Who opposes the abolition of “investment tax”?

25-10-2016

gorod

Original text: “Novoye vremya

Reforms mean, first of all, the regeneration of the system and the reengineering of mentality.

Any changes bring to light a lot of dirt, where the corruption and incompetence of the government are hiding in the “comfort zone”, which is out of society sight. And the system “activates” its resistance to reforms to keep “things suitable for all”. In addition, the system appeals solely on the basis of documents and rules “produced” by itself while absolutely ignoring the fact that a main goal of the government in a democratic society is the welfare and rights of citizens and a main document – the Constitution.

Currently, Ukraine has the highest unemployment rate, lowest salaries in the regions and an extra-low for Europe level of housing provision. However, we don’t see any great efforts to create new enterprises or construct mew buildings. While relying mainly on Soviet principles of total control and planned economy, our officials “have produced” a large number of regulations, the goal of which is to create conditions for chasing the money of businesses and the community, over 25 years of independence.

One of the most popular principles regulating starting a business is to increase a market entry cost not to allow new players to compete with companies paying bribes to these officials. The share participation works on the same principle

One of the most popular principles regulating starting a business is to increase a market entry cost not to allow new players to compete with companies paying bribes to these officials. The share participation works on the same principle. Of course, the government “is hiding” own interest with the help of ideas about the need to develop infrastructure and networks. Probably, it has been true 20 years ago, when the state owned infrastructure companies. It will be a manipulation to say that share contributions are essential for the development of engineering infrastructure of cities. Today, private companies own the most of urban infrastructure. Kyivenergo, Kyivvodokanal, Ukrtelekom, Kyivgas, regional gas and power distribution companies have long been included in the largest financial and industrial groups of our country – the majority of companies are owned by private owners (usually we call them “utility oligarchs”). The principles of ownership have been changed, but not the counter-arguments. It is because there is a profit. It is because this allows manipulating the community: the rates can not be affected as the companies are private, but it is needed to collect money for “infrastructure development”, because they were municipal enterprises 20 years ago.

Having 42% of civilized terms

The abolition of share contribution can not have a significant impact on local budgets – for example, according to the State Treasure Service, it amounts only 0.2% of planned revenues of local budgets in 2016. Thus, Ukraine has collected 793 million UAH of contributions (including Kyiv – 333 mln. UAH, 42% of all budget revenues in Ukraine) with planned 486 million UAH.

Special cynicism is that opponents of the reform often manipulate: they say the share participation is an important source to fill urban development budgets. However, they are not a sole source of development expenses – according to Article 71 of the Budget Code of Ukraine, local authorities determine independently how much revenues will be spent for the development. However, in practice, it is obvious that the urban development is not a priority for local administrations and limited only to share contributions that amount not more than 1.8% of city revenues. It is even less in the most of cities: Kyiv – 1.5%, Lviv – 1.72%, Kharkiv – 0.29%, Mykolayv – 0.02%. As a result, we have a poor visual appearances and conditions of cities and villages.

At the same time, no one neighboring European country has such a concept as share participation and the quality of infrastructure and comfort of living is much higher there, because cities expenses are aimed directly at target functions of local authorities – providing the urban environment and infrastructure, which are comfortable for their residents.

Investor awaits – community suffers

The abolition of share participation means, first of all, the investment attractiveness of the country. The World Bank experts estimated that its abolition could attract 2-3.3 billion dollars of additional investments annually to the country. While defending the abolition of investment tax, pubic servants make use of every Ukrainian. In addition, they will use any arguments to defend own interests.

The second attempt to abolish “investment exactions” in construction (share participation in infrastructure development) in the Verkhovna Rada on October 18 was also a false start. They didn’t have enough time to consider it. And at the same time – the “system” had a respond, because there was a real risk of changing principles and rules, which have been fixed and convenient for officials from the Soviet times.

The share participation in infrastructure development should be abolished. It is necessary to destroy the last rudiments of underdeveloped “transition” economy urgently to create favorable conditions for the business and society development instead of the old familiar clan of officials.

What does a share participation essentially mean? Imagine that you are offered to provide a shopping list in a supermarket and immediately asked to pay from 4 to 10 percent additionally “to purchase a new cashier desk”. Of course, they will add that socially unprotected citizens are exempted from paying this fee. They will give clear reasons – old cashier desks are overloaded and it is necessary to buy a new one for your comfort… Is it absurd and ridiculous? However, essentially, it is the share participation. Having faced such an attitude, you as a buyer will simply go to another supermarket, where an owner will equip and buy cashier desks himself. It is clear that the first supermarket will become a bankrupt quickly. The same situation is with an investor, who will find a more favorable environment for his investments. The competition will win.

The main goal of the draft law 3610 regarding the abolition of share participation is to make our country investment-attractive for developing a new business and create a level playing field for all market participants

The main goal of the draft law 3610 regarding the abolition of share participation is to make our country investment-attractive for developing a new business and create a level playing field for all market participants. First and foremost, consumers and the community will benefit from this. Investments mean more jobs with higher wages, more budget revenues from taxes and so on. In addition, this is a strategic decision to develop the society for many years. After all, a main goal of local authorities in all civilized countries is to improve the well-being of city residents and for this purpose, it is needed to attract investments and jobs to the city. Our officials should understand this fact as well.

Again about ratings

Currently, Ukraine has the lowest position in the Doing Business rating among the countries of the region – the 82nd position at the level of Guatemala, Fiji, Uzbekistan and Tonga. Besides Ukraine, just a few countries in the world impose a share contribution on construction developers. For example, if a potential investor would like to build a factory to manufacture electronics in Ukraine, he will have to spend at least 10% more than in any neighboring country. No wonder that in this situation, neighboring countries get investments and jobs of the world’s leading corporations.

Accordingly, this is reflected in the Doing Business ranking’s element – Dealing With Construction Permits, according to which Ukraine has one of the worst positions among countries of the world (Dealing with construction permits part: the 140th position among 180 possible positions). This is a level of economies of Micronesia and Sierra –Leone. And while our country is ahead of its nearest neighbors in terms of normative periods to get permits and a number of steps necessary for this, we have almost the worst position in terms of an aggregate cost of this process. For example, the cost of licensing procedures in our country is 15.2% of the construction cost, where 10% – the share participation, then this is 0.3% in Poland, 1.6% – in Russia, 0.1% – in Slovakia, 0.4% – in Hungary, 2.3% – in Romania and the average over the region – 4.4%.

Someone pays thrice while the elite negotiate

The maximum rate of share participation for housing construction, which creates a main burden to the infrastructure (87% of all real estate built in Kyiv are residential property), is 2.5 times less than for industrial areas. Moreover, to find out an exact amount of charged share contribution, the developer should personally come to the appropriate official. It will be unnecessary to tell that such a scheme is a direct way to the corruption. As a rule, there are special rules for “the elite” of housing developers – local authorities often exempt them from paying share contributions. For example, recently, the Budget Committee of the Kyiv City Council exempted the Kyivmiskbud company from paying 30 million UAH of share contribution. That is why the share participation has nothing in common with the efficient regulation of urban development, but it is one of the biggest sources of corruption in cities.

According to results of the Rolling review of regulations, it can be reported already in the first stage – the inefficient regulation is in those cases where there are exceptions in contravention of common rules

According to results of the Rolling review of regulations, it can be reported already in the first stage – the inefficient regulation is in those cases where there are exceptions in contravention of common rules. To prevent abuses, it is necessary to create the environment where corruption is impossible. First of all – to remove all grounds for “finding solutions through kickbacks”. The share contribution should be abolished just for this purpose by using the world experience.

In addition, the population and the business pay a tariff, which should include the cost of network development, depreciation and maintenance, for using the infrastructure. However, since there is a statement that local government bodies lack funds to maintain and develop the infrastructure, we can conclude that these local government bodies either established a wrong tariff or spent the money paid for using the networks to cover the cross funding of other items of their budgets. Both cases are an evidence of incompetence of local authorities and can not be a ground for the existence of an additional fee.

In developed countries, the infrastructure development of settlements is carried out exclusively based on property tax instead of the “entry duty” for projects.

In Ukraine, this property tax has been introduced since 2015. And in fact, it is much more effective than fees required by regulatory bodies at the level of 4-10% of the construction cost.

The Center for Economic Strategy estimated that the property tax just for owners of apartments in Kyiv (the area of apartments to pay for is more than 60 sq.m) at a rate of 2.4% would fully compensate the planned revenues from share contributions (plan for Kyiv in 2016 – 281 mln. UAH).

At least, nothing prevents to abolish the principle of double taxation that violates the law rules.

Government is a manager but not a caste of “decision-makers”

Article 13 of the Constitution of Ukraine clearly states: “The State shall protect rights of all property rights holders and economic operators, and the social orientation of the economy. All the property rights holders shall be equal before the law,” and Article 42 says: “The State shall ensure the protection of competition in pursuit of entrepreneurial activity. The abuse of a monopolistic position in the market, unlawful restriction of competition, and unfair competition shall not be permitted”. The Constitution of Ukraine has supreme legal force.

Laws and other regulations are adopted on the basis of the Constitution and should be constitutional. Over 25 years of independence, the government hasn’t yet got used to treat the Fundamental Law of Ukraine not like just a set of declarative thesis, but like a main socio-political agreement between the government and the society. This is a main state employment contract for a caste of officials that regulates rights and obligations. No secondary legal act can conflict with this contract.

One of the government’s arguments in favor of “fairness” of the share participation is that “not everyone will pay since there are many exceptions”. The Law “On regulation of urban development” determines ten categories of facilities, the construction of which doesn’t imply paying share contributions, as well as allows local government bodies to exempt construction developers from paying this share contribution at all or reduce the share contributions amount (the Law sets only a maximum possible amount – 4% and 10% of the estimate cost for housing and commercial construction correspondingly). Thus, the current legislation provides for a possibility for officials to determine how much to pay by themselves (with no clear criteria).

One person can decide who will pay 10% for a new shopping mall and who won’t pay anything at all, because he had a “proper agreement” with the government. The infrastructure and people convenience have nothing to do with this. It is more important that they can use “a pie in corruption feeding trough” in the amount of at least 3.1 billion UAH a year. It becomes clearer why officials defend the preservation of existing procedures while hiding behind the community interests.

The economist of the Center for Economic Strategy Oleksandr Kashko provided some calculation reports.

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