Tetiana  Potopalska

How do businesses pay taxes in Ukraine? Why is a balanced tax system so important for the development of any business: both...

How do businesses pay taxes in Ukraine? Why is a balanced tax system so important for the development of any business: both private and public? Tetiana Potopalska, leading expert and taxation advisor of the president of the state company «Enerhoatom», told to LDaily.

potopolskaya 1

Exit capital tax will prompt business to give up the unlawful tax preferences

27.03.2020 (№ LDaily #2)

How do businesses pay taxes in Ukraine? Why is a balanced tax system so important for the development of any business: both private and public? Tetiana Potopalska, leading expert and taxation advisor of the president of the state company «Enerhoatom», told to LDaily.

After a conversation with Tetiana Potopalska, the catch phrase of Benjamin Franklin calls to mind. It says, «in life you cannot avoid two things – death and taxes.» For obvious reasons, we won’t speak about the first one, but the
second statement is arguable, and Ukrainian businessmen proved it.

LDaily: Tetiana, you as a representative of the state company, for sure, have a lot to tell on the specifics of this business in Ukraine. Some people believe that the public sector in our country practically does not raise money, and the majority of state enterprises are at a loss. Is it so?

T. Potopalska: This is a stereotype. State companies will be able to earn as well, if they are allowed to do it. I can explain. Maybe you have paid attention to the latest list of the largest taxpayers in Ukraine for 9 months of 2016, presented by one of the local periodicals.

Top 10 taxpayers are represented by two state enterprises and 5 enterprises with the state share in the capital stock

It is not because the companies belonging to the state receive excess profits: they just pay more than non-public companies, 75 % of net profit to be precise. 25 % remains for the development of an enterprise. The world practice shows that withdrawals should not exceed 30 % in order for the public companies to be effectively functioning. 50 % already put them on the brink. And having 25 % remained, any modernization or development seems to be impossible. In Ukraine, terms for the public and the private sector are not equal. Working capital is not enough, and these companies are simply left on the brink of survival.

At the same time, there are certain sectors in which the state monopoly is necessary, for instance, atomic power energetics. I often meet people promoting the idea of absolute privatization: everything should be sold. Nevertheless, here you need to be aware that simply not every company can be transferred into private ownership. Sometimes it can endanger not only national interests but state security as well.

LDaily: Tetiana, what tax system would you like to see in Ukraine?

T. Potopalska: I want it to be reasonable (smiles). It concerns not only the tax rate. Worth mentioning that in
Ukraine we have not the highest taxes compared to the European countries. However, our system lacks stability. Every year some drastic changes are introduced to the Tax Code, so it is difficult for business to adapt to the constantly changing conditions.

In addition, I think the tax system in our country should be the result of joint work of business and government.

entrepreneurs and Ukrainian authorities should reach a consensus and focus their efforts on the country’s development, not only on the budget formation or personal profits as it happens now

You know, today in certain corporate circles non-payment of taxes is a steady trend. Of course, it doesn’t concern everyone. However, in Ukraine for representatives of small and medium-sized businesses the simplified taxation system has existed since 1999: more than 15 years. We must honestly admit it hasn’t given the expected result. On the contrary, today these weak points of the tax laws are used to minimize taxes. It is almost impossible to check who pays taxes and how much all around the country. Respectively,

something has to be changed. Accordingly, it is necessary to create such conditions that make non-payment of taxes disadvantageous per se

LDaily: What do we need for this?

T. Potopalska: A lot. But now Ukraine has a unique chance. 2016 was a year of tax initiative concerning the exit capital tax. Today, there are legal grounds for the Ministry of Finance to draw up a respective Draft Law. Further actions remain a concern of the Ukrainian establishment. Nonetheless, in my opinion, the idea is progressive and worth attention. Firstly, exit capital tax will prompt business to give up the unlawful tax preferences. The main idea of the new approach is that only the amounts “extracted” from a business on the owner’s decision shall be subject to taxation. Thus, the owner can foresee everything, and it makes it possible to show the real financial picture of the company. Secondly, the model proposed will allow enterprises to invest more in its own modernization and create new jobs. A similar tax system functions in Estonia now and from the 1st January it will be introduced in Georgia.

