The American-Argentinean international rating named the tax system of Ukraine one of the worst in the world. Despite the subjectivity of some assessments, it is difficult to disagree with the fact that everything is far from ideal with taxation in our country. And war is not the main reason for this. Journalists found out what problems exist in the domestic tax system and how they should be solved.
Ukraine is one of the top ten countries with the worst tax system in the world. This is evidenced by a study conducted by The 1841 Foundation, a non-governmental non-profit organization that promotes the ideas of tax competition and the protection of property rights and privacy.
Among the states with the most “hellish” tax systems (Tax Hells), Ukraine took an honorable fourth place in the 2023 ranking, behind Argentina, Venezuela and Belarus.
The 1841 Foundation emphasizes that it uses data from the International Monetary Fund (IMF) and the World Bank in its research. However, it must be understood that the organization interprets this data at its own discretion, and therefore the results of the study cannot be considered completely impartial. And the term Tax Hell itself is not universally recognized - it is popular mainly among right-wing conservatives who advocate lower taxes, primarily for large capital.
It should also be noted that The 1841 Foundation only assessed countries in Europe and America. It can be assumed that if the countries of Asia and Africa were also represented in the ranking, Ukraine would not be among the leaders.
However, we have selected the appropriate company - the already mentioned Belarus, Venezuela and Argentina, as well as Russia, Brazil, Mexico, Bolivia, Nicaragua, Suriname, Honduras, El Salvador and Haiti. Even a cursory glance is enough to understand that we are talking about rather corrupt, in some cases repressive countries that can hardly be called examples of democracy and entrepreneurial freedom.
As noted above, the organization that compiled the rating of the “hellish” tax systems of the world advocates reducing the tax burden, but high tax rates are not an automatic “ticket to hell.” Thus, among the leaders of the rating there are no Scandinavian countries, which are known for their high taxes. At the same time, the tax systems of Spain and France have a reputation for being moderately “hellish” due to their excessive complexity and bureaucratization, but they are clearly not in the top ten.
When compiling the rating, The 1841 Foundation relied on such indicators as the share of the tax burden in relation to the country's GDP, the debt burden - also in relation to GDP, inflation and budget deficit.
In addition, the so-called qualitative factors were taken into account - the rule of law, the effectiveness of public administration, political stability, and the level of corruption.
In this regard, it cannot be said that the presented rating evaluates the tax system as such, says Ilya Neskhodovsky, head of the analytical department of the ANTS network.
“This is a set of indicators that are very remotely related to it, and the very name (of the rating) is clearly designed for hype,” the expert said in a commentary
As for Ukraine specifically, since it is in a state of war, the redistribution of GDP now is not happening at all like in peacetime, and therefore the assessment of our country cannot be objective, Neskhodovsky added.
Country of risky taxation
However, the above does not mean at all that Ukraine has an excellent tax system and there are no problems with it.
Moreover, in the pre-war ranking of “hellish” tax systems, our country was already in the “ten” worst - only one step lower than this year.
And that means it’s not only and not so much about the war. So what then?
“The first thing we have is a complex tax administration system,” tax consultant Alexandra Tomashevskaya tells the publication. — For one simple operation it is necessary to create, at best, five documents, and sometimes it can reach up to a dozen. Abroad, there are simply incoming invoices and outgoing invoices - both in America and in Europe. They don’t have something like we do: an invoice, then an invoice, then a tax invoice, a bank statement, and then it all goes into the declaration.”
According to her, in recent years the state, represented by the tax office, has transferred its functions to business, and now taxpayers do everything themselves for the tax office: “They draw up the documents themselves, they detail everything themselves, they describe each transaction in the reporting, after which they charge themselves fines, if any.” "We made a mistake."
Thus, Tomashevskaya ironically, in a certain sense, the simplification of tax administration in Ukraine did happen. But it has been simplified only for the tax authorities themselves, and not for taxpayers. At the same time, the administration problem creates additional difficulties.
According to Ilya Neskhodovsky, over the past year the problem associated with blocking VAT invoices in cases where payers are classified as risky has worsened.
