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About Buffalos and Mice. How One Tightens the Screws On Small Businesses In the Guise Of Meeting the IMF Requirements

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The new version of the memorandum with the IMF contains a recommendation to strengthen the requirements for the simplified tax system from 1 January 2018. It is also proposed to cancel the moratorium on tax and labor inspections of small businesses and increase penalties for informal staff employment.

The fact is that the IMF only dictates its will to the Ukraine`s government to live up to income. How to do it, local councilors and technical assistance projects whisper. And these advisers tell the IMF that all the evil in Ukraine comes from small businesses: from traders who work without cash registers to any kind of uncontrolled startups, freelancers and small shop owners. They cite as an example the situation which suits the foreigners`stereotypes about ‘shadow’ economy.

In Ukraine, however, unlike most countries, the lion’s share of the ‘shadow economy’ belongs not to small, but big business. Major abuses take place there. Under the roof of the local tax administrations large companies have established a successful tax evasion industry. That is, tax pits, ‘envelope’ salaries, offshore capital withdrawal and schemes in the stock market… Those who stand behind it attract the IMF`s attention to the simplified tax system, especially since small businesses are in many cases their direct competitors.

To collect a lot of tax form self-employed individuals is basically a bad idea. The role of micro-business worldwide is more social one. This is a way of adapting to business activity, a kind of cradle for business. And at the same time it is a ‘school of capitalism’ and a good example for people of their neighbors started working, not sleeping at night, making their way in the world and earning money. In addition, the simplified tax system serves to compromise unshadowing and eliminates unnecessary – in terms of business – accounting expenditures, particularly onerous ones (and thus unnecessary) especially in microbusiness.

Meanwhile, Ukraine has its own feature: our fiscal services are not tax administration within the meaning of the IMF. In fact, it is a Mykola Azarov`s brainchild – it is more a gang of racketeers with the state license. Their mission is to fulfill the plan of tax (and sometimes corrupt) income plus political orders. It is felt by everyone … except whose who use simplified tax system. Because this system is specially made so that it was difficult to push on businessmen.

What happens if you cancel simplified tax system? Entrepreneurs again go into the ‘shadow’. Those who will not do that will be paying much less taxes, because the general tax system, particularly given the corruption, allows cheating the state much more. Today, according to statistics, the general tax system payers pay no more than the simplified tax system payers. A load on the budget will cause unemployment increase: small businesses which do not want to pay ‘tribute’ will close. It will be laid on taxpayers` shoulders. That is, there will be no improvement in the Ukraine`s budgetary balance, as required by the IMF.

You will find it in a different place. First, you need to reduce budget spending, because with such a load, as we have, the economy does not take off. It only creeps upward.
Second, we need to look for ways to collect more taxes from the big players, who evade form taxpaying on a large scale: they withdraw to offshore each year about 10% of GDP. The same amount of money is laundered by them through tax pits, and so on.

Huge abuses occur when we take into consideration land taxes, not to mention the multibillion-dollar benefits, which are generously (interestingly, in which real motives?) distributed by local authorities. In addition, it is important to mention purely informal sectors such as gambling or amber mining, which the IMF urges to legalize.

Read the full article [in ukrainian] by CASE Ukraine`s Senior Economist Volodymyr Dubrovsky for  ‘Focus’ magazine

March 28, 2017