In the current challenging economic environment, the Ukrainian government

Ukrainian tax reform still a work in progress
Failure to simplify Ukrainian tax system continues to hamper growth and government revenues
In the current challenging economic environment, the Ukrainian government
is understandably looking for measures to increase cash inflows to the state
budget. One of the most direct options is increased tax collection. In 2014, the
Ukrainian authorities announced a programme of tax reform with the stated
objective of achieving the following goals: decreasing the number of taxes, simplification of taxes, decreasing the tax burden on salaries, and tax decentralisation. It was the view of the Ukrainian government that these measures would
simplify tax administration in the country and motivate Ukrainian businesses
to become more transparent in the tax area. As a result, there was considerable
expectation that the result would be increased tax revenues.
Tax weaknesses undermine
Ukrainian competitiveness
It is widely believed by industry observers that the above goals are the correct ones. Year after year, the annual ‘Paying Taxes’ study by the World Bank
consistently shows that Ukraine suffers from two key drawbacks in the tax
area when compared to the tax policies of more developed economies. First
and foremost are the very high social security charges imposed on individual
Ukrainian businesses. In practice, these high social security charges fuel a
culture of shadow payrolls in the country and, as a result, are also responsible for a lack of tax revenues for the government. The second key issue is
the ambiguity of the country’s tax laws and general complexity of compliance rules. This means significant tax compliance costs, inevitable tax disputes and exposure to additional tax assessment and penalties. This serves
as a genuine barrier to the development of a better tax compliance culture
among domestic businesses.
Initial tax reform fails to meet goals
Changes in Ukraine’s tax laws were approved in December and published just
before the end of 2014. This was a clear breach of Ukrainian legislation, which
prohibits the introduction of any new tax rules six months prior to the beginning of a new calendar year.
Analysis of these initial changes, and of their impact on the Ukrainian
business sector, shows that the declared goals of the reform process have
not been achieved. In particular, only small and relatively insignificant
taxes were actually abolished. Some other taxes
were combined without any simplification
of tax computation and reporting rules.
Meanwhile, the announced decrease in
social security charges cannot be practically implemented by transparent
businesses in 2015.
The new laws have in many cases increased the existing taxes and introduced
new taxes, such as a tax on the retail sale
of excisable products, a commercial property tax and importation tax. It could therefore be
argued that the tax burden
on certain businesses has in practice increased. The declared objective of tax
decentralisation also failed to result in any significant benefits for Ukrainian
businesses.
Businesses concerned
over greater tax check authorities
In terms of the improvement of the country’s tax administration processes, the
new laws did not introduce any sound changes, except to switch from tax to
statutory/IFRS accounting for corporate tax purposes. This change is of questionable value, because the Ukrainian tax agencies have also received new authority to audit the financial statements of Ukrainian businesses. As a result,
the Ukrainian business community is currently concerned that such tax audits
will only increase compliance time and costs.
To summarise, the changes in Ukraine’s tax laws introduced at the end of 2014
have not improved the tax climate in the country. They have also failed to create
an environment where there is any marked potential for increased tax revenue
collection. The Ukrainian government should therefore urgently revise its approach to the way it imposes and collects taxes in the country.
Upcoming tax reform efforts
Ukraine is currently approaching a new round of tax reforms. In line with the
announcement of changes in the country’s tax administration leadership, new
tax initiatives were also announced. According to the most recent vision, as
outlined in public communication between the Ukrainian government and
representatives of the IMF, the next round of tax legislation reform will focus
on a number of key directions: State Fiscal Service reform by means of decreasing the number of personnel and regional offices, improvement of personal
income tax administration, introduction of the ‘single window’ concept during customs clearance, and improvement of dispute resolution procedures. In
order for this fresh round of tax reform to have a positive impact on Ukrainian
tax collection, it is crucial that it should be well structured, intensively prepared
and carefully launched.
Taxation challenges:
still more to be done
While there is general agreement over the current proposed directions for
the next round of tax reform, many industry observers see several other areas
where tax reforms should be conducted. These additional focuses include daily
control over transfer pricing (the control mechanism is already covered in the
existing law and does not require significant revision); strong anti-corruption
initiatives; a decrease of the tax burden on salaries; and a balanced and a
thoughtful approach to changing the tax regimes governing extraction and agriculture, as well as the introduction of electronic VAT administration systems.
When planning tax reforms it is crucial to recognize the value of stability
and simplicity of the Ukrainian tax system. In the current situation, where
the Ukrainian authorities are confronted by a lack of funding to finance state
expenditures, it is more effective to introduce a unified approach and not
only increase tax rates, but also improve tax collection and consider reducing
expenditures.
ABOUT THE AUTHOR: Oleg Shmal is Senior Manager with PwC Ukraine and Vice-President of the Union
of Tax Advisors of Ukraine.
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