Olek­sandr Dany­lyuk: "If peo­ple pay taxes, the state will re­duce rates where pos­si­ble”

The Min­is­ter of Fi­nance on tax re­form and cam­paign against shadow econ­omy, cor­rup­tion

The Ukrainian Week - - CONTENTS - In­ter­viewed by Tetyana Omelchenko

The Min­is­ter of Fi­nance spoke to The Ukrainian Week about the new blueprint for tax re­form, the cam­paign against shadow econ­omy, cor­rup­tion at the cus­toms, State Fis­cal Ser­vice re­form, and the 2017 bud­get.

What are the dif­fer­ences be­tween the new tax re­form blueprint and the two pre­vi­ous drafts de­vel­oped last year? What were the key pro­vi­sions of those drafts that made it im­pos­si­ble to adopt the re­form in 2015, and what changes have been made to the new ver­sion?

— The re­form draft has ac­tu­ally been ap­proved, with only a few pro­vi­sions not in­cluded in the fi­nal ver­sion. Last year, I was also in­volved in the process in the ca­pac­ity of the Deputy Chief of Staff of the Pres­i­den­tial Ad­min­is­tra­tion and worked on the Tax Code amend­ments. So, I un­der­stand quite well where the prob­lems are. Most im­por­tantly, I un­der­stand how the tax of­fice works and how the tax ad­min­is­tra­tion sys­tem func­tions.

Tax rates are not the main is­sue. It is the ad­min­is­tra­tion of taxes that de­ter­mines cor­rup­tion lev­els and af­fects the in­ter­ests of in­vestors. Af­ter all, when in­vestors con­sider in­vest­ing their money, they first of all study the Tax Code and con­sult le­gal and au­dit com­pa­nies pro­vid­ing ser­vices to busi­nesses in Ukraine.

We have re­duced la­bor tax, and this is a pos­i­tive move. But has this helped solve ma­jor business prob­lems? No. Do busi­ness­men ar­gue about VAT rates? No. But al­most ev­ery­one com­plains about the prob­lems with VAT re­im­burse­ment, in­clud­ing kick­backs for such re­funds. Of course, such abuses greatly dis­cour­age busi­nesses. And this is just one of the most ob­vi­ous ex­am­ples.

So, the three main dif­fer­ences in this year's pro­pos­als are as fol­lows.

First of all, we fo­cus on solv­ing the main prob­lem of the business: we sim­plify ad­min­is­tra­tion. Se­condly, this time we have no war­ring camps or dif­fer­ent re­form vi­sions, we are work­ing as a team to­wards a com­mon goal. A work group has been es­tab­lished that in­cludes rep­re­sen­ta­tives of the Par­lia­ment's Com­mit­tee on Tax­a­tion, in­clud­ing its Chair­woman Nina Yuzhan­ina and other MPs, coleg­is­la­tors of Bill No. 3357, business as­so­ci­a­tions, com­mu­nity ex­perts, and State Fis­cal Ser­vice rep­re­sen­ta­tives. Of course, it was not al­ways easy to com­pro­mise, but we have found so­lu­tions to all dis­puted is­sues and will de­liver the re­sults that the busi­nesses are ex­pect­ing. Thirdly, un­like last year, when the last tax re­form was kept se­cret to the last, this time we made the process as open as pos­si­ble from the very start, in or­der to take into ac­count as many ideas as pos­si­ble. We or­ga­nized dozens of meet­ings and pub­lic con­sul­ta­tions with busi­nesses and com­mu­nity ex­perts, and pub­lished draft up­dates on the of­fi­cial web­site of the Min­istry of Fi­nance and its Face­book page to en­cour­age pub­lic dis­cus­sion, so that ab­so­lutely any­one could make com­ments and sug­ges­tions.

What are the chances that the new tax re­form will be ap­proved this year and im­ple­mented in 2017? Will the Par­lia­ment be­come the big­gest ob­sta­cle?

— I don't think that the Par­lia­ment will op­pose it, they are quite pos­i­tive about it. Only those prof­it­ing from it to­day will backpedal. The vot­ing will show. Busi­nesses need this re­form badly. They will sup­port us, es­pe­cially as far as the elim­i­na­tion of the tax po­lice is con­cerned. How­ever, our bill does not cover the is­sue of deal­ing with the tax po­lice and es­tab­lish­ing the Fi­nan­cial In­ves­ti­ga­tion Ser­vice. A bill on that has al­ready been drafted, it is cur­rently dis­cussed with the min­istries, and we are plan­ning to sub­mit it for the

Cab­i­net's ap­proval sep­a­rately. Af­ter all, the tax po­lice is just one of the tools used by the State Fis­cal Ser­vice, and not the most ef­fi­cient one. In fact, ac­cord­ing to busi­nesses, its role is rather nega­tive.

