Lack of tax re­form costs Ukraine bil­lions each year


For a Euro­pean na­tion of 42 mil­lion peo­ple, Ukraine’s econ­omy is re­mark­ably small. Ac­cord­ing to some es­ti­mates, up to a third of it is in the shad­ows.

Ukraine col­lected Hr 650 bil­lion, or $26.5 bil­lion, in taxes in 2016. But be­cause of tax eva­sion and tax­a­tion poli­cies, that num­ber is $13 bil­lion too low, ac­cord­ing to Fi­nance Min­istry es­ti­mates.

Mak­ing sure peo­ple and com­pa­nies pay tax is the job of the State Fis­cal Ser­vice, the state agency that over­sees all tax and cus­toms op­er­a­tions. But in its cur­rent con­di­tion — in­ef­fi­cient, cor­rupt and ill-re­puted — the body is in no shape to close the tax gap.

So the Fi­nance Min­istry, which over­sees the ser­vice, plans to re­form it through cut­ting some jobs, filling the re­main­ing po­si­tions with staff se­lected in a trans­par­ent com­pe­ti­tion, and trans­fer­ring func­tions on­line.

If suc­cess­ful, the re­formed fis­cal ser­vice should not only col­lect taxes more ef­fec­tively, but also in­spire enough trust to make the pub­lic and busi­nesses pay their taxes more will­ingly.

Tak­ing shape

The is­sue of re­form­ing the State Fis­cal Ser­vice has been on the ta­ble since 2014. Some de­mands for chang­ing the tax ad­min­is­tra­tion have been in­cluded in the mem­o­ran­dums signed by Ukraine and the In­ter­na­tional Mone­tary Fund.

But it wasn’t un­til April that the first ma­jor changes came, with the Fi­nance Min­istry au­tom­a­tiz­ing re­funds of value-added tax, mean­ing that busi­nesses no longer have to wait for months to have the money.

The min­istry needs to have sev­eral more suc­cess sto­ries like that, she says, to per­suade the IMF and Ukrainian politi­cians that it is pos­si­ble to re­form the ser­vice. Now, there is no faith in it and there­fore not much po­lit­i­cal sup­port.

“They only want to sup­port ideas that have a strong chance of com­ing to life,” says Yana Bu­g­ri­mova, an ad­vi­sor to Fi­nance Min­is­ter Olek­sandr Danyliuk and the of­fi­cial over­see­ing the re­form of the State Fis­cal Ser­vice. “We need sev­eral small suc­cesses like the VAT re­fund case to get back­ing for fis­cal ser­vice re­form.”

Mean­while, plans for the re­form of the ser­vice are fi­nally tak­ing shape. In Septem­ber, the Fi­nance Min­istry and IMF out­lined four ar­eas for over­haul: on­line and phone ser­vices, tax au­dits, tax debts, and per­son­nel.

Go on­line

While it is im­pos­si­ble to com­pletely re­move the hu­man fac­tor from the tax and cus­toms op­er­a­tions, cor­rup­tion risks can be re­duced, Bu­g­ri­mova says.

The first step is to trans­fer more op­er­a­tions on­line. To­day, 90 per­cent of the pub­lic’s vis­its to tax of­fices con­cern 10 types of op­er­a­tions, nine of which could eas­ily be per­formed on­line, ac­cord­ing to Dmytro Kokhan, a Fi­nance Min­istry ex­pert work­ing on tax re­forms.

Ide­ally, Kokhan says, only 20 per­cent of all the func­tions per­formed by the fis­cal ser­vice should in­volve face-to-face con­tacts: the rest should be done on­line and through the ser­vice’s call cen­ter. To­day, 60 per­cent of all ser­vices are per­formed via face-to-face meet­ings with tax of­fi­cers.

To re­duce that num­ber, the State Fis­cal Ser­vice will move ser­vices on­line and in­crease the size of the call cen­ter: to­day, due to low ca­pac­ity, only 50 per­cent of calls are an­swered.

