Oleksiy Honcharuk: Ukrainian business needs a level playing field  

01-06-2016

гончарук

The head of the Better Regulation Delivery Office (BRDO) Oleksiy Honcharuk summed up the ‘season of reform’ on the Ukrainian Radio in the last days of May. You can read how the government’s Action Plan on implementation of the best practices of doing business as reflected in the World Bank’s methodology of the Doing Business ranking is implemented and what problems the Ukrainian business is facing with today in the interview.

– What are the biggest problems the Ukrainian business is facing with now?

– Ukrainian business is in a difficult situation, because the business can successfully grow only when the environment is predictable. When the state is predictable. Alternatively, when the rules are constantly changed, the business can’t feel comfortable, because this fact deprives it of the possibility to plan own activity. In addition, there are many issues remaining in the main areas of the business interest – it is taxation, work with tax agencies, currency regulation (unstable currency). Therefore, it is hardly possible to say that the business took advantage of the positive effect of reforms.

At the same time, there are many positive examples and positive stories happened over the past 18 months. For example, the reform of public procurement (especially, Prozorro), liberalization of many permitting documents transformed from licenses (it was impossible to obtain them) into simpler forms of licensing procedures (declaration, etc.). However, there are still a lot of work we need to do.

– What do overall results of the Doing Business reform season imply? 

– It is our interim event, during which we want to total all pluses and minuses of the period when Ukraine had an opportunity to improve its legislation and thereby improve own positions in this ranking.  Why are they called the reform results? This is because, primarily, it concerns the recognized world’s Doing Business ranking – as May is the last month, when the state can make some changes that will be considered for next year. That’s why we posed the question in this way – the windows of opportunities will be closed and it is time to total all pluses and minuses.

This ranking provides 10 components, which are used to assess the business activity – there are both construction and energy (how easy it is to connect to electricity supply networks) sectors among them – in other words, the business access to, relatively speaking, such strategic resources as electricity, without which it can’t exist. This implies the ease of doing business, simple procedures of business liquidation, bankruptcy procedures – that is the debt collection and others.

However, this ranking is not an end in itself. Therefore, we will try to speak about the best regulatory and legal practices existing in the world and that we would need to adopt, but the period, which could allow us to influence on the ranking next year, is over. Nevertheless, the life is not over – we need the best regulatory practices not only for the ranking. First of all, we need them to provide the ease of doing business. For example, if we are speaking about connecting to electricity supply networks – as it turned out, a large problem for business start-ups in the regions is to connect to electricity supply networks without corruption. This issue should be resolved not for the ranking, but to allow the business to grow. The same is true for taxation.

– What factors exactly are related to taxation – rates or predictability?

– The ranking doesn’t take into account the stability of the law – as for this case, it takes into account the burden that falls on the business and time limits as a resource that the business has to use for certain procedures.

Do we meet the European business standards in terms of this burden?

– Well, the situation with taxation is not very well. The main reason for this unfavorable climate in taxation is instability. We know that we live in a time, when the adoption of the next tax law is around the corner. The end of last year was marked by major changes in this area and now we expect the tax reform. Therefore, the business, of course, can’t feel comfortable in the context of  rapid reforms and continuously changing rules, and it is not a matter of the tax rate. The problem is that rates are not equal for everyone. The business can pay the tax of both 20-30%, 50% and even 70% if all companies pay the same. The reason is that the market will regulate it later. If business owners are on equal footing – eventually, this is put in the price of goods or services that the business provides.

– As for large and small businesses: do we need to make a distinction? Benefits for small business? 

– We mean that there should be equal conditions for everyone. The rules should be equally applied to everyone. If there are ‘tax gaps’ – it means that someone has a competitive advantage due to the fact that he doesn’t pay taxes. This is the main problem, the lack of existing tax laws. There is the same business in the same market, but one business has a certain tax burden, while another one enjoys more favorable terms due to a combination of good contacts and connections, so the state actually discriminates an honest manufacturer.

However, I would like to emphasize that this week is quite busy in terms of economic initiatives for the Verkhovna Rada and there are many draft laws that need to be adopted. The draft law #2418a regarding the reform of state control and supervision designed to simplify the relationship between the business and control and supervisory bodies significantly is among them. These bodies should be more open and have much less opportunities to abuse their right to conduct inspections; also a public electronic database of inspections, where the business can always find itself and be aware of the date of the state bodies visit and be able to prepare for this, should be created. We will also raise a question concerning a moratorium on business inspections – now control and supervisory bodies are still not reformed, so we can’t say that the business trusts them and they have been really transformed into service-providing institutions while being enforcement and punishment mechanisms no more.

– In what country do entrepreneurs trust inspection bodies and wait for them? Isn’t it true that the business always doesn’t trust them?

– This is a common mistake to believe that the Western civilization was built on distrust. The basis of mechanisms operating in civilized Western countries is trust. This differs from the Ukrainian business and Ukrainian supervisory bodies – there is no trust between them. Where there is no trust, transaction costs of communication and relationship building are too large. In western countries, the business not only trusts, it is also interested in ensuring that the control and supervisory bodies work in a proper way, because such a proper work is a guarantee that everyone is on equal footing, as in this case market mechanisms are operating and the business is living in a market environment. This is a key stone.

– If there is a large tax burden on entrepreneurs and business owners, why is the state treasury half-empty? Why are there such problems with government expenditures and social functions performed by the state?   

– It is a complex question and the truth is that there are many reasons… The first reason is the collected funds are not always spent efficiently, so they are not enough. Until recently, there even was no more or less adequate register of persons entitled to social benefits. In other words, the targeting of social benefits is an issue remaining very acute in the state, because we don’t understand where and in what way the funds aimed at providing the required social support to people are used. But it is just a small problem. Speaking of taxes for the business, then… go to Khreshchatyk. Visit any boutique or restaurant and see who will give you a check if you buy a product or service there. This will be a private entrepreneur usually paying minimum taxes. However, Khreshchatyk implies more than a significant volume and turnover of funds and cash. Therefore, when somebody says me that the Ukrainian business pays too many taxes – it doesn’t mean that there are high tax rates in Ukraine. In reality, if you take a look at the amount of taxes paid by the Ukrainian business, it looks like the business says: “Don’t touch us and we will use tax schemes allowing almost not to pay taxes, and instead we won’t monitor the way you spend money we pay to you.” We should break this corrupt social contract and rebuild the tax system in such a way that a boutique at Khreshchatyk or an expensive restaurant in Kyiv doesn’t have any chance to pay a couple thousand hryvnas a month, because it doesn’t reflect a real amount of their revenues.

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