HOW ARE ‘SHADOW’ INCOME SOURCES TO BE LEGALIZED IN UKRAINE?

Viktor PYNZENYK , MP, member of the tax and customs policy subcommittee of the VR finance and banking committee:

I think that just an enactment legalizing shadow capital will not suffice unless backed by a number of other top-level decisions. The shadow factor will survive due to certain factors that must be removed. The main one is the misconception of the role of the state and its regulatory functions that form the corrupt environment and cause spending that cannot be recorded as lawful disbursements. Such steps always provoke those paying taxes to avoid them.

Another important problem is precisely how to return shadow money to the economy. In my opinion, there are two cardinal points: financial stability as a guarantee that those with shadow capital will not suffer from inflation and a favorable investment climate. We have a number of examples showing that capital finds a way to get legit once steps are made in the right direction in Ukraine. Look at the statistics: Cyprus and Liechtenstein are among ten countries receiving the most investment. And there have been interesting stages in the process of financial stability; in 1997, with $14 billion worth of exports, Ukraine’s currency market turnover amounted to $32 billion. And I mean the dollar part only. In other words, there are channels which can be used to legalize shadow capital.

Serhiy TERIOKHYN , MP, deputy chairman of the VR finance and banking committee, co-author of the alternative bill On Tax Amnesty:

The essence of the Cabinet bill “On the Legalization of Incomes by Natural Persons who Paid no Taxes on them” reminds me of a financial mousetrap. Suppose money starts returning to Ukraine and is legalized. What happens to that money next? It cannot be remitted abroad, for we have rigid legal restrictions on non-trade transactions. As for trade [business] transactions, there is the ill-famous 90- day clause (the proceeds must be returned in 90 days). Buying anything in Ukraine is also practically impossible, because we have a monocurrency regime, meaning that an amount in hard currency received from abroad must be translated into hryvnias, meaning that one has to assume currency risks as well.

Naturally, we need a tax amnesty law, but it must be linked to something else. Tax amnesties that swept over Europe in the 1960s-70s were caused by the cancellation of the gold-exchange standard and introduction of mutual exchange rate support. At the time European governments allowed their citizens to keep amounts in a foreign currency and on foreign bank accounts without any restrictions. Perhaps such amnesty would work in Ukraine if the new wording of the tax bill is finally adopted and we allow the hryvnia to become convertible under current operations. This would be the first step anyway, allowing citizens to have as many foreign bank accounts as they wish; they, in turn, would be under obligation to declare all such money for taxation in Ukraine. The idea is very simple: paying taxes is every citizen’s obligation, just as every citizen is free to act as he pleases after paying them.

Oleksandr PASKHAVER, president of the Economic Development Center:

Such incomes can be legalized two ways, using the carrot or stick-and-carrot method. The former must provide conditions in which one will find such legalization profitable. At least we should overcome the risks involved in such legalization. But knowing how people trust the government in Ukraine, I consider this idea purely utopian. It is easy to predict that bills boiling down to carrot and no stick will be for the birds, but this does not mean that legalization is unnecessary. We surely need it, except that it must be provided in the context of other Cabinet actions, for it’s the only way to make the taxpayer believe the state.

The stick-and-carrot method seems more effective. One is to choose between legalizing one’s shadow capital or having all one’s further expenses closely followed (a legal framework is being developed to do just that), meaning one will have problems. In all likelihood the state will simultaneously issue enactments legalizing such money and enhancing control over it. Anyway, everything seems to point in that direction. Also, consider the response of those that will have to go legit. In the end the investment climate will get worse, not better. All fortunes being built or already existing in Ukraine will have to leave this country, given such rigid conditions. This will be a sudden negative effect, as is often the case. Having analyzed both approaches, I can state that legalizing such incomes is economically inexpedient for the time being.

Volodymyr DUBROVSKY , expert with Harvard Institute for International Development:

The overall concept of tax amnesty and income legalization is praiseworthy, yet certain aspects should be clarified. First, it is necessary to determine what the whole thing is all about: changing the investment climate or attracting some money as investment. Unless the social climate is altered, trying to attract money as investment makes no sense; even if attracted, such an investment will not be effective. Therefore, attracting money comes next and the social issue — [tax] amnesty, different relationships between the state and taxpayer — comes first and foremost. In this sense, amnesty is to serve as a guarantee that the state admits to its previous taxation policy as faulty.