What should Ukraine improve in implementing European tax practices?
Due to being granted official status as an EU candidate, Ukraine saw not only new horizons of its development, but also realized new tasks before itself.
In terms of approximation of our country’s tax system to EU standards, unfortunately, nationaltax lawmakers accepted this challenge formally, wrongly believing that the implementation of a number of EU tax directives into the Tax Code of Ukraine would be enough for such “homework” of the candidate country to be accomplished.
This is a misunderstanding of the essence of taxes and their impact on the economy and society, which, in the case of meaningless use, may cause harmful consequences or, at the very least, result in marking time where it is necessary to move by leaps and bounds.
The world we knew before February 24 has been fundamentally changed forever. The domestic economy, our society even more so. I think it’s hard to argue with that.
It is also difficult to argue with the fact that the domestic taxation system, in fact, from the beginning of its foundation, thirty years ago, was designed without taking into account the specifics of the transition period from a planned economy to a market one, from the closed economy to an open one.
Tax breaks for parks, individual entrepreneurs and others during wartime. What to keepand what to review?
From the industrially developed economic system of the 4th and even 5th technological revolution inherited from the USSR, to the degradation of entire industries into a raw material appendage of global corporations.
All this time, we have been trying to catch up with someone, copy something, bring better world experience, etc., at the same time, little attention was paid to what exactly domestic business and society need in order to work efficiently, for everyone to become prosperous (the hit of all economic documents is now the term “inclusive”!), and not fragmentarily and even very selectively.
The attempts to reform from time to time the tax system only led to the fact that the tax legislation, and later the Tax Code, began to resemble not a complete set of taxation norms and rules, but a kind of letter from Uncle Fedir to parents from the famous Soviet animated film“Prostokvashyno”.
Everyone who got access to the legislative initiative added what they wanted or what was lobbied at the persistent, not unpaid requests of wealthy and influential people, who obtained financial and material political rent from it.
As a result, we have received a kind of a set of the tax system elements, which in general is considered quite good, but in fact is a set of separately functioning rather than integrated elements of a single system, full of legal conflicts and logical contradictions.
Lawmakers try to eliminate them all the time, but they surprisingly do not disappear anywhere. That is why, such a normal function of taxation as a fiscal one for some reason turned into a service function ten years ago, and the discretion in decision-making by tax auditors is considered a kind of scarecrow that should be gotten rid of and we will live, as they say, like in Europe. But, in practice, the replacement of concepts, minor changes do not change anything in life, on the contrary, over time theyonly complicate it.
And the key point is that we cannot implement tax directives and European standards without taking into account the realities of our lives, because it can be like suicide!
Actually, there is something wrong with our adverbial modifiers of place and time. Where we need to speed up, we slow down, where we need to wait, we speed up.
Where incentives or benefits are needed, we introduce taxes and raise rates; where we can get an extra resource for the budget , we turn a blind eye to the problem.
There are many examples here, so we will confine ourselves to only the most vivid and, so-called, relevant ones.
In 2017, an eight-year plan to increase the excise duty on tobacco and tobacco products was adopted, with the final results in 2025 at the European level of the tax burden – 90 euros per 1,000 cigarettes.
Over the next two years, the excise duty was increased by 30%, and then annually by 20%. By the way, an exception to the increase in tax rates in the draft state budget for 2023 was made specifically for tobacco products, since another 20% increase is expected.
As a result, only due to the “strict” compliance with the EU tax directive, without taking into account the real situation in Ukraine (the average income level of the population and its actual purchasing power, the low ability of regulatory authorities to counteract the circulation and production of contraband and counterfeit products) as of the end of last year, the share of the illegal market of tobacco products rose to 20.4%.
Today, some of the largest taxpayers in Ukraine say that further growth in the level of illegal trade may cast doubt on the feasibility of maintaining production in Ukraine.
Although tax rates did not grow at such rates in other segments of the excisable products market, we observe the same situation with illegal production and sale in other product groups (gasoline, alcohol, etc.).
The problem with all similar “innovations” also lies in the fact that the state, i.e. the budget and society, lose at least twice from such inadequate timing practice of introducing taxation norms into Ukrainian realities.
The first time is when, due to the insufficient institutional capacity of the regulatory authorities, a shadow market segment of a product/service develops and, accordingly, honest payers suffer, and the budget loses significant amounts of tax revenues.
The second time is when the same state regulatory bodies are not able to force the final beneficiaries, specific individuals, to pay taxes on the received excess profits and income.
Here is another example. As additional sources of filling the budget of Ukraine, especially during the war, it would be useful to receive information within the framework of the automatic exchange of tax data between countries that have joined the BEPS action plan.
Notably, the first exchanges within this event took place in 2017. As of today, 102 jurisdictions have already made at least first exchange of information, and Ukraine plans to do this for the first time only in September 2024.
It is clear that today there are additional objective difficulties associated with the war as forspeeding up this process, but 7 years in total for its implementation seems too much!
It is obvious from these cases that somewhere we are lagging behind tax initiatives and processes, and somewhere we are trying to kill the goose that lays the golden eggs.
Such double standards in the area of tax policy can neither remain unnoticed by honest taxpayers, nor be useful for those who have a “golden feeder” from it.
Thus, it will be a big mistake in the further development of the tax policy of Ukraine to see only the implementation of norms and provisions of the EU tax directives.
Firstly, according to the EU tax experts, certain directives are out-of-date and need to be updated taking into account the new realities. I think that very soon we can expect new editions of directives on excise and environmental taxes.
Today, we can talk about the implementation of tax directives in terms of the introduction of administration practices of some taxes, but the issues of tax elements (rates, base, reliefs, etc.) cannot be put on the line, since these are very specific things that must meet most importantly the opportunities and needs of the Ukrainian economy, and not the Brussels directives, even the best and most perfect ones.
Secondly, because of the war, the so-called field for tax maneuver in Ukraine is very narrow. Obviously, we cannot do without the support of our international partners not only during the war, but also after it.
We should receive carte blanche, for at least one or two years, to restart the economy and the entire tax system of Ukraine.
In the process of such restart, we must decide on the priorities of the country’s socio-economic development and a set of tax instruments and mechanisms that should be used for this in the most effective way.
And finally, the tax policy of the state is the art of compromise between mutually exclusive requirements on one scale, let it be an abscissa “economic efficiency – social justice” and on the other, let it be an ordinate “administrative efficiency – convenience and ease of paying taxes”.
Let’s call this plane “the set of tax compromise states”. It is very easy to imagine it. Therefore, it is important that there is no excessive bias in this space in any of the side, and that all economic agents, subjects of tax legal relations, act towards achieving a mutually beneficial balance.
Only then we have to take into consideration the guidelines required of us by the status of the EU candidate country.