LDaily: Could you provide some statistics: how many companies in Ukraine do not pay taxes today?

T. Potopalska: It’s quite difficult to talk about any figures in the context of this question. Furthermore, accurate data on companies evading taxes basically do not exist. The only thing I can say – many companies surely minimize taxes. This applies mainly to small businesses. Large companies, businesses with foreign capital and medium-sized businesses in most cases pay officially shown salaries and the necessary taxes in full.

On the other hand, the branch of industry should also be taken into account. For instance, when we talk about
one of the fastest growing branches, i.e. IT-business in conditions of the Ukrainian market, very often the company’s employees are registered as sole proprietors. And it doesn’t violate the law. Although in fact, it is the minimization of taxes. That is when it comes to the entrepreneur who heads the company having some average profits, certain production volumes and office in Kyiv, but a salary slightly exceeding the minimum wage rate, such a situation raises some questions to the existing tax system.

LDaily: Tetiana, and what about taxes in European countries? I’m sure you know.

T. Potopalska: Western Europeans and Americans consider official employment and salaries as their social insurance and contribution to the future pension support. In Ukraine, many people lack the understanding that the
state is not obliged to provide a person not working or not paying taxes with maintenance. Thus, we shall be willing to take responsibility for our own future.

LDaily: How do you think is it possible to consider imperfect Ukrainian tax system as one of the main obstacles to attracting foreign investment?

T. Potopalska: No. From my point of view, instability of the national legislation and foreign exchange restrictions
are the most critical ones. After all, every person doing business wants to receive some dividends from it. In this sense, the Central Bank’s policy not carrying a possibility of receiving profits in foreign currency does not stimulate
the investor.

It should be also noted that the lack of qualified personnel is an important issue in the context of attracting investments to Ukraine. On the one hand, this is caused by emigration of many talented young people abroad in search of a better working environment. On the other hand, over the past 20 years, we, Ukrainians, have forgotten how to perform certain tasks. Often the work is performed for process per se, not for achieving the ultimate goal. And the problem is not always in employees, but in national business as a whole, and it is the lack of clear goals. That is, blurring of responsibilities takes place: everyone does perform their own part of work, but all together, it
does not work. Therefore, what we need here is a clear strategy, in frames of which each team member understands their exact role and, at the same time, what the final results are to be.

However, in this regard, there is another obstacle:

lack of the national development strategy. In Ukraine, it is very difficult to predict which bank will go bankrupt tomorrow, or how will change the legislation in the next few years. To be honest, in our country forecasts cannot cover the period of more than a year

LDaily: Can you say based on your experience that some specific business culture starts to form in Ukraine?

T. Potopalska: Business culture is a very complex concept. When trying to understand it, firstly association with business ethics comes to mind. In this light, I would say that there are some elements of the business culture in Ukraine, but probably there is no overall national culture. Do you know why? We just should recall how the
local entrepreneurs used to solve problems arising from time to time with regulatory or law enforcement authorities. Not always it lies within the legal or “cultural” framework. As long as such practices continue, it’s too early to speak about the widespread culture of doing business in Ukraine. It exists, but mostly among large companies with foreign capital.

LDaily: How do you think, what business area is the most promising in Ukraine?

T. Potopalska: First of all, I would like to emphasize that Ukraine should use its export opportunities qualitatively. And I’m not talking about the export of raw materials and intermediate products like ferrous metallurgy, pipe rolling, rolling, or grain. No. It’s time to think about the export of derivative products, which have the value added. These are ferrous metal products, this is flour at least, not grain. Such initiative could give not only additional revenue but also help to create new jobs.

IT-business is another promising area. But again: its potential should be used taking into account the domestic market. The synergy of innovative developments and domestic industry could give a good result. If there are orders for IT products or services from the national employer, it will allow Ukrainian IT-business to develop here and not to work for the Western consumer.

In my opinion, energy and logistics industries are promising as well.

LDaily: If you decide to leave Ukraine, where would you go?

T. Potopalska: I love Italy. I know the Italian language, and I really like it there. However, it is not easy to live in
that country now. On the other hand, Ukrainians and Italians have similar mentalities. Well, I cannot but mention
that Italy has a very interesting taxation system (smiles).