The issue whether Ukraine can afford to introduce tax reform during the economic crisis will be discussed at the debate in Kyiv on September 9th (or 10th), 2009 organized by the Foundation for Effective Governance (FEG) in partnership with the Intelligence Squared (IQ2), Great Britain.

Tax system in Ukraine is very unfavourable towards businesses. According to the World Bank’s study Ukraine has one of the lowest rates in the world in this regard. Tax environment, unfriendly for businesses, impedes attraction of foreign direct investments (FDI), decreases competitiveness of Ukrainian companies, and cultivates shadow economy which, according to some estimates, already constitutes 50% of Ukraine's GDP.

While the majority of policymakers agree on the necessity to introduce tax reform, there are doubts about launching it during the economic crisis. International practices do not give an accurate answer for the question whether it is reasonable to implement tax reform during the economic recession. On the one hand, the economic crisis creates a unique opportunity to realize numerous programs for revival of the country's economy. On the other hand, the crisis increases dramatically the risks that may happen during radical changes; failure may cause the collapse of a weakened system.

Arguments in favour of tax reform during the economic crisis are based on the opinion that a simple and predictable tax system is one of the key elements of Ukraine’s business climate. In the future, it will play a leading role in attracting financial resources that are vital for getting out of recession. If Tax Code is adopted it will help reduce tax regulation burden for the companies allowing them using their resources more efficiently. It will also help combat corruption and diminish shadow economy, at the same time increasing the state budget revenue. These measures are particularly important in the situation of an economic recession and budget deficit.

Moreover, the introduction of a property tax – one of the suggested elements of the reform – will serve as a new source of regional governments’ revenues, at the same time, enhancing social justice. The heaviest taxes will be levied on rich citizens and owners of the most expensive property in the country. Tax revenue may be spent by regional governments for modernization of infrastructure and housing, road building, and other social needs.

Opponents of the immediate tax reform think that simplification of current taxation system will inevitably reduce budget revenue that have already dropped dramatically. The Government may fail when fulfilling its social obligations and impede investment programs that are essential for combating the economic crisis. Under the economic crisis conditions, the Government has to be flexible in tax regulations. If a Tax Code is adopted the Government would loose an opportunity to manage the tax system "manually", i.e. via separate resolutions. Consequently, the Government will not be able to react rapidly on changes in the economic and fiscal situation.

Moreover, adapting to new tax conditions will increase pressure on the companies at the moment when their current efforts are aimed at surviving. Implementation of a new tax recording system and changes in the existing regulatory system will demand special training of personnel and purchasing new equipment. Extra time and money are necessary for introduction of a new system. There is a risk of fines for possible violations of new rules. It will complicate doing business, especially in medium-sized companies.

Status update

The main drawbacks of Ukraine's taxation are high taxes for businesses, considerable underlying costs of tax procedures for all taxpayers, and inconsistent policies of tax administrations.

• Effective tax rate for business constitutes more than 57% of income, compared to 46% on average among the countries of the Organization of Economic Cooperation and Development, 38% in Poland and 29% in Ireland. 
• Because of complicated tax procedures, companies in Ukraine have to spend up to eleven times more of time and efforts compare to their peers in developed countries in order to meet all requirements of the current tax system. 
• Unequal terms of tax administrations and taxpayers, and sometimes power abuse of tax inspectorates lead to inconsistent policies and selective approaches of tax administrations on the one side, and tax avoidance and evasion on the other.

Nowadays experts and policymakers have reached a general consensus regarding the implementation of tax reform. Its main objectives are: 

1. to ease direct and indirect tax burden on businesses to an average level of Eastern European countries; 
2. to enhance effectiveness of tax administration in order to limit the scope of shadow economic relations; 
3. to increase financial independence of regional governments.

To reach these objectives, the following priority tasks should be fulfilled:

to adopt the Tax Code which will integrate separate regulations and standards and eliminate controversial or ambiguous provisions, and which will serve as a single comprehensible source of tax administration; 

• to reduce the number of taxes and levies; 
• to simplify taxation procedures;
• to restore equal rights of taxpayers and tax administrations, limiting opportunities of power abuse; 
• to introduce a single social tax, electronic accounting statements, and accountability to a single rate collector; 
• to simplify profit tax recording for enterprises by adapting principles of taxation to bookkeeping at enterprises; 
• to introduce a property tax.

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