One of this year's key business events in the country, the Ukrainian Tax Reform And Anti-Corruption Summit, took place on 23 March 2023 at the Parkovy Convention and Exhibition Centre. The event was held under the patronage of the President's Office and brought together more than 500 participants: world-class economic and tax experts, representatives of the President's Office, leading Ukrainian companies and specialised associations.
The main topic of discussion at the summit was the draft tax reform in Ukraine, which is currently being developed by the President's Office and MPs. The goal of the reform is to support Ukrainian business in wartime and create conditions for bringing the economy out of the shadows and overcoming corruption in the tax system. The Tax Summit provided a platform for discussions on the best global tax practices and the opportunities the reform opens up for Ukraine.
During the discussion panels, the summit participants discussed best practices in corporate income tax and value added tax, ways to overcome corruption and reduce regulatory pressure.
The speakers of the Ukrainian Tax Reform And Anti-Corruption Summit concluded that reducing the tax burden on Ukrainian businesses, which have been heroically preserving jobs during the war, is an effective strategy to preserve the Ukrainian economy during the war and in the coming years of the country's recovery. The participants signed an official communiqué.
Speakers of the Forum:
Anna Bjerde, World Bank Regional Vice President for Europe and Central Asia
Tom Palmer, Vice President of Atlas Network
Rostyslav Shurma, Deputy Head of the Office of the President
Oleksii Sobolev, Deputy Minister of Economy of Ukraine for Digital Development, Digital Transformations and Digitalization
Krassen Stanchev, Bulgarian expert, Institute for Market Economics
Maryan Zablotskiy, Member of the Tax Committee of the Verkhovna Rada of Ukraine
Remigijus Šimašius, Lithuanian lawyer and economist, former Minister of Justice of Lithuania
Grover Norquist, Americans for Tax Reform, USA
Joseph Bishop-Henchman, Executive Vice President, National Taxpayers Union Foundation, USA
Scott Hodge, President Emeritus, Tax Foundation, USA
Stephen Brien, Director of Policy, Legatum Institute, UK
Maryan Zablotskiy, Member of the Tax Committee of the Verkhovna Rada of Ukraine
Kateryna Glazkova, Union of Ukrainian Entrepreneurs
Viacheslav Lysenko, CEO Club Ukraine
Yaroslav Romanchuk, Senior Fellow, Institute for Economic Leadership
Eugene Artyukhov, co-founder of Club100
Oleg Gavrysh, Office of the President of Ukraine
Andrii Dligach, co-founder of the Center for Economic Recovery
Mykhailo Lavrovsky, Director of the Institute for Economic Leadership
Andriy Stelmashchuk, Managing Partner, Vasil Kisil & Partners
The main reason for the need for tax reform is that the current tax rates and collection mechanisms do not correspond to how the tax system operates. Formally, the VAT rate in Ukraine is 20%. However, dividing it by the size of the official retail turnover, we get, at best, 10%. Formally, the total amount of taxes is 51% of the amount an employee receives in hand (personal income tax and unified social tax). In reality, two-thirds of payroll taxes come from the salaries of state employees. At the same time, public sector employees make up only 20-25% of the workforce and have salaries lower than the average in the economy. Formally, there are no export taxes in Ukraine, but informally, they exist due to non-refundable VAT. Everyone understands that the current tax system has nothing to do with the reality of paying taxes. It is time to change this and make it official. Problems that the reform solves:
The economy is the basis of defence capability. And the economy is dying now.
Business has no resources. The consumer market has shrunk by 40%. There is no working capital, the State Tax Service has seized significant money from businesses and is not returning it.
The shadow economy distorts competition.
The shadow economy is caused by taxes. They are optimised by over 90% of Ukrainian businesses, and over 40% of Ukrainians receive their salaries.
As a result, the business operates in the grey zone, corruption is rampant, and the budget does not have the resources to finance the state's tasks.
We are introducing a level of taxes that makes it more profitable for businesses to pay taxes than to optimise them. So, in effect, we are removing the economic basis for corruption. And we make tax optimisation unprofitable. That's why 89% of surveyed entrepreneurs support the reform. We need to raise the level of wages in the country. If we set attractive taxes, this will allow businesses to increase wages. In this way, Ukraine can compete equally with its neighbouring countries for capital. We are focusing on the rates that already exist in European countries. These are Romania and Bulgaria - 10% personal tax. Corporate tax: Bulgaria - 10 %, Hungary – 9%, Ireland - 12.5%. What is the essence of this reform? What are its main provisions? The reform seeks competitive tax levels, but they are not an end in themselves. It would be optimal to have a personal income tax of 10%. Corporate income tax - 10%. VAT - 10%. The unified social contribution to the Pension Fund should be 0% instead of the current 22%.
But the rates are not final but a matter of discussion. The main criterion for success will be if the shadow economy drops below 15%, there are no VAT refund debts, no tax payments in advance, no unjustified blocking of tax invoices, the share of cashless transactions exceeds 90%, etc. When the market for VAT cashback and trade, as well as other ways of optimisation, basically disappears. This can be achieved through different tax rates, which we will discuss with our international partners based on our integration commitments. In any case, we will offer a new social contract to entrepreneurs, requiring them to pay a reasonable amount of taxes and abolishing excessive discretionary powers of tax authorities. The reform will bring the money back. Businesses can reinvest the money that tax cuts will generate. Why is this reform good for ordinary people? No companies will pay salaries in envelopes within six months after the reform starts. It will become unprofitable to pay wages in envelopes. Entrepreneurs can show the bank official financial statements (not optimised) and get a loan on good terms as non-risky borrowers. The reform will also provide an incentive for a mortgage programme. And the second most important thing is that a VAT cut means reducing all prices in the country. What are the compensators for budget losses? First, we are removing tax privileges. Second, we are raising taxes on harmful consumption and production. Third, we raise taxes where there was a low level of taxes – first of all, excise taxes and rents. But even these steps are rather a matter of general fairness regarding individual taxes. We are not talking about reducing the total amount of taxes collected. We are talking about containing the same 10% of retail turnover but doing it transparently and officially. It is about collecting the same amount of taxes from salaries, but not to find out later that 65% of the revenues come from state employees, although their share in wages is less than 20%. Won't this reform lead to an increase in inflation? On the contrary, reducing the cost of production and taxes are components of the cost of production, leading to deflation, i.e., lower prices, not higher prices. Why did all the countries at war raise taxes while we cut them? This is not true. Countries that were at war, not in the Second World War, often introduced tax holidays because there is no bigger shock to business than a sharp drop in revenue and an acute lack of labour force being drafted into the army, which always happens during a war. We believe that all of the above is an ambitious but critically necessary decision. The only one correct strategy to reduce the tax pressure on Ukrainian business, which heroically saved jobs during the war, is the only correct strategy for preserving the Ukrainian economy during the war and for the coming years of the country's reconstruction.
The summit was co-organised by the NGO "Institute for Economic Leadership" and the NGO "Tribunal".