Former Deputy Prime Minister of Bulgaria: When implementing tax reform, additional funding sources must be envisaged


Kyiv, February 23, 2016. Ukraine should not only implement tax reform, but combine it with other reforms which will provide additional extra revenue to the state. For instance, privatization must take place, said Simeon Djankov, visiting professor at the London School of Economics, former Deputy Prime Minister and former Minister of Finance of Bulgaria, at a round table discussion at Ukraine Crisis Media Center. “During first years of implementing the reform, the government must have additional funding sources and serious privatization program. This is what Ukraine needs,” said Djankov. The professor believes that Ukraine has no strategic companies in the production sector worth of remaining in the ownership of the state.  As a result of such business situation, the system remains corrupt. “When the government and politicians in general have access to huge amount of money, it becomes the biggest source of corruption, not only economic, but political. Such political corruption results in distortion of the entire democratic process,” said Djankov.

According to Djankov, implementing tax reform in a country with economic upswing is easy. Nevertheless, Ukraine’s macroeconomic situation at the end of last year was difficult, so it is evident that implementation of the tax reform can yield no instant result. Moreover, the countries in such circumstances usually implement reforms in stages, improving taxes management and reducing tax benefits. This is what Georgia and Estonia did in due time, said the former Deputy Prime Minister.

Ivan Mikloš, MP of Slovakia, chief advisor to the Minister of Finance of Ukraine, former Vice Prime Minister and former Minister of Finance of the Slovak Republic, explained that the tax reform in Slovakia was implemented on single-step basis. Single tax was used to simplify the system, excluding any additional schemes or special rates. According to Mikloš, former taxation system contained over 80 different tax rates. “Following the reform, only one tax rate remained, i.e. 19% for any tax including VAT,” said Mikloš. Moreover, transfer tax, dividend tax, estate tax etc. in Slovakia were reduced.

Economic reforms are rather political than technical in any country in transition, said the Member of Slovak Parliament. “History of tax reform in Ukraine is the clear evidence. There are political reasons for brilliant comprehensive liberal proposals regarding tax reforms being wasted and defeated, not only those coming from the Minister of Finance, but the government too,” said Mikloš. He added that it was the first comprehensive reform in Ukraine, but it had never been implemented. According to Mikloš, it is crucial that the tax reform is a part of a wider package of structural reforms. Former Vice-Prime Minister named political motivation as the biggest hindrance on the way to reforms, in particular, basic rules of the game, distribution of power, relations in coalition government etc.

“Reduction of labour tax and solving the problems with VAT repayment are two huge problems,” said Pavlo Kukhta, economic expert of the Reanimation Package of Reforms (PRP), disagreeing with Mikloš’ opinion. He admitted that sometimes the reform was quite chaotic, but it was a huge step forward.  PRP expert said we still have time to make progress in the sphere of unitary tax system. “We face a problem of receiving 10% GPD of income tax, so-called labour tax,” he said. Nevertheless, discussion between the government, parliament and non-governmental organizations regarding tax management continues. According to Kukhta, misuse of powers by fiscal service is upsetting. “Nevertheless, the change took place, regardless of all the chaos,” stated the expert. Moreover, he emphasized that it is worth while remembering that optimization and reduction of overextended expenses took place, when speaking of other reforms and processes, including privatization. Same time, he believes that implementation of tax reform will take several years more.