Recently, the Association of Ukrainian Entrepreneurs and the Better Regulation Delivery Office presented the Regional Doing Business 2018 rating – a local analogue of the Doing Business from the World Bank, developed using a similar methodology. In the focus of the study, there are six areas of cooperation between entrepreneurs and authorities: the establishment of enterprises, payment of local taxes, obtaining permits for construction, registration of a land plot for a real estate, tying an electrical line and the quality of electronic services. The maximum score, that the regions could receive during the investigation was 600.
And compared to the maximum score, the real results were very modest. At the first place, there was the Vinnytsia region, scored only 334 points, a close second are the Frankivsk and Zhytomyr regions, which scored 332 and 313 points, respectively. The founders of the state, that compared with last year’s indicators, the progress is obvious and some regions have taken into account the recommendations of the experts. In particular, it has become easier to create a new enterprise in the Zhytomyr region. The Chernihiv region simplified the allocation of land plots. The Kharkiv region simplified the requirements for payment and administration of local taxes. Despite the positive dynamics, changes in the business environment are extremely slow, and the solution to some issues has stopped at all.
In particular, two all-Ukrainian problems during the year have not been resolved – the complexity of connecting to the electricity grid and the problem of the shared property, which contains a huge corrupt component and literally frustrates the investment of decent companies. For the year, the indicators for both of these items have even worsened. Accordingly, the positive points are precise and the government is ready to change the rules of the game only where it does not affect the interests of certain officials or business related to them.
The authors of the rating, in order to continue the dialogue with the authorities now at the central level, have arranged discussions on the quality regulation of business by inviting representatives of the Ministry of Economic Development, the Parliamentary Committee on Taxation and Customs Policy, the State Regulatory Service, the Reform Support Office and the representatives of the real sector.
The conversation went deaf and dumb. Despite the loud declarations of the officials and the deputies on the simplification of working conditions, the promotion of development and openness to proposals, the business does not notice that conditions for conducting business in Ukraine have become easier. Changes that are regularly introduced into legislation that regulates the work of the real sector, do not lead to a simplification of the working environment, or even worse. As a result, the fifth year of reform, the frustration of companies from their absence has changed with the expectation that there will be no change at all. For the economy that has fallen by 20% during the crisis and since then has grown at a negligible 3% annually, this is a very alarming signal since only the real sector can actually provide sustainable GDP growth, higher incomes and stable budget revenues.
In the rating of promotion of the iMoPe reforms, by VoxUkraine, the component of the “business environment” is steadily on top by the number of adopted legislative changes, but if we talk about their implementation, then the dynamics is not that impressive. The number of changes, that made business simplification in recent years has increased several times, but the tax administration has not become easier as well as the regulation.
According to the latest annual assessment of the USAID business climate, the main obstacles to business development are high tax rates, complex administration, frequent changes in economic legislation, high regulatory pressure and corruption. Noting that in general the business climate in the country is improving, entrepreneurs point out, that the level of business confidence in public policy remains low, especially when it comes to small and medium enterprises, 58% of such companies regard the state as a barrier to doing business or even an “enemy” of business. With an increase in the size of enterprises, the proportion of those who consider the state an enemy, decrease and the proportion of those who consider the state an obstacle or restriction to business increases. But the percentage of those who perceive the state as a partner, despite all the successes of deregulation, barely reaches up 14%.
The bills made to stimulate business development are registered in the parliament on a weekly basis, and some of them are accepted by deputies, but the real sector is still growing very slowly. One of the main problems is that even after the adoption of the necessary rules, they are just not performed or the start of implementation is delayed for years. Tax legislation is often not interpreted clearly; some fiscal norms can be read arbitrarily, fulfilling them or not, as the case may be. Instructions on administering activities and the requirements of controlling bodies can also be interpreted extensively, literally creating business problems during each inspection.
According to the office of the business ombudsman, in the two quarters of this year, the number of complaints from businesses on abuse of state bodies in comparison with last year increased by 73%. At the same time, 62% of the complaints concerned violations of business rights during tax audits. At the same time, two-thirds of the complainants are small and medium businesses. Namely, those companies that have the potential for growth and should be cherished by the state in order to accelerate the GDP growth rate.
Entrepreneurs are outraged that in most cases they are concerned with small, sectoral issues, which as a rule nobody even pays attention to because in top corner offices they only think about global things. In the rest, this is the problem of the failure of deregulation in Ukraine.
Common electronic document management will gravely simplify the life of business and also controlling bodies, since it speeds up all checks, allowing to carry out most inspections remotely. Moreover, electronic document management is transparency, not just for doing business, but also for the work of controllers themselves, which significantly reduces the risk of corruption in many areas of business. But the reform has been prolonged for years and is not even close to the end.