I be­lieve that the re­form will be adopted. Of course, it also has anti-cor­rup­tion pro­vi­sions, which some peo­ple might not like. But there's noth­ing we can do for them. It's now time for real change.

Does the tax re­form en­vis­age re­duc­ing the over­all tax bur­den on the econ­omy and the rate of GDP re­dis­tri­bu­tion through the bud­get?

— Our changes to tax­a­tion do not in­clude the re­vi­sion of rates. We use a dif­fer­ent ap­proach. We re­duce the bur­den on busi­nesses by stream­lin­ing ad­min­is­tra­tion. This will help busi­nesses save both time and money.

Some might say that if the rates have not been re­vised, it is not a re­form. First of all, we never called it a re­form. It is de­signed to im­prove the ad­min­is­tra­tion and re­solve the ex­ist­ing business prob­lems. Se­condly, we in­tro­duce prac­ti­cal changes that will have real im­pact on busi­nesses. This is the most im­por­tant.

Talk­ing about the bud­get, I have al­ways sup­ported the idea of a "small state." That is, I lobby for the small but ef­fi­cient state ap­pa­ra­tus. I don't like it when funds are spent in­ef­fi­ciently to pay those who do not per­form their func­tions or per­form them poorly. So, our goal to­day is to op­ti­mize the state ap­pa­ra­tus (and we care­fully study all ex­pen­di­tures), iden­tify in­ef­fi­cien­cies, find re­sources and chan­nel them where nec­es­sary. We have al­ready iden­ti­fied the key pri­or­i­ties in the bud­get process and will al­lo­cate re­sources to the ar­eas where they are most im­por­tant to­day. These are de­fense, ed­u­ca­tion (es­pe­cially sec­ondary), en­ergy ef­fi­ciency, in­fra­struc­ture, and diplo­matic ser­vice.

As for the other ar­eas that are in­ef­fi­cient, they should un­dergo lay­offs in or­der to in­crease wages. Take the State Fis­cal Ser­vice (SFS), for ex­am­ple. Af­ter 30% lay­offs, it cur­rently em­ploys 41,000 peo­ple, but I be­lieve that its staff should be fur­ther re­duced in or­der to in­crease salaries. Given the cur­rent level of salaries of the lead­ing SFS in­spec­tors, we can hardly hope to erad­i­cate cor­rup­tion. I am sure that ev­ery state agency should pri­mar­ily look for its own re­sources. All and any op­ti­miza­tion should be used to in­crease salaries. I would like to em­pha­size that the state does not have a huge vault, where it could find bil­lions of hryv­nia to dra­mat­i­cally raise wages for all. We have very lim­ited re­sources!

You were the ini­tia­tor of tax hol­i­day for small busi­nesses. How­ever, ac­cord­ing to the State Statis­tics Bu­reau, 56% of all in­di­vid­ual en­trepreneurs and most small busi­nesses work in sales and re­pairs, that is, they don't pro­duce any sig­nif­i­cant added value. Does it make sense to en­cour­age small busi­nesses work­ing this way?

— It is nec­es­sary to look for var­i­ous in­cen­tive mech­a­nisms and see what works best. To­day we have al­most no small and medium busi­nesses in Ukraine. How­ever, it is ex­actly this sec­tor that we should fo­cus on. But there are some prob­lems. It is al­ways dif­fi­cult for small busi­nesses to en­ter even the Ukrainian market, not to men­tion the in­ter­na­tional one. The rel­a­tive costs of market en­try are dis­pro­por­tion­ate. Another dis­ad­van­tage for small and medium busi- ness in Ukraine is the lack of fund­ing. Typ­i­cally, banks would not lend to them, or only pro­vide lend­ing at very high in­ter­est rates. In the West, pro­grams are avail­able for business star­tups through ven­ture cap­i­tal. In Ukraine, there is no such thing yet. The only op­tion is bank fi­nanc­ing, but it is ex­tremely risky and ex­pen­sive. Know­ing this, we have pro­posed a tax hol­i­day tool. But we will also look for other ap­proaches. It is very im­por­tant for small busi­nesses that all ob­sta­cles to reg­is­ter­ing a com­pany are re­moved and re­port­ing is min­i­mized. Af­ter all, these are all ad­di­tional costs and risks for busi­nesses. This is ex­actly what we are do­ing.

