Legalizing business will activate investors

During the next plenary week (October 5-8) the Ukrainian parliament will start working on the new Tax Code. Ukraine’s Prime Minister Mykola Azarov hopes that this most important document will be adopted by the end of October, and the budget based on it will be prepared by the end of November. In the opinion of prime minister, the Tax Code is a compromise between the needs of the state and wishes of business. However, Azarov worries that in the process of adopting the code in the Verkhovna Rada, where the position of business is strong, this balance can be disturbed. Indeed, Serhii Teriokhin, already ex-head of the parliamentary committee on tax and customs policy (Vitalii Khomutynnyk replaced him before the discussion), demanded to stick as close to the procedure as possible and “to rethink this opus before submitting it to the consideration of the Verkhovna Rada.” However, the code will hardly be subject to any conceptual changes during the discussion. Most likely, the authors of the code will be ready to concede in some details, albeit perhaps details with important implications. For example, the Association of Ukrainian Banks supposes that “the losses of the state incurred due to taxing income from deposits of physical entities can considerably exceed real revenues to the budget.” Bankers think that this measure may lead to substantial costs for depositors. At this, the Association of Ukrainian Banks is confident that with an annual deposit interest rate of 18 percent, 122,000 hryvnias will be taxed on deposits, which according the association’s estimate cannot be considered luxury.

Nevertheless, so far the government hasn’t shown any inclinations to become more flexible in negotiations. As Azarov stated, “We, the current government, assume all responsibility and risks for the realization of this Tax Code.” Moreover, the premier is ready to force hands, even those of members of the coalition.

This is confirmed by his explicit threat directed to the speaker of the Verkhovna Rada Volodymyr Lytvyn: “If he votes against it, he must leave the coalition.” After all, he is also responsible.

Thus, the Tax Code has many parents who treat it differently. The Day talked with one of them — Vice Prime Minister for Economy Serhii Tihipko — on The Day this document was submitted to the Verkhovna Rada.

What do you feel today: pleasure from the work accomplished, or bitterness due to the fact that the document, as before, contains many novelties rejected by business?

“It’s very good that thanks to the persistent work on the project we managed to get a truly different, updated document. Undoubtedly, this is a positive moment. But at the same time I understand very well that there is a number of debatable issues requiring additional work and deeper discussions. So we don’t relax but continue working. There are still concerns pertaining to issues like agriculture, culture and arts (this area bothered few people so far but I think it is very important). Simplified accounting for small enterprises, which will be based on the general system of taxation, is a very serious problem. Besides, there are certain suggestions of investors that we must thoroughly consider. We will sum up the work on the Tax Code after corresponding decisions are made in the Verkhovna Rada. This will be our intermediate result, because even after this we will have to work on the Tax Code, improve it and develop it.”

In addition to the army of specialists and experts, such key figures as the primer minster, Vice Prime Minister Borys Kolesnykov, Minister of Finance Fedir Yaroshenko, the country’s chief tax officer Oleksandr Papaiika, and you worked on the code. Mykola Azarov recently said that the government assumed all responsibility for the Tax Code. The head of the parliament Volodymyr Lytvyn repeated this phrase in a slightly different way. Responsibility can be very vague. Each of the aforementioned leaders had their specific part. As far as I know, you were responsible for large provisions regulating small business. Kolesnykov was responsible for large business, and the minister of finance and Papaiika for the administration of taxes. But experts, including Oleksandra Kuzhel, your deputy in Strong Ukraine, stated that the code is very good for large business, but small business will simply be destroyed by it. (She does not criticize you, but hints at someone). There is also a lot of criticism regarding severe and arbitrary administering. Can one speak about moral and political responsibility of concrete people under these conditions?

“There wasn’t any division into blocks and no responsible persons were attached to them. The Ministry of Finance, which, naturally, cooperated with the tax administration, worked on the first version of the code. After this a working group which I headed and which included representatives of Ukrainian business and foreign investors joined in. Later, in a month or a month and a half, Borys Kolesnykov headed this group and we coordinated its work together. In the final stage, when the actual codifying was in fact finished, political decisions were made. First of all, they dealt with the key moments of administering taxes and rates. These were very important political documents and, of course, representatives of the coalition were supposed to know them well. I cannot agree with the statement that the Tax Code was written for big business. I believe this approach is wrong and harmful because they are mutually dependent. If appropriate conditions are not created — for both large and small businesses, no one will benefit. The conditions we created for small business, the zero rate income tax for five years and simplified accounting (in fact, these are the tax vacations President Viktor Yanukovych talked about), will be more beneficial for entrepreneurs-legal entities than the previous ones. Regarding the simplified system for entrepreneurs-physical entities, for them we decreased the sales limit to 300,000 hryvnias, but did not introduce the mandatory use of cash registers. We legalized this business, which before was quite wrongly viewed as a money laundering that did not give a person a normal status but turned them into something inferior, something working only in the gray or even black economy. In my opinion, this shouldn’t be the case.”

