Ukraine’s Business Ombudsman on Evolution From Oligarchy to Capitalist Democracy – Kyiv Post Interview (Part II)

The Business Ombudsman Council was established in 2014 and aims to protect legal business rights before the state. Since then, it has saved companies in Ukraine more than half a billion dollars thanks to its investigations.

Roman Waschuk, appointed as the chairman a month before Russia’s full-scale invasion of Ukraine, in January 2022, spoke to Kyiv Post about post-soviet habits of tax inspectors, why Ukrainian entrepreneurs like the Polish tax system more than Ukraine’s and what can be done inside the country to win the hearts of businesses.

Though Ukraine is often perceived as a corrupt country, corrupt practices are not usually the reason why the country’s economy has suffered – it’s mostly the bad governance of the State’s Tax Service, the customs agency or law enforcement.

I recall a recent interview the Minister of Finance Serhii Marchenko gave to Ukrainian media where he was talking about new taxes to finance the defense needs. But when asked about the tax evasion, he replied this is the work of law enforcement, not the tax service.

One would think of this as an image that the Ministry of Finance does not control the State Tax Service. Who owns the who has the ownership of the tax service and should set the KPIs then? 

I come from Canada, a country that has a doctrine of ministerial responsibility. Now, not always 100% implemented, I’ll admit. But I’m of the view that fiscal services, and in the case of Ukraine, the tax service and the customs service, are subsidiary entities of the Ministry of Finance, should be guided by the goals of the Ministry of Finance and, indeed, should be part of the policy and implementation package, that is guided by the Ministry of Finance. 

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What we saw, what we’ve seen since 2019 – this reflects a trend, a longer trend that precedes 2019 – the system rejecting an attempt to put in new people with new approaches, Maksym Nefyodov and Serhii Verlanov.

[Both were appointed as the Heads of the State Tax Service and Customs Service but were ousted in 2020. Verlanov stated the reasons for his dismissal were political – Kyiv Post].

Formal reasons were found for ejection. And ever since then, we have had acting heads of tax and customs. Everyone at the local and regional level is also acting.

So, nobody really has the security of knowing that I’m gonna have my job tomorrow. 

The Ministry of Finance, the government more generally, the political authorities, should have a new head of customs or head of tax at the time to make changes. You can’t say “You’ve had 32 days and haven’t doubled tax, you’re no good, out you go.”

You need to have an empowered person, and a plan for 1 or 2 years with a clear signal.

So, the Ministry of Finance should give this signal?

It should be the Minister of Finance, the Prime Minister, and the President. This needs to come from the top.

I also wanted to talk about law enforcement, which also becomes the object of criticism from the business sector. You’ve met Prosecutor General Andrii Kostin twice and signed the standards for prosecutors’ activities in the field of investment protection during pretrial investigations. Do you see signs that they took it seriously? 

The standards are already the order signed by Kostin at our April meeting.

I was on a regional visit to Cherkasу in early summer, and the prosecutors there said this was going to be part of our year-end evaluation process. At least people working in the regions are aware that this is now a criterion or a set of criteria against which they will be judged on performance at the end of the year.

I think there is a desire on the part of Mister Kostin to ensure that or to try and prevent cases from coming to him. So that public administration problems would not become law enforcement problems. 

Do you think prosecution still has a wish to prosecute for no obvious reason, as it was before? Has the approach changed?

You have a situation where the prosecutor’s office no longer actually prosecutes, because it is up to the individual agencies to investigate.

So, what you have is a situation where locating responsibility is again difficult. 

You can’t undertake these reforms of individual agencies in isolation. Ukrainian leaders, political leaders, and also donors need to take a more system wide approach. And that’s painful because it’s complicated. But Ukraine is a complicated country, with a very formalized legalistic tradition.

Even though the laws have changed, the spirit hasn’t always changed, especially on the middle level of employees. And you have both civil society and donor inspired anti-corruption, hyper integrity, et cetera stuff can also end up having this kind of freezing effect on officials.

A proactive approach to business does not mean favors – but it could avoid two years of wasted resources in fighting about something that could have been fixed with a phone call.

It’s also very trendy and cool to set up something new. You set up a new agency, it’s got a new logo, you cut a ribbon. It’s a lot less sexy to dismantle no longer necessary or relevant parts of old structures.

So, you know, Ukraine needs people for renewal. Maybe the thousands of people on the economic side in the Ministry of Internal Affairs and National Police could become project managers. Ukraine needs creative restructuring in public administration. And releasing people into the economy where everyone says there’s a lack of workforce. 

Speaking of the workforce. Ukrainian refugees abroad are of working age and are often entrepreneurs who relocated their businesses abroad, according to researchers of both American University of Kiev and the Center of Economic Strategy. It could be perceived that Poland does not have the logistics and safety problems Ukraine has.

When asked what Ukraine can do to return them home, they may have a list of requirements including a perfectly working rule of law, lower taxes and tax administration “as good as Poland has.” Ukraine does have problems, but can we propose anything to people who have seen better business climates?

The Polish tax system is quite complex, especially for small and micro businesses. Way more challenging than Ukraine’s, but it is predictable and non-predatory. If you’ve filed the documents, things are going to be fine.

In fact, the Polish VAT system is much more invasive – all your transactions go through a single account per company between you and the tax office, a bank account that is monitored in real time. In Ukraine, it is impossible since bank secrecy is sacred.

Ukraine as a state needs to reestablish its credibility with businesses. Are Ukrainian tax rates extraordinarily high? No. What is extraordinarily high is the number of fines and inspections and things that come upon you, and that makes people distrustful.

Ukraine’s National Revenue Strategy, though a bit controversial, just aims to fix that. 

But that’s weird because, though I also read the same thing in the National Revenue Strategy, I have been thinking about it a lot right now. The Ministry of Finance was saying that we should reestablish trust, but then reimposed new taxes just several months afterwards since the defense spending was pushing them. 

I have quite a bit of understanding of the Ministry of Finance and the government here. We are in a situation where there has been a full-scale war since February of 2022, but there has been no substantive change in taxation since then.

Let’s be realistic. You need more revenue. Strategically, you would want to have that discussion and keep to the 6-month deadline as foreseen in the tax code. 

But if that means the armed forces not being paid in November, that’s a bit of an extraordinary circumstance. We’ve seen a kind of backwards consultation process that has happened, but it’s been a consultation process, nonetheless. In other words, it would probably have been better if it had gone out in the spring and summer.

If we were to change something tomorrow, what are the 3 first tasks on the to do list that the State can resolve to improve business climate?

I would say first would be to implement the new reboot laws on Bureau of Economic Security and Customs in the way they have been voted on. Don’t try any backdoor maneuvers with it. That will help reestablish trust.

Secondly apply a consult first approach. That doesn’t require changing all of Ukraine’s laws. It’s already in the law of the administrative procedure. Ask questions first. Provide time to fix technical mistakes. Don’t punish initiative. 

Third is, after you reboot the Bureau of Economic Security and customs, apply the same principles to the state tax service.