Fiscal arithmetic

The government’s attempt to push for new tax legislation met with fierce resistance from the public. The entrepreneurs’ protest rallies on Independence Square seem to have forced the government to heed the people’s voice and make some concessions. Is this a sign of weakness or a positive signal that the government is ready for a constructive dialog with the business community? We hope for the latter, as Ukrainians are now poised for a large number of reforms: taxes, pensions, customs, etc. Where are the limits for compromise in these difficult matters? This and other issues are the subject of The Day’s exclusive interview with Deputy Prime Minister for Economic Affairs Serhii TIHIPKO.

Did you take part in the negotiations with the picketers?

“This was the preserve of the presidential administration, which invited experts from various bodies of power to conduct a dialog. I was not part of this task force.”

But you are the deputy premier for economic issues, so it would be logical if businesspeople talked to you.

“It is politics, not business, that is talking now. Unfortunately, society has failed to hold a competent and constructive debate on the Tax Code.

There have been many emotions, accusations, and politics, while what the code needs is expert debate. Our opposition has been, as usual, criticizing, whereas the government has been defending the interests of the state, i.e., of pensioners, teachers, and doctors, who are paid from the budget. Why so many emotions? In my view, they will soon subside. This country really needs new tax legislation, and the code has many positive aspects, which will benefit the economy in the course of time. And people will see this.”

What is the limit to compromise between business and the government, as far as the simplified taxation system is concerned?

“Any good economist will tell you that a successful country should have a single transparent system of taxation. History decreed that Ukraine should have two parallel — general and simplified — systems of taxation. If we want to retain the simplified one, we must make it transparent and precise in any case. We must close all the loopholes through which some big companies evade paying taxes. And this should be laid down in no uncertain terms — otherwise simplified taxation will remain a suspended question.

“So, in my opinion, we should make a fair appraisal of this problem and say clearly which of the provisions we leave behind or delete. It is, above all, entrepreneurs who need clarity because they want to work under stable conditions. And one should improve the conditions for small- and medium-scale businesses by simplifying fiscal and tax-related accountancy, reducing interest rates, etc.”

Small business does not refuse to pay more taxes, but it is unable to withstand the ever-increasing fiscal pressure and existing corruption. According to the Maidan picketers, about 95 percent of “simplified taxpayers” are paying bribes worth 2-3.5 times as much as official taxes. So would it be a good idea to adopt the Tax Code and carry out anticorruption reform at the same time?

“To begin work in this direction, one must be prepared for some rather tough steps. This is confirmed by the experience of many countries, such as Georgia, that have managed to make progress in corruption eradication. If both the government and society are prepared for such steps, they will succeed. But so far there are only words, not deeds, about combating corruption.”

Is anything or anybody hindering you from carrying out economic reforms today?

“Nobody can hinder me from doing so. The government has begun a long-awaited wide-scale reform of the economy. But every reform affects someone’s interests. Now about 40 percent of businesses are in the ‘gray zone.’ Some find it better to leave this zone, while others prefer to stay there, because they do not have to pay taxes. So there will always be discontents. We saw today the presentation of a law on simplified procedures in the construction sector. This is an extremely important document that introduces revolutionary changes in this field. When passed, this law will reduce the number of procedures in civil construction from 93 to 23, out of which only nine will be obligatory for investors, and one will be able to obtain all the necessary permits in 60, not 415 days. As a result, corruption in the construction sector will drop by about 90 percent. Accordingly, house prices are supposed to go down by at least the estimated money spent on bribes. This is not so little because builders’ expenditures on ‘stimulating’ corrupt bureaucrats sometimes account for 30 percent of the construction budget.

“So, no wonder that this reform has met with fierce resistance from bureaucrats — for we are ruining a long-established ‘gray’ business that brings in enormous profits. But this should not hinder reforms. In my view, the only thing that can hinder economic reforms is a lack of political will. We won’t be able to change anything without the latter.”

Does this political will exist today?

“We shall see. My job is to make high-quality decisions based on the experience of countries that have successfully carried out reforms and managed to ensure economic development and higher living standards. This is why we must explain to people as much as we can the necessity of reforms and the fact that they will eventually improve their lives. I’m convinced that the most difficult reforms can be carried out in the first half of 2011, while there is political will. That’s precisely what I’ll do; I will carry out these reforms.”

Maidan picketers say there is a disproportion in the Tax Code between the taxes levied on small and big businesses; they want the government to include a clause providing for a return of all the money in offshore bank accounts, instead of pressuring small business.