Will legal entities-entrepreneurs now contribute to the Retirement Fund?

“Yes, by all means.”

In full?

“As much as people getting the official minimal wage.”

Consequently, they’ll get the same pension?

“It can’t be otherwise. They have the right to the pension they earned and paid for. This was presupposed already at the moment of creating this simplified system, and then their pension was even higher than average. At present, we can’t increase the load on the system — everybody must contribute to the Retirement Fund, especially businesspersons.

“Thus, concluding the answer to your question about the moral-political responsibility, I must say that neither I nor the others who worked on the code fear this responsibility. Another thing disturbs me: I hear a lot of criticism today and I am under the impression that these people consider the current tax legislation one of the best in the world. We allegedly defiled something sacred. Everybody forgot that in fact, this is one of the worst legislations in the world and we should be ashamed of it. It scares investors away. I am sure that we will solve the situation and improve the attitude of investors towards Ukraine. When there is constructive criticism and business proposals — there is a second reading ahead — we will listen to them attentively and will correct the code. I understand how important it is. The life of the entire country depends on this document. So the process is not finished yet.”

In the government you have to work with representatives of other forces. Do you find it easy to work and assert your positions?

“Certainly, it’s much easier to work in the government if you have the support of the majority in the parliament or at least a faction, when you can influence personnel decisions. However, I see that reforms are approved, that one can make certain changes. But everybody knows: in any situation it’s difficult to introduce something new because it breaks norms that someone already benefits from. So it’s difficult to modernize the economy. And you don’t expect praise. It will come when we get results. I believe that in some time people will understand that everything was done in a good and proper way. So I have nothing to complain about. I understand one thing – we need to work.”

A bit more than a month is left until the local elections, which will become the most credible survey of the population and an indictor for correcting the course for the government. In its turn, mainly the state of economy and living standards in the country will influence people’s votes. How would you evaluate the current situation and what is your prediction? How quickly will people feel the changes for the better and will elderly people live to see them at all?

“In order to feel an actual improvement, we need daring reforms and fundamental changes, first of all for the business environment. I mean modern progressive tax and customs legislation, terms of getting land and the right to develop it, private form of property for agricultural land, such instruments as real warehouse certificates, insuring risks, etc. If we dare apply them, if we do it, we will have the right to expect that the life in the country will start improving very quickly and people will feel it. Since we see that the courtiers which followed this path reached a better living standards in some ten years. Poland is an example. Do you remember the time when we went to Poland and sold everything we had? And Poles didn’t have their own production, they bought everything from us. Look at it today, Poland actually did not feel the crisis, their average salary and pension is much higher than in Ukraine. Hence the conclusion: those who are not afraid of challenges, who are ready to make reasonable changes, live better. If we quickly make serious changes this and next year, already in two or three years we’ll see some results: we’ll see interested investors who will invest money in new technologies, create decent jobs, average salaries and the level of social security will increase. We will feel it immediately.”

Before the elections the government suddenly started denying that utilities tariffs will increase as a result of the gas price increase for domestic production. Is this necessary but unpopular measure simply postponed until December or until the New Year?

“I suppose that one shouldn’t fear such things either, they should be discussed with people. It’s necessary to explain that we cannot continue equally support both a pensioner and a millionaire at the expense of the state. Until now the state subsidized gas. Today we shift to the socially fair system: pensioners will pay for utilities not more than 10 percent of their income, and employed people — not more than 15 percent. This is normal. Thus, those who get a higher salary and who earn more will pay more. It is fair when rich people support the poor. Regarding the utilities tariffs, in this case it is very important not to forget those groups of the population that should not be harmed. What the government did today in the social sphere is impressive. Even trade unions admitted and stated that they didn’t expect such a simplified approach to getting subsidies — on one page you fill in information about yourself and get a decision regarding your subsidy right away. We see from the rates of filing documents for subsidies that at least 30 percent more families will use the assistance of the state. A lot of debates and politicization will surround this issue, but to be honest, I am not afraid of it. If there were any other ways, more socially acceptable, certainly we would take them. But in any case, we will not prolong the existence of a system where the state supports millionaires who can afford paying the real price for gas and utilities.”

