous tax system is still here, and once again we are witnessing some reform attempts. On September 3, the National Reforms Council considered the proposed improvements of the tax system. I would not criticize these proposals without proper consideration, since they announced quite general ideas and, most likely, details will be clarified. But I’d like to comment on some nuances.
The idea of ”all for 20%” sounds good, but its benefits for taxpayers are not obvious. In fact, the only real change will be UST reduction, but even the Minister of Finance admitted that the UST decrease up to 20% would not be offset by an increase in the income tax and the personal income tax. In addition, Ms. Minister has all grounds to be skeptical about quick de-shadowing of our economy. In this context, the question is – how serious is the proposal, if the budget losses have been already considered and the costs grow, and no “compensators”, apparently, have not been found yet.
The main “pressure point” of the business is the repressive nature of the tax system. If required, they will press you down, and nobody will protect you other than corrupt contacts. This is caused by the fact that populists promised to give the Ukrainians from the budget much more than the economy can provide. And tax rates are still rising before the election. Therefore, as soon as extra funds are required, they use a tax screw. It is simply impossible to manage the political process without it. The concept says nothing about this nuance. And, judging by the new profuse promises of the Government (to raise social benefits from September 1), they do not plan to refuse the “manual” tax pressure.
The concept does not give details about “compensators” but, most likely, it will be additional taxes. And here, perhaps, they cannot do without “fast money”, such as excise duties and taxation of agribusiness. The rapid increase in excise duties results in increase in smuggling. And it is not entirely consistent with the articulated reform. As for the agriculture, the Ministry of Finance should have a broader look and take into account the fact that the agriculture is a special sector that is generously subsidized by the major competing countries. The desire to replenish the budget at any cost may deprive us of a large part of foreign currency earnings. And it is quite possible that the agriculture will go “in the shadow”.
In general, we feel that the National Council strives for something positive, but still has no understanding how to do it. We should better begin with cutting of budgetary obligations: to regulate the public procurement, to restore the state-owned enterprises and, finally, to carry out the pension reform and privatization. Well, and to enlist support of international financial organizations – to find funding for temporary gaps in tax collection.
In any case, we shall begin making the tax reform right now, because the upcoming political race and its results once again put it on the back burner.
Igor Mazepa, Director General of Concorde Capital Investment Company, chairman of the Business Council “The Price of the State”
http://finance.liga.net/economics/2015/9/9/opinion/44881.htm
