‘Is VAT in the EU the same as VAT in Ukraine?’ Why does the general taxation system need a ‘human touch’, yet the Ministry of Finance, for some reason, turns a blind eye to this?
Key points:
The central tenet of Ukrainian fiscal policy is the view that the general taxation system is the benchmark to which one should aspire, whilst other tax regimes are seen as deviant and temporary; the sooner these deviations are brought into line with the benchmark, the better.
Ukrainian entrepreneurs do not wish to grow and develop, and consequently create jobs, once they reach a certain level of development.
Tax administration under the general system is very burdensome and unfriendly to entrepreneurs.
The Ministry of Finance dismisses these concerns, arguing that such talk stems from a reluctance to pay taxes, a lack of understanding of how the tax system works, and, more generally, the spoiled and unscrupulous nature of entrepreneurs.
In a CASE Ukraine survey, entrepreneurs pointed not only to the significant burden of the general tax administration system compared to the simplified tax regime, but also to the increased risks for entrepreneurs in switching to the general tax system.
The highest costs of tax administration fall on entrepreneurs operating under the general VAT taxation system.
Maintaining tax and accounting records under the general VAT taxation system requires an average of 478.2 person-days per year, according to the results of the CASE Ukraine survey. This is four times more than is required for record-keeping under the simplified tax system without VAT, where the figure stands at 114.5 person-days per year.
Corruption is a greater problem for VAT-paying entrepreneurs than for non-payers.
Entrepreneurs on the general VAT system feel the impact of artificial barriers, created to facilitate informal payments, much more acutely. Among the reasons for making informal payments to the State Tax Service, the vast majority of entrepreneurs under the general VAT system cited ‘preventing or removing formal/bureaucratic/unjustified obstacles to business activity’ as the primary reason.
Against this backdrop, entrepreneurs do not express particular trust in the tax authorities.
Entrepreneurs believe that the State Tax Service is more likely to facilitate tax evasion schemes (27.5%) than to effectively prevent them (22%).
At present, the Ministry of Finance does not take this problem into account in its activities, leading to both weak strategic documents and a number of risky decisions, such as lowering the VAT threshold, which undermine the efforts of the government’s economic bloc to create better conditions for doing business in Ukraine’s already difficult circumstances.