Recently Max Alier, an IMF representative in Ukraine, said: “We saved the building. Now we need to rebuild it and make it safe.” It sounds good, and you’re considered the main person in the negotiations with the International Monetary Fund — the person who provided 15 billion dollars for the country, but also agreed to increase gas prices, utilities tariffs and the retirement age for women. You are also blamed for numerous negative features ascribed to the project of the Tax Code. Granted the situation, do believe in the success of your party during the elections?

“The rumors about my almost unlimited influence, as they say, are very much exaggerated. Can one person in the government possess such powers and control everything that happens in the country? Today such leaflets are dedicated to me (you can see them even on my table), accusing me of all sins. It is convenient for someone to make Tihipko responsible for everything. If the country really needs a person to be responsible for everything, it does not scare or worry me. I am confident that without the International Monetary Fund there will be no stability in the country. I am not afraid of reforms. Those who intimidated us with them led the country to its current state. And they didn’t do anything good for teachers, doctors, or pensioners. These are conservative forces, populist forces, their place is on the fringes. But today they still continue impeding the development and modernization of the country.

“Regarding the future of Strong Ukraine, I know very well who voted for me: the youngest and the most experienced electorate. These people are capable of understanding what the country really needs. I believe in them. People’s support is very important for me. But I think that I should be honest before the people and before those principles which always guided me. Let there be a lot of criticism, but I believe that we will get a better Tax Code. Currently I took on the Customs Code as well, and I am sure that we will get a better legislation for foreign trade. Recently I considered a new version of the provision regulating land for building and development activity. It was suggested to give 71 days for registering licenses but I said: no, there will be 60 days for the investor who would come with money and will start building. And we will forget that outrage when 470 days and hundreds of signatures were required for this. Though there will be tons of criticism regarding each documents. But I don’t have time to pay attention to criticism. I know that the country should be changed, and I will suggest new solutions.”

About future elections, have you made your political choice? In other words, will you continue bearing the responsibility for the work in the government, including the elections, and coordinate your actions with the Party of Regions, or you will move closer to the opposition? By the way, Mykhailo Chechetov, a member of the Party of Regions, already included you in the opposition. Can you really leave the government in this difficult time?

“We have only one choice: to change the country. I do not think that it is a particularly difficult time for the government. We just managed to consolidate the finances. We stabilized, more or less, what we inherited: huge debts (we had to pay five billion dollars each month for three or four months due to the liabilities of the previous government), and unbalanced budget (with a deficit of about 15 percent). But, of course, there are problems too. It is necessary to quickly change the working principles of the tax administration and the customs structures, which simply do not cope with their functional duties and cannot arrange a normal mode of relations with business. If you managed to do it, the situation would quickly improve. But in any case, I’m not going to leave the government. Because we manage to make important decisions. And if reforms don’t go beyond conversations, if they skid, then I can join the opposition. But I’m sure that the government can change the situation and improve its image only by means of reforms, fighting everything that bothers manufactures and impedes them.”

One of the main problems of the government and the economy of Ukraine is the price for Russian gas. The government asks for a decrease in it, and instead is told to give up the gas transport system, receiving a promise that the South Stream will not be built instead. I understand that this is not your sphere of responsibility, but anyway, I would like to hear your opinion as a politician and an economist: will these promises bring any good?

“I suppose if some definite decision is taken on this issue, I may be responsible for this as well. (Laughing.) I do not fear this. However, in my opinion, the position should be unequivocal: we must save our gas transport system. If the North Stream, and especially the South Stream are launched, theoretically we can lose a big part of gas — up to half of what we transport today. This will harm our economy, and there will be quite different figures regarding our gas transport system, despite the fact that our way of transporting gas to Europe is the cheapest and most beneficial economically. I think there is only one way out: we should incorporate this company, we should involve investors from Europe and Russia, who would invest money into the gas transport system. This way we could decrease the company’s debts and modernize it so that it earns more and the state spends less money to maintain it. Thus we would be able to decrease the load on taxpayers as well. But Ukraine should keep control over the gas transport system.”

