Tax Reform in Ukraine

One of the first things I heard upon my arrival to Ukraine three months ago was the statement that “государство душит малого придпринимателя,” which means that the government is suffocating the small business owner. It is a sentiment that was present in all of my serious discussions with loan officers, small business owners and general Ukrainian public. I wanted to highlight this point because it is a serious concern for many of HOPE Ukraine’s clients – how to survive in an environment that hinders small business development?

Corruption is present and sometimes blatant in Ukraine, so there exists a general mistrust of the government and its policies. A regular deputat or two have been known to shine a Rolex, Viktor Yanukovych has criminal convictions, Yulia Tymoshenko is an oligarch, and “hostile” takeovers of companies are accomplished with guns – it is all a reality in Ukraine. It is not a surprise then that the proposed new Tax Code is currently a hotly debated issue, especially among small business owners who see it as another attempt to smother their business.

Around ten thousand people actually took it to the streets on November 16^th to protest the proposed tax code as it was given its final reading in parliament in Kiev. There are quite a few issues around this tax code. First, Ukraine is in dire need of modernization as its tax legislation ranks third worst in the world according to World Bank’s “Doing Business” survey. Ukraine’s economy is largely in the shadows, with a lot of employers paying off the books to survive. Second, the recent $15bn loan from MFI came with quite a few strings, one of which was to bring down the budget deficit. Some of it will be accomplished by the recent 50% price increase on gas, some by the new changes to the largely ineffective taxation system.

As the government tries to find wealth in modernization, the small business owner is feeling squeezed, argues that the burden is unfair given the tax breaks for large businesses. Are the big supermarket chains and shopping malls tired of competing with the street markets? Who knows, but aside from the tax hikes, the proposed pension plan reform is also a significant change for many business owners I talked to at the market. An involuntary monthly contribution will be required from small business owners into a state pension fund; it is not a huge amount but it all adds up very quickly when taxes and inflation are eroding profits. The other major hurdle is the mentality. It is very hard to sell a new tax code when most of the population does not see the point of paying taxes to an already “corrupt” government.

While Ukraine sorts its internal affairs out, I personally feel that Kiva loans are valuable more than ever. The majority of HOPE Ukraine’s clients are women who sell clothes or food at the local markets around the country, so the organization and its clients will certainly be affected by the future changes. Plus, for a small entrepreneur it is still very hard to find a trustworthy bank and get a loan without collateral. While these loans are not necessarily life changing, they do help run a business in sometimes absurd conditions. Please consider supporting the following loans currently in the funding stage from HOPE Ukraine!
Margarita Salasyuk has finished her KF12 fellowship with HOPE Ukraine. She will remember Ukraine for its warmth and its survival instinct. Meeting loan officers and clients all over Ukraine was an intense, challenging, informative, real and thought provoking experience that she is grateful for. Margarita is joining KF13 class from Israel and Palestine next.