“Individual people are hired to prepare documents for transmission to the tax office, and the costs of enterprises associated with operating normally have increased,” says the expert. — At the same time, the system used by the tax office is fundamentally incorrect, because 80% of blockings (invoices) turn out to be erroneous. And of those businesses that sue, 96% win their cases. That is, the tax office cannot prove that the company is evading taxes. But even after winning the court, the company still does not get access to its money, because the tax authorities massively do not comply with court decisions. What kind of legal system can we even talk about?”
Another serious and rather painful problem is the situation with business inspections. As is known, after the Russian invasion, inspections of enterprises were suspended, but they resumed in August 2023.
“Enterprises are not afraid of inspections as such, but they see that inspection bodies inadequately interpret tax and other legislation, as a result of which enterprises receive fines absolutely out of nowhere,” says Ilya Neskhodovsky. “At the same time, the tax office very often does not update its electronic services, which is why businesses are not informed about problems in a timely manner, and therefore they have even more of these problems.”
The inspections renewed this year, in particular, relate to the lawful use (or non-use) of settlement transaction registrars (SROs). But the problem here is that the relevant legislation is applied selectively.
“People don’t know whether to use PPOs or not, and some people install them just in case, while others don’t install them just in case,” says Alexandra Tomashevskaya. — When you explain all this to foreigners, they are, to put it mildly, very surprised, because it cannot be that a legislative norm does not have a clear interpretation. In fact, this creates so-called tax risks. Abroad they take this seriously, and they come to the conclusion that it is unrealistic to comply with the law without a fine. And in fact, they refuse to open a business in Ukraine, because the potential risks will be very high.”
Incentives instead of repression
As you can see, there are plenty of problems with the Ukrainian tax system. Moreover, the above list is far from exhaustive.
“Not only is our tax system confusing, and no matter how much you work, you will still be fined, or you will fine yourself, we also have legislation that is impossible to predict - tax rates are introduced, canceled, and in the middle of the reporting period. We have organizational chaos at a high level, and specialists who spend their entire lives poking around with these pieces of paper are already complaining. What can an ordinary person say who doesn’t understand anything about taxes,” sums up Alexandra Tomashevskaya.
But it seems the authorities don't realize, or don't want to realize, how serious it is. Therefore, their plans are only to increase tax rates and increase repression against non-payers (although, as we saw in the examples above, in most cases claims of tax evasion turn out to be unfounded). That is, as before, business will be a nightmare.
“Our (tax) rates are average in Europe. But the problem is that in our country they are paid mainly by low-income enterprises. If we take enterprises in the agricultural sector, which now accounts for two-thirds of our exports, then they actually do not pay taxes to the budget. He is in the fourth single tax group and is reimbursed for VAT. At the same time, the biggest burden falls on medium-sized businesses,” says Ilya Neskhodovsky. — The same applies to individuals. If in Europe there is a tax scale in which people with higher incomes pay more taxes, then in our country it’s the opposite. It’s similar with VAT – we have a single rate of 20%, but in Europe different rates are used to stimulate economic growth.”
Thus, if with the question “who is to blame?” We have more or less figured it out, the equally important question remains “what to do?”
“We need to change legislation, reduce the burden on people with low incomes, increase the tax burden on enterprises with excess income, and use additional funds received from closing “schemes” to reduce the burden on business. In other words, it is necessary to create an adequate tax system that will meet European practices,” says Ilya Neskhodovsky.
Moreover, much of this can be started to be done without waiting for the end of the war.
“The approach should be: by growing the economy, you expand the tax base. Therefore, if business income increased from one million to two million, then budget revenues will double. And, if we think in these categories, then our budget revenues will increase, and not what is happening now,” explains the expert.
By the way, in the study on the “hellish” tax systems mentioned above, it is noted that Ukraine’s rapprochement with the EU can significantly improve our country’s position in this matter. There are also good opportunities to improve the situation in the post-war period.
We would like to add that it is important not only to have good opportunities, but also to be able to use them properly. Therefore, much will depend on ourselves. And not only when it comes to taxes.