What is the state of the negotiations about the free trade area with the European Union? Representatives of some fields, particularly, sunflower processing, are worried that national interests can be harmed.

“The negotiations regarding the agreement on the association with the European Union are constructive. Recently we suggested and adopted a number of decisions, which had been expected from Ukraine for years. This includes the Law on the National Bank, which added independence to it, laws on government procurement, gas market, single regulator of utilities tariffs, information protection, etc. Of course, Europeans react to concrete deeds much better than to conversations about them, which were heard for a long time. Regarding the free trade area, which is a part of the agreement about the association, the situation is a bit more complicated. It deals with the real economy and we must make reasonable decisions, which would not just open our market and make it unprotected, but create conditions which will enable our enterprises to freely compete on the open European market. Our agricultural enterprises need it most of all. These are difficult negotiations, but there is a position of the president concerning it, who clearly stated that we would not open the markets unilaterally. Certainly, we need the agreement about the association and it should be reasonable. You should not be afraid of anything. I remember the conversations concerning our joining the World Trade Organization. At that time, everyone worried for agriculture. Today it is in crisis, but anyway it interested foreign investors and they came because this way they got some freedom owing to our membership in the WTO. The agreement on the association will be as or even more efficient. It can be proved by the experience of Turkey, they were cautious as well, but after they joined the association, the trade with Europe increased tenfold. This is advantageous. Most importantly, new opportunities for investors appear. For both European and Russian, which will be interested to work with us when we become a member of the association with the European Union, because we will be a springboard for real manufacturers.”

Experts say that in fall, probably after the elections, rotations are possible in the government. Do you think Prime Minister Azarov will withstand any economic situation? Who could be the most efficient replacement?

“The practice of changing prime ministers twice a year is not justified. This is the wrong approach. A manager should have a normal chance to realize his plans. It is impossible to do anything in half a year or even a year. Besides, I would not make the prime minister responsible for everything. Personally, I can easily share the responsibility with him, because the Cabinet of Ministers is obliged to work as one team. However, one can expect or request some serious results from the government at least after a year. Some signals can be sent much earlier, but it will take at least a year to get results. However, even this is not always the case. I think that Mykola Azarov will continue working, though some changes in the team are possible. I hope they will be for the better. I want to stress that the trust we have today between the coalition, the premier, and the president of the country is a big advantage for us.”

Without much publicity the activity of the previous government is being audited. To what purpose: only to demonstrate the incompetency of the previous government, or also to recapture a part of the illegally spent funds?

“Certainly, one can exploit criticizing the previous government for some time. But as a rule, this possibility quickly runs out, and the responsibility comes to those who directly run the country. I guess the latter of the goals you have mentioned. If possible, it is necessary to return what was stolen to people and the state. Most importantly, it is necessary to block all ‘holes’ and schemes so that there is no ‘leak’ in the current government. Surely, those persons who stole should be treated as Zheglov said: a criminal should be in prison.”

A few unpleasant questions for a public person. (The interlocutor smiles: “Were the previous ones pleasant?”). Before the elections your family was involved in a scandal regarding the not quite legal purchase of an expensive car? What did your personal investigation show?

“It didn’t show anything. The automobile was bought legally, without any violations. The deputy head of the tax service already commented on this situation in public.”

You recently said that you were ready to sell your business. But today the buyers are mostly Russians. They already have a big share of the banking sphere. They probably would not mind taking a dominant position on the insurance market as well. Doesn’t this trouble you? Do you agree that in Ukraine a threshold for the penetration of foreign capital should be established, or on the contrary: given the investments deficit and competition for them in the entire world we should be guided by the principle “the more, the better?”

“We shouldn’t be afraid of any investors. We still do not have any critical investment shares in any sector. Perhaps the activity of investors in the telecommunication business can be a bit scary. But the main thing that prevents excessive expansion and dominance of foreigners is the availability of strong regulators on the specific market. We should also have strong antimonopoly structures. When these services start working honestly, this will be not important who and how much will invest. Concerning the insurance market you have mentioned, I think it is necessary to help our regulator, which perhaps is comparable in scope and importance with the regulator of the bank market. But the insurance regulator is much weaker than the bank one. It has far less people and money compared with the National Bank of Ukraine. And the corresponding legislation is much weaker. The state pays less attention to it as well.

“My businesses, as I already said, are ready for sale. Once real purchasers appear, I will give it up quite easily.”