In fact, all means for further promotion of this reform already exist now, each businessman has electronic keys, the State Fiscal Service (SFSU) accumulates a lot of information about the activities of companies on its servers, in addition, the service is constantly working on improving various risk assessment systems in the activities of companies , software developers are always ready to offer the state and businesses solutions for the implementation of any idea and this market has very keen competition. In fact, the only reason for the slow transition to the electronic document management is the lack of understanding of the business needs by state.
In most cases, top corner offices do not have a clear idea of what changes might make it easier for companies to work. They are more concerned with tax revenues to the state budget. In particular, entrepreneurs, whose activities are subject to excise taxes are outraged by the fact that the rates of excise taxes are indexed by the Ministry of Finance without discussion, in addition, the percentage of indexation is not always clear and the formulas are not transparent. Often, companies perceive it just as a simple desire to collect more taxes and fees to the State Treasury. At the same time, the government does not take into account the fact, that an increase in the tax burden leads to a reduction in working capital of companies and, in the rest, to a decline in production and the actual volumes of tax payments in the future.
Also, entrepreneurs who work legally, and pay taxes, are dissatisfied with the absolutely uncompetitive conditions of work in the state. In the market, especially in the retail sector, there are a lot of entrepreneurs who do not even give fiscal checks, therefore, they do not pay any taxes at all. Why does the fiscal service fail to notice these companies for years, and the government ignores this problem? It can be only explained as a corrupt conspiracy. Such an attitude of power to business is offended by the real sector, because in fact, those who regularly pay taxes are forced to work in non-competitive conditions in comparison with those companies, that do not pay anything at all, but as soon as the state needs funds, it looks in the pocket of legal business, not even trying to find free funds in the shadow economy of the state. At the same time, working legally, entrepreneurs are burdened with significant outdated norms of work, such as accounting books, which have been trying to cancel for a year, but the things aren’t moving.
The lack of dialogue between the authorities is the main reason for another business-worrying problem of “legislative spam” in Ukraine. The number of changes introduced by the parliament to domestic legislation is obviously excessive; these changes are not always necessary and useful, but business must take into account them in their work, constantly changing the models of work, the principles of documentation, reporting forms, etc. Moreover, often during the implementation of EU legislation, the rules of the union are simply copied without taking into account Ukrainian realities, as a result, laws that are not implemented, because they simply can not be implemented – multiply. This significantly worsens the planning of work in the future, and often entrepreneurs do not want any changes.
A perfect example is an uncertainty about the next tax reform that should start from the new year. According to the tax law, any changes related to the tax system should be implemented six months before the start of the new fiscal year, so that entrepreneurs have time to adapt to new working conditions. For many years this requirement has not been fulfilled. This year, the situation is repeated again, three months before the start of the new fiscal year, the situation with the replacement of the tax on income tax on the withdrawn capital remains uncertain.
According to the latest data, the Ministry of Finance offers the IMF a completely neutral option for tax reform in terms of its impact on the budget. However, the fund still considers the change in tax policy to be untimely and unreasonable. Even finding compensators for possible budget losses, in the amount of 35-48 billion UAH, the Ministry of Finance can not reach the agreement with the fund. It is possible to understand the lender of last resort – next year the country will have to pay a significant amount of money to external creditors, to survive the elections, to form a new government and parliament. All of these factors are risks, and the IMF simply does not want to add to them another one, in the form of a new tax. But even if the Ministry of Finance can persuade the IMF to replace one tax with another, it will be a challenge for the business, and not a victory, as for the time that is left until the new year, the fiscal service will not have time to master the administration of the new tax, and the entrepreneurs themselves will not be able to master the new requirements for tax reporting. So, most companies will not be able to avoid mistakes, fines and penalties. This is just one of many examples of how the state systematically ignores the interests of the real sector.
In fact, it is very difficult in those circumstances to expect the increase in the tax culture of companies and the maintenance of payment discipline. On the basis for relations between the state and business should lay trust and respect. Without these components, entrepreneurs are convinced that the state considers them only as a source of cash receipts, one way or another will seek ways to optimize the tax burden and withdraw money from the country, instead of reinvesting them in the development of their business. And the state, that is convinced that everyone wants to deceive it, will continue to put a break on the deregulation reform in order to keep control of the real sector. Unfortunately, the state does not understand this, once again denouncing that the shadow sector of the Ukrainian economy has grown again to 40%, and this requires strengthening control, the introduction of new requirements for activities for players in different markets and regular changes to the legislation, that would provide for new fuses, and therefore regular barriers for the development.