There is no doubt, much noise has been made by the draft law No.5600, which formulates thestate tax initiatives, which were ambiguously perceived and evaluated by society, the expert community. Today, there is already enough analytics in the information space regarding the advantages and disadvantages of the draft law, so it makes no sense to repeat the same. Nevertheless, there is a desire to look at trends in the state tax policy more globally to understand how appropriate it is to sacrifice lower rates of economic growth in the medium and long term by collecting additional UAH 50 billion in tax revenues of the state budget in the short term. I hope few will object to the fact that these funds could remain with consumers and producers, who would decide for themselves how to use them, and it is not at all a fact that, in general, these decisions of economic agents will be less beneficial to the economy than if they were redistributed through the state budget.
From a macroeconomic point of view, this is not the best time to “put things in order”. We should remind that the unemployment rate in Ukraine according to the ILO methodology has already exceeded 10%, and the level of capital investment according to official data of the State Statistics Committee for the first quarter of this year is at a historically low level of 9.7% of GDP. This looks even more dramatic if we look at consider the ratio of capital consumed in the economy and what is accumulated. It is clear that normally the level of capital accumulation should be bigger than the level of its consumption. Historical figures indicate that as soon as the ratio approaches one, economic growth becomes impossible. In the first quarter of 2021, it was 1.33 (see Figure 1).
The arguments of the policymakers of the draft law No. 5600 are as follows: we close off the loopholes in the tax legislation, create equal conditions for all taxpayers, help increase the voluntary payment of taxes, eliminate illegal benefits, and etc. Nothing original and new. In fact, we always hear it, which is commendable, but as for eliminating preferences in the form of low rents for oligarchs we should wait for the final text of the law, because previous attempts to do so, one of which was in 1210, were unsuccessful.
Ukraine is a rich and unique country, because despite the unacceptably low GDP and the lowest level of average per capita income in Europe, we have, in fact, two offshore sectors comparable to the official economy. The first is external offshore, the size of which is even larger than the official GDP of Ukraine. According to international experts, five years ago about USD 180 billion of Ukrainian origin assets were hidden on various exotic islands. Given that USD 8-10 billion is transferred from Ukraine to low-tax jurisdictions every year, today this figure is certainly more than USD 200 billion. For comparison, in 2020 Ukraine’s GDP amounted to about USD 152 billion. The second offshore is an internal one, the sizes of which are estimated in a wide range.The most reliable estimates, which, in our opinion, can be trusted, are about 50% of official GDP. It is clear that income and profits in foreign and domestic offshore are not taxed. Given this, deoffshorization and de-shadowing are more than appropriate.
Taking into account these statistics, a logical question arises: where to start to close off the loopholes and eliminate illegal benefits? In our opinion, we should start with offshore, for which the world community provides Ukraine with all the tools and opportunities. However, for some reason we do not hurry to use them, so there are doubts about the sincerity of efforts to “put things in order and close off the loopholes” in this way.
For example, Ukraine has joined the action plan within the BEPS project, which provides for the use of tax information exchange tools under the CRS (AEOI and REOI) protocols, but at the same time it is in no hurry to implement into its own practice such administrative standards that have already proven effective. This conclusion can be drawn from the fact that according to the Action Plan adopted by the Government of Ukraine a few months ago to prevent tax evasion and prevention of money laundering in offshore areas, the first exchange of information under the CRS standard is scheduled for the 4th quarter of 2022! At the same time, only in 2019, more than 100 countries exchanged information automatically concerning 84 million financial accounts of their residents in offshore jurisdictions, and the total funds in these accounts amounted to more than EUR 10 trillion. Recent studies on the effectiveness of information exchange procedures show that this has reduced deposits in offshore jurisdictions by at least 25%!
On June 24, 2021, the OECD Global Forum on Transparency and Information Exchange for Tax Purposes published a report on the results of the completion of the first phase of Ukraine’s audit. It contains comments and recommendations that must be taken into account to obtain a satisfactory assessment (rating) on compliance with the standard of information exchange on request. It is clear from the report that to obtain a “satisfactory assessment” of implementation of this standard, government agencies still have much hard work to do.
We should remember that corruption and the resulting lack of institutional capacity of regulatory authorities remain a major problem for the national tax system. Under such conditions, no matter how good and progressive tax laws are adopted, the effectiveness of efforts to “put things in order” may be close to zero, because even the absence of holes and inconsistencies in the law leaves dishonest taxpayers the opportunity to obtain additional illegal benefits if double standards are maintained.
An example of a completely unsuccessful increase in tax rates with insufficient institutional capacity of regulatory authorities, which is largely due to insurmountable corruption and illegal schemes, is the case of the cigarette market. For those who do not smoke and are out of the loop let me remind you that in the last few years the state has significantly increased the excise tax on cigarettes, which, by the way, is in line with our obligations for European integration. However, as a result, today, we also have the highest level of shadow production and circulation of cigarettes, which is estimated at 10-12% of the official market, and the foregone tax revenues is, respectively, up to UAH 12 billion. This is recognized by all, including the authorities.
Summing up, I will note that state tax policy is the art of finding a compromise between the mutually exclusive requirements of economic efficiency and social justice, the art of finding a balance between the interests of all economic agents. Thus, the movement on this road cannot be one-sided, when we “care” only about the fiscal interests of the state, forgetting to ask citizens and entrepreneurs whether they agree to pay even more taxes to the state, which is unable to overcome corruption, ensure the rule of law and quality, and the public services that it provides, to put it mildly, leaves much to be desired.
Therefore, predictability and transparency in everything, both in tax administration and in making important policy decisions in the field of state tax policy, is an unalterable way to restore trust between the state and taxpayers and, as a result, increase the desired level of voluntary tax payment. In any other case, the war of all against all will continue with tragic and foreseeable consequences. We hope this will not happen!
Doctor of Economics, expert of the Growford Institute Kostiantyn Shvabii for Livyi bereh.