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Euroviews. Is Ukraine's tax policy hindering its economic growth potential?

One Ukrainian hryvnia bill with a Ukraine crest pin, illustration
One Ukrainian hryvnia bill with a Ukraine crest pin, illustration Copyright Unsplash/Euronews
Copyright Unsplash/Euronews
By Dmytro Boyarchuk, Executive Director, CASE Ukraine
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The opinions expressed in this article are those of the author and do not represent in any way the editorial position of Euronews.

Can you imagine how the economy of any major Western country would perform if one had to gather a heap of documents for every transaction, just to prove your good intentions, Dmytro Boyarchuk writes.

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To counter Russian aggression both today and in the future, one thing is clear: Ukraine must strengthen its economic capacity.

Ukrainians cannot realistically expect foreign investments to flow into the country until Russian hostility subsides. 

Thus, the only resource we can truly rely on is the business community currently committed to remaining in Ukraine. Local businesses—small, mid-sized, and large—represent the future of the nation.

Surprisingly, however, Ukrainian authorities seem to undervalue the importance of their most valuable internal resource, placing their bets on significant foreign support and potential reparations from Russia as the means to stabilise the economy.

Meanwhile, Ukrainian businesses — especially those of medium size — grapple with a burdensome taxation system. 

The flawed tax administration consistently ranks high in business polls, second only to issues like a drop in demand and other war-related complications. 

But it’s not just the magnitude of the taxes that concerns businesses (even though taxation is by no means insignificant) — it is also the disruptive manner in which authorities handle tax and customs collections.

'Guilty until found innocent'

Remember: The Ukrainian law enforcement system is not merely “weak”; it is dysfunctional and unreliable. 

A lack of trust in the judiciary and law enforcement has led authorities to base tax and customs collections on a presumption of guilt. 

Can you imagine how the economy of any major Western country would perform if one had to gather a heap of documents for every transaction, just to prove your good intentions?
AP Photo/Jae C. Hong
A woman takes pictures with a "I Love Ukraine" sign in Kyiv, July 2023AP Photo/Jae C. Hong

Unlike in developed countries where tax administration relies on the inevitability of punishment for tax evasion, the Ukrainian system operates on the assumption that all taxpayers are potentially planning to commit a crime. 

Therefore, taxpayers are required to provide proof for every single transaction, demonstrating that they have no ill intent.

Can you imagine how the economy of any major Western country would perform if one had to gather a heap of documents for every transaction, just to prove your good intentions?

The Gordian knot that needs untangling

The visa application process is a fitting analogy. Consider how every EU or American citizen who plans to visit mainland China must obtain a visa. 

They gather the necessary documents and fill out the required forms, yet the visa's approval is not guaranteed. Instead, approval is at the discretion of a Chinese officer. 

Ukrainian businesses face a similar challenge with their government, needing a metaphorical “visa” for every reporting period to continue operations.

Businesses have put forth numerous proposals to address this issue, ranging from a simplified tax on withdrawn capital to the more radical idea of abolishing the VAT (Value Added Tax) in favour of a sales tax. 

The authorities refuse to acknowledge the problem, asserting that Ukrainian taxpayers simply don't want to pay taxes — which is not true.
AP Photo/Jae C. Hong
A couple share a laugh in a subway car in Kyiv, July 2023AP Photo/Jae C. Hong

While the former is more feasible, the latter seems improbable given European Union mandates that all member states implement a VAT.

The authorities refuse to acknowledge the problem, asserting that Ukrainian taxpayers simply don't want to pay taxes — which is not true. 

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Something must be done to untangle this Gordian knot. Otherwise, Ukraine will find itself continually and indefinitely seeking more financial support from EU and US taxpayers, just to stay afloat for years to come.

Fixing the disruptive tax administration isn’t a straightforward task. In a setting where the rule of law is non-functional, “presumption of guilt” administrative practices are highly discretionary and largely corrupt. However, a solution is necessary.

GDP growth is tied to reducing corruption

In the West, there is a significant focus on the issue of corruption in Ukraine. 

Individual accountability for corrupt actions is undeniably crucial. Yet there seems to be less emphasis on addressing the tools and systems that enable corruption in the first place.

Research from the International Monetary Fund indicates that Ukraine could see an additional 0.85% in annual GDP growth if corruption were reduced to levels seen in neighbouring countries like Bulgaria and Romania, members of both the EU and NATO. 

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Simply eliminating one document, the 'deeds of transfer and acceptance' — which tax authorities use extensively to exert discretionary power — could save businesses around 0.6% of GDP annually.
AP Photo/Efrem Lukatsky
Activists attend a rally in front of Ukraine's Prosecutor General's Office protesting against corruption in the court system and demanding reforms in Kyiv, February 2021AP Photo/Efrem Lukatsky

CASE Ukraine's own estimates suggest that simply eliminating one document, the “deeds of transfer and acceptance” — which tax authorities use extensively to exert discretionary power — could save businesses around 0.6% of GDP annually. 

This particular document is not utilised anywhere else globally, except in post-Soviet nations. 

And it represents only a fraction of the vast system in place that leverages “presumption of guilt” practices against taxpayers in Ukraine.

Be the reformers Ukrainians desperately need

This is why a petition was initiated and addressed to President Volodymyr Zelenskyy, urging the elimination of the “presumption of guilt” practices in tax and customs administration. 

The petition garnered the required 25,000 votes, an impressive number for a tax-related issue in Ukraine, indicating that there is significant concern for thousands of businesses. 

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President Zelenskyy even responded favourably to it. However, the Ministry of Finance countered, asserting that there isn't an issue and the existing law clearly establishes a “presumption of innocence” in taxation practices.

This response, once again, highlights the disconnect between the written law and the actual practice on the ground. 

Ukraine’s businesses are left bearing the consequences and struggling to stay afloat, while our nation’s growth potential is hindered.

The path to a brighter future for the Ukrainian economy is clear. The only question that remains is, can policymakers be pressured into becoming the reformers that Ukraine’s people so desperately need?

Dmytro Boyarchuk serves as Executive Director of CASE Ukraine, a think tank based in Kyiv.

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