EU has new requirements for Ukraine

In order to become an EU member, our country needs to reform its tax, labour laws and public administration. How difficult will it be to fulfil these requirements?

The European Commission is requiring Ukraine to raise taxes, tackle undeclared work and corruption. How will we fulfil these requirements?

New requirements of the EU

The European Commission considered Ukraine’s application for EU membership and evaluation the real situation in the tax and labour spheres as well as in public administration of our country.

In order for Ukraine to join the European family and for Europe to open its doors to us, our country to fulfil a number of new requirements.

The European Commission evaluated our tax sphere, the sphere of employment and social policy.

Regarding tax legislation and tax discipline, the European Commission gave Ukraine only 2 points in its report. The Commission recognized that the VAT complies with the standards (the rate of 20% corresponds to the one agreed in the EU), stated that Ukraine needs to improve the electronic mode for the movement of goods, that we do not have a rule on the exit tax [from the jurisdiction] and that no general anti-abuse rule has been introduced.

Notably, the IMF also demands that Ukraine increases tax revenues and ensures maximum transparency of tax administration.

The European Commission gave even a lower score to the employment and social policy of Ukraine – only 1 point, which corresponds to the initial level. The commission stated that undeclared work continues to flourish in Ukraine, as before, which leads to much lower level of taxes paid. Also, stress has been made on insