Key points:
🔹Legislative initiatives by the Ministry of Finance, presented as part of harmonization with the EU, may in fact fail to bring Ukraine closer to European standards; on the contrary, they may expand the discretion of tax authorities and increase the risk of corruption. The main problem lies not in the idea of adapting to EU standards itself, but in the fact that the most dangerous instruments are being attempted to be transferred to the Ukrainian context without first establishing basic European principles—the rule of law, the presumption of innocence, and effective taxpayer protection.
🔹While the controversy surrounding attempts to cap the simplified tax system at 1 million UAH has not yet subsided, the Ministry of Finance has come forward with a new initiative. Its essence is to make the general taxation system an even more “manipulable” tool. And this is happening against the backdrop of the National Revenue Strategy, which already provides for expanding the tax authority’s powers, particularly regarding the extrajudicial seizure of corporate assets. Taken together, such changes could finally bury the dream of normal, civilized relations between business and the state.
🔹What exactly is being proposed? First and foremost, the long-abolished criterion of “the connection of expenses to business activities” is effectively being reinstated. It used to be a real nightmare for businesses: the inspector would decide at his or her own discretion whether a particular expense was necessary for the company. Now, instead, the Ministry of Finance is proposing a different framework: a tax official will be able to determine whether a transaction had a “business purpose” or was carried out solely to minimize the tax base.
🔹Previously, the concept of a “business purpose” applied to cross-border transactions under anti-BEPS rules. Now they want to extend it to domestic transactions as well. For now, this applies only to transactions between related parties, but the logic is clear: the scope of this tool may expand over time. Formally, this looks like a fight against tax schemes. But in practice, in a country with weak courts and high levels of corruption, this means even more room for “creativity” on the part of tax auditors.
🔹The concept of “tax abuse” is being introduced separately, based on GAAR—the general anti-avoidance rules. The approach itself is not particularly novel: EU legislation does indeed include such provisions. But in Europe, they operate within a system where the final say rests with an independent court, and the taxpayer’s rights are a fundamental value. In Ukraine, however, such a provision—without clear, publicly defined criteria—risks becoming a tool for “milking” businesses.
🔹We already have an example—the SMKOR. Only after a serious crisis that erupted in the fall of 2022 was it possible to transition to a more inclusive procedure for establishing risk criteria. This is precisely what partially mitigated the devastating effect of blocking invoices. In the case of GAAR, the logic should be the same: no “directly applicable rules” without criteria developed in an open process involving businesses, experts, and all stakeholders.
🔹The problem runs even deeper. Ukrainian tax culture is still based not on the presumption of the taxpayer’s innocence, but on the presumption of their guilt. Business is often viewed not as a source of economic growth, but as a suspect target for “tax mobilization.” This overlaps with a long-standing tradition of confiscatory taxation: it is not expenses that are adjusted to match revenue, but revenue that is forced to match budget expenditures at any cost. Hence the infamous “indicatives,” collection quotas, additional assessments, fines, and an entire system that has historically encouraged discretion.
🔹We must not allow the tax authority to write its own rules. We need a comprehensive tax reform: simplifying and streamlining VAT administration, replacing the income tax with a tax on withdrawn capital, reducing the burden on the wage fund, combating the shadow economy, cutting inefficient spending, pension reform, and a complete overhaul of the State Tax Service based on the principles of the reforms of the State Budget and Customs.
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