“Hot-air sessions will not bring back any of the money. We must repair the domestic economic situation, precisely what we’re doing, with a minimum tax burden on our businesses, as laid down in the new Tax Code. I realize that the current performance of the Tax and Customs Administrations raises many questions, and that our businesses suffer the effects, but the situation can be improved only by establishing clearly formulated rules binding on one and all.”

Perhaps you should start by reforming the Tax Administration and adopt the Tax Code later?

“Reforms must be carried out in parallel, otherwise Ukraine will remain ranked as the world’s 145th country in terms of foreign direct investments. Of course, the existing attitude of the tax and customs authorities to business people, as inveterate malefactors, must be changed.”

Will the Ukrainian state support the small and medium businesses in 2011 through micro-loans?

“No such loans are possible with the 3.5 percent budget deficit foreseen for next year.”

Whose experience do you think Ukraine should use to make effective economic reforms?

“I recently attended an international conference organized by the World Bank, involving 25 countries from Eastern Europe, the Caucasus, and Central Asia. Ukraine might find the experience of each country interesting, but this country can’t accept a single economic model. Ukraine is doubtlessly interested in exploring the experience of economic reforms in Estonia, Georgia, Slovakia, and Bulgaria, but the Ukrainian approach to such reforms will be dictated by the interests of our citizens, allowing for the world’s best experiences. Georgia, for example, is practicing simplified tax procedures, so its citizens have to pay only six taxes, with a lower customs rate, and joint and common liability that solves the problem of fake VAT payments. Ukraine is following in Georgia’s footstep, reducing its taxes and lowering the tax rate. In fact, we propose to lower the company income tax, so [companies] will stop transferring funds to offshore bank accounts and keep their money in Ukraine.”

Will the number of taxes be reduced after adopting the Tax Code, so we can expect six taxes, like in Georgia?

“I think that we should continue cutting the number of taxes, but there is no way to do without the value added, income, or excise tax, although there is food for legislative thought.”

In other words, none of this will happen in 2011?

“Life will show what will happen.”

Could Ukraine lower the customs rate to 0.6 percent, as Georgia did?

“To lower the customs rate, you have to look for ways to combat contraband, although I don’t rule out the possibility of a lower customs rate clause being included in the Customs Code.”

When can we expect to read the Customs Code bill? Don’t you think that this project should be held on a broader public range?

“We can’t have all of our society involved in the working out of economic bills, for this is the prerogative of experts. Business people are constantly included in such task forces. Professional business associations have worked on the Tax Code. They’re now working on the Customs Code bill and I’m supervising the project that involves experts from the European Business Association, the US Chamber of Commerce, the Business Council at the Cabinet of Ministers of Ukraine, the Council of Entrepreneurs, and other organizations. Our task is to work out legislation so that the customs policy supports business and the economy as a whole. We are now working on customs procedures, then we will settle all disputed matters with the prime minister and businessmen, and finally make it public for nationwide discussion. The Customs Code bill will be ready before the end of 2010, although there is no telling whether we will be able to submit it to parliament within this timeframe.”

A number of analysts believe that you lost your clear-cut political stand after you joined Mykola Azarov’s cabinet and faded into the Party of Regions’ background. Are you sure you made the right decision?

“I’m absolutely sure. It was either to join the opposition and keep criticizing everything or try to do something. For me the choice was clear. Too bad we’ve had a strong opposition for 19 years that has done nothing but criticizing, and a weak administration that has done actually nothing for the benefit of Ukraine, leaving the poor to suffer the consequences. We have 67 percent of pensioners in Ukraine who are paid less than one thousand hryvnias per month. This is the cost of all that criticism and official inertia. And so I want do to something I consider to be important for this country. I’m also prepared to face some of my actions being misinterpreted by the people.”

Am I correct in assuming that you have temporally scattered your position, just to assume a single one eventually, to win back your electoral support?

“I do hope that Ukrainians will eventually comprehend my actions and the reasons behind them. For example, two very important technical regulation bills have been passed, bringing Ukraine closer to Europe by one year. I think that Ukraine will sign a free trade area treaty with the European Union in 2011. I can assure you that I will make every effort to change the attitude of all prospective investors and governments to Ukraine for the better. They will finally realize that our country is capable of making progress and carrying out reforms. Once they do, we will have hard cash investments and our living standards will be on an upward curve.”

Does this mean that you are not retiring from working in this government?

“Certainly not. I will keep fighting for reforms.”