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Tax reform

Business hopes for the implementation of the "10-10-10+3%" tax reform, which consists in a new social contract with the government

The attitude of Ukrainian business towards the country’s tax system has never been favorable. Even the seemingly liberal changes implemented in March 2022 failed to stimulate business activity for companies under martial law.

Tax policy 2022

The tax policy of the state in 2022 was destructive, despite the attempts of individual politicians to implement positive solutions for business and, accordingly, the economy. But all this was destroyed by a big systemic error – the state was looking for ways to finance itself at the expense of business.

This led to the fact that corruption in the tax system remained, UAH 160 billion was collected from businesses due to overpayments of income tax, blocking of tax invoices, etc. At the same time, statistics show that businesses win more than 90% of tax cases in court. And therefore, tax officials act illegally. Also, in March-July, the state almost did not refund VAT to exporters. Many of them have still not received VAT refunds since February – and this is against the background of the fact that loan rates have increased. Thus, the state took working capital from companies. In fact, the business is loaned at 28% per annum, and part of this money is taken by the state as an open-ended and free loan. Instead of persuading our international partners to increase financing of the state budget deficit or other targeted financing, the state takes funds from businesses.

At the same time, banks actually stopped project lending to businesses. Volumes of loans under the “5-7-9%” program or grant programs are insignificant from the point of view of real business needs and losses due to the war. The real needs of business in additional financing are currently approximately UAH 600 billion (according to research conducted by Advanter Group together with Diya Business).

One could call the introduction of the 2% sales tax a positive thing, but it was economically miscalculated, did not have a noticeable effect on most companies, significantly confused the work of accountants and created opportunities for abuse by tax officials. This innovation helped certain types of business, but in general did not have a positive impact on business activity and state budget revenues. Moreover, the Committee on Finance, Tax and Customs Policy of the Verkhovna Rada of Ukraine and the State Tax Service operate in the context of the “presumption of guilt” of business, seeing it only as a source of taxes, and not as a key force that the state must rely on to restore the economy.

Only a small percentage of those in power are liberal and understand that it is necessary to change the actual ideology of the tax system – not just to reduce taxes, but to implement detinization and reduce corruption. Our modeling shows that this will make it possible to increase GDP by 8% already in 2023, and as a result, budget revenues will increase. Despite some support for the idea of ​​a liberal tax reform in the Verkhovna Rada, the government and the Office of the President, this is still not enough to launch it.

Anti-corruption tax reform

The essence of the anti-corruption tax reform (“10-10-10+3%) is a new social contract with business. The state brings the tax system into line with economic realities, and business undertakes to pay taxes in full. Our economic modeling on a sample of more than 200 companies shows that this will lead to an increase in the amount of tax payments. Critics of this reform know about the results of the calculations, but pretend that they are fairy tales. It is precisely in such difficult times as now that radical reforms should be carried out, as Ireland, Bulgaria, Croatia, Cyprus, Romania and other countries once did.

We continue negotiations with international partners and refine calculations to justify the idea. Now the Ministry of Finance, members of the Verkhovna Rada and international partners have to give their official assessment. I expect that the head of the Ministry of Finance will see the opportunities that this reform will create, and international partners will promise “insurance” for falling budget revenues. According to our calculations, in the worst-case scenario, the state budget may not receive $4-5 billion in the first and second years of the reform. However, the most likely scenario shows that already from the first year we are on the growing trajectory of state budget revenues.

Tax prospects

If the state does not make changes in the tax legislation, then the year could be catastrophic. According to estimates by the World Bank and other institutions, by the end of this year 25% of Ukrainians will live in poverty. And by the end of 2023, this number may increase to 55%. There will also be further spillover of business to neighboring countries, which we have already estimated at 12% of GDP. Since the beginning of 2022, 12,000 new companies founded by Ukrainians have been registered in Poland.

The current tax policy actually squeezes Ukrainian business out of the country, which can lead to a real disaster. Therefore, whether the 2% sales tax will be abolished or not is of little importance, since not all business was in favor of this idea from the very beginning.

Business expects predictability from the state and purposeful policies to support business activity. More than 90% of companies to one degree or another helped the Armed Forces and participated in humanitarian projects, but business is forced to act pragmatically in order to survive and decide right now whether to continue working in Ukraine or move abroad. Instead, the state still treats business purely as a source of revenue for the state budget. Only economic freedom (namely, the protection of the rights of investors and entrepreneurs, deregulation, anti-corruption reform of the tax system and customs, effective Antimonopoly Committee of Ukraine, privatization) will make it possible to move from survival to sustainable innovative economic growth.