Do you agree that most of the busi­nesses op­er­at­ing in the shad­ows evade taxes not be­cause they don't want to pay them, but be­cause they won't sur­vive if they do? The chal­lenge to im­prov­ing ef­fi­ciency of business, in turn, is the lack of proper ed­u­ca­tion, man­age­ment skills etc. Will fight­ing shadow econ­omy be suc­cess­ful in such en­vi­ron­ment, and how should it be brought to light un­der these con­di­tions?

— Of course, it will be suc­cess­ful. As for go­ing out of business, our tax rates are quite com­pet­i­tive com­pared to other coun­tries. There are cer­tain tax­a­tion mod­els. We can­not say that the na­tion will go bust if we all pay taxes hon­estly. For ex­am­ple, in cap­i­tal­ist coun­tries busi­nesses op­er­ate suc­cess­fully and pay taxes. The tax rate here is not im­por­tant.

Un­for­tu­nately, our sys­tem al­lows for not pay­ing taxes or pay­ing the min­i­mal rate. When it comes to small busi­nesses (re­tail com­pa­nies and stores), there is a lot of abuse there through the flat-tax sys­tem (also known in Ukraine as the sim­pli­fied tax sys­tem – Ed.) There­fore, the flat tax should strictly per­form its func­tions and pre­vent such abuses. I'm sure that the cur­rent laws al­low for putting an end to some com­pa­nies' abuses re­lated to the flat-tax sys­tem.

More­over, we should not for­get that the taxes paid are al­lo­cated for pen­sions and the pub­lic sec­tor. That is, we have to think about the econ­omy, rather than try­ing to pay as lit­tle as pos­si­ble. For ex­am­ple, many Ukraini­ans to­day make pur­chases over the in­ter­net (and these are gray de­liv­er­ies) or go to the shops that sell coun­ter­feit prod­ucts and don’t pay taxes.

There­fore, I be­lieve that if we don't change the ad­min­is­tra­tion sys­tem to a fair one, en­trepreneurs who want to work hon­estly will not be com­pet­i­tive. But this is the is­sue of not just rates, but also hon­esty. When the rules are the same for all, the model will work dif­fer­ently. If peo­ple pay taxes, the state will re­duce some rates where pos­si­ble. But now, un­til some of the press­ing prob­lems that I men­tioned are not solved, do­ing this would be just ir­re­spon­si­ble. Be­cause to­day we have very re­al­is­tic bud­get es­ti­mates. And we re­ject any ex­per­i­ments that sound too pop­ulis­tic. We can't af­ford the risk of hav­ing a hole in the bud­get, and the govern­ment is ac­count­able to pen­sion­ers and those re­ceiv­ing state sub­si­dies and salaries. Our task is to make sure they re­ceive those funds. Pen­sion­ers are not sup­posed to pay for the fact that we have an in­ef­fi­cient tax ad­min­is­tra­tion sys­tem. The me­dia quite often re­port that that the state loses tens of bil­lions of hryv­nia through cus­toms. For ex­am­ple, Kostyan­tyn Likarchuk men­tioned about 20–50% of the

Olek­sandr Dany­lyuk, born in 1975 in Moldova, grad­u­ated from the Kyiv In­sti­tute of In­vest­ment Man­age­ment and the Kyiv Polytech­nic In­sti­tute. He earned his MBA from Kel­ley School of Business at In­di­ana Univer­sity (USA). He started his ca­reer as a stock bro­ker. Later, Dany­lyuk worked for three years with Baker & McKen­zie projects in Lon­don and Moscow. He headed an in­vest­ment fund in Lon­don. He also served as a su­per­nu­mer­ary ad­vi­sor to Pres­i­dent Viktor Yanukovych and headed the Co­or­di­na­tion Cen­ter for Eco­nomic Re­forms. In July 2014, he was ap­pointed Pres­i­den­tial rep­re­sen­ta­tive in the Cab­i­net of Ukraine. In Septem­ber 2015, he be­came Deputy Chief of Staff for the Pres­i­den­tial Ad­min­is­tra­tion. On April 14, 2016, he was ap­pointed Fi­nance Min­is­ter of Ukraine.

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