Fair au­dits

To make tax au­dits cor­rup­tion-free and more ef­fi­cient, the Fi­nance Min­istry wants to change the way busi­nesses are se­lected for au­dit.

At the mo­ment, a cen­tral­ized al­go­rithm as­sesses tax risks and de­ter­mines which busi­nesses should be au­dited. The names of the busi­nesses are then sent to re­gional tax of­fices.

That’s when things start go­ing wrong.

As the num­ber of can­di­dates for au­dit is far above the ca­pac­ity of the tax of­fices, in­spec­tors select which ones to au­dit them­selves, and can so­licit bribes from com­pa­nies to es­cape a tax in­spec­tion.

“We looked at Odesa Oblast,” says Kokhan, show­ing a re­cent re­port. “The tax risk sim­u­la­tor picked out 5,385 com­pa­nies there for au­dit. The re­gional tax of­fice started se­lect­ing, and got that num­ber down to 285 com­pa­nies — that’s how much they can phys­i­cally au­dit.”

The plan is to im­prove the tax risk sim­u­la­tor so that it selects num­bers of com­pa­nies that can re­al­is­ti­cally be au­dited, leav­ing in­spec­tors no op­por­tu­ni­ties to pick them them­selves. A pi­lot project of the new sys­tem will start work­ing in some re­gions within two months.

Re­mote au­dits, where an in­spec­tor doesn’t show up at the com­pany but in­stead an­a­lyzes its tax re­ports, can be partly au­tom­a­tized, say Bu­g­ri­mova and Kokhan. That would de­crease the in­spec­tors’ work­load and again re­duce the risk of cor­rup­tion.

Tax debts

Tax debts in Ukraine reached Hr 81.6 bil­lion ($3 bil­lion) in Septem­ber. Hr 12.5 bil­lion of that is new debt that has ac­cu­mu­lated since the be­gin­ning of 2017.

The tax of­fice hasn’t been ef­fec­tive in col­lect­ing it. On the one hand, the tax in­spec­tors lack free­dom to so­licit tax debts and need to rely on courts too much.

On the other hand, when it comes to debt so­lic­it­ing, tax of­fi­cials have been re­luc­tant to ap­ply even the lim­ited author­ity they have.

The plan is to pri­or­i­tize debtors who are still in busi­ness and whose debt is new, and to chase them ac­tively. For this, a spe­cial unit needs to be or­ga­nized within the tax of­fice.

Staff short­ages are part of the prob­lem. In Ukraine, only 4 per­cent of tax of­fi­cials are ded­i­cated to debt so­lic­it­ing, com­pared to 13 per­cent in other de­vel­oped coun­tries. Op­ti­miz­ing other op­er­a­tions could free up em­ploy­ees needed for the debt so­lic­it­ing unit.

Peo­ple are key

New staff will be the cor­ner­stone of the re­form. To­day, the tax of­fice is so dis­trusted by the pub­lic that it both re­pulses tax­pay­ers and feeds cor­rup­tion.

Bu­g­ri­mova be­lieves that re­plac­ing the key em­ploy­ees with new peo­ple through trans­par­ent com­pe­ti­tions will change the cul­ture of the tax of­fice. But it won’t be easy.

“There is re­sis­tance to the re­form com­ing from all the po­lit­i­cal forces,” Bu­g­ri­mova says. “It could be be­cause some peo­ple paid to be ap­pointed to cer­tain po­si­tions and don’t want to lose them.”

With po­lit­i­cal elites not par­tic­u­larly fond of fis­cal re­form, the best hope is for the IMF to fi­nally put it high on their agenda. While the re­form has been a struc­tural bench­mark for the IMF, it’s never been as high a pri­or­ity as other is­sues.

That taken into ac­count, the re­form of the Fis­cal Ser­vice will take at least three to four years.

“There is enough work here for us and for sev­eral gov­ern­ments to come,” says Bu­g­ri­mova.

Yana Bu­g­ri­mova, ad­vi­sor to the fi­nance min­is­ter, be­lieves that the re­form of the State Fis­cal Ser­vice will take at least three to four years. (Oleg Pe­tra­siuk)

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