Taxing Ukraine

Paying Taxes 2012, the annual study from PricewaterhouseCoopers, the World Bank, and the International Finance Corporation, was released a few weeks ago. The study “measures the ease of paying taxes across 183 economies worldwide, covering both the cost of taxes and the administrative burden of tax compliance.”

It contains grim news for Ukraine.

The study ranks countries along four measures: ease of paying taxes, the number of tax payments, the time to comply, and the total tax rate (which measures the “amount of taxes and mandatory contributions borne by the business in the second year of operation, expressed as a share of commercial profit”). According to the 2012 study, “In high income economies the case study company makes 15.2 payments, takes 168.7 hours to comply with its main taxes and has an average Total Tax Rate of 37.4%. This compares to 38.3 payments, 271 hours and 67.8% for low income economies.” Keep those figures in mind, and take a deep breath, as we look at Ukraine’s numbers.

The Yanukovych government claims that tax reform is the centerpiece of its economic policy, so we should see some pretty impressive changes in Ukraine’s rankings, right? Wrong. Ukraine ranked 181st in ease of paying taxes in the 2010 report (which measured the country’s tax situation in 2009, the last year of President Yushchenko’s administration), 181st in the 2011 report (covering 2010, Yanukovych’s first year in the presidency), and 181st in the 2012 report (covering 2011). In a word, there’s been no relative progress whatsoever under Yanukovych. So much for his new tax code, adopted with great fanfare in 2010.

In 2011, your typical Ukrainian firm had to make 135 tax payments (183rd place), spend 657 hours annually on tax compliance (175th place), and suffer a total tax rate of 57.1 percent (152nd place). In 2006, the first year of the Paying Taxes study, things were even worse. Although Ukraine was ranked 174th of 175 countries in terms of ease of paying taxes, its firms had to make 98 tax payments totaling 2,185 hours of compliance time and amounting to a 60.3 percent tax rate! By 2009, however, Ukraine had managed to make significant progress. Total tax payments had gone up to 147, but time to comply had fallen to 736 hours, and the tax rate had dropped to 57.2 percent.

So consider the difference between Yushchenko and Yanukovych. Between 2006 and 2009, Yushchenko increased tax payments from 98 to 147 (bad), but reduced time to comply from 2,185 hours to 736 (excellent) and the tax rate from 60.3 percent to 57.2 percent (good). Yanukovych, in contrast, reduced tax payments from 147 to 135 (so-so), time to comply from 736 to 657 (not bad), and the tax rate from 57.2 percent to 57.1 percent (lousy). So who’s the bigger reformer?  

Here’s how Ukraine stacks up against Canada, the United States, Poland, and Zimbabwe in the 2012 report:

Now consider what some of these numbers mean for your average businesspersons in Ukraine. They have to make a whopping 135 payments in the course of 365 days—a little more than one every three days. Unsurprisingly, that translates into 657 total hours per year—or a little less than two hours a day that could be more profitably spent on just about anything. And remember that every payment probably involves a bribe or two, if only to speed up the miserably slow process; and bribes are just another form of taxation.

Small wonder that Ukrainian entrepreneurs are up in arms. Small wonder that small- and medium-sized businesses are dying and that foreign direct investment is abysmal. Small wonder that Ukrainians don’t pay their taxes. Small wonder that the shadow economy probably accounts for about half of gross national product. Small wonder that the Ukrainian government is on the verge of bankruptcy.

Now, you’d think that Yanukovych, who emulates Zimbabwe’s Robert Mugabe in so many ways, would follow his example with respect to taxes. But no, the Regionnaires have done nothing—and will do nothing—to ease Ukraine’s tax burden. After all, their wealth and power are inversely proportional to those of the people. If the only way you can make money is by raiding prosperous enterprises and stealing from the state budget, then it necessarily follows that reducing the tax burden on the people will reduce your income. In Ukraine, a rising tide would sink the Regionnaires’ boat.

So, let me hazard a really wild prediction. In next year’s Paying Taxes study, Yanukovych’s Ukraine will still hold down the fort at 181. Or, if another sham tax reform is adopted, it’ll zoom up to 180.


Photo Credit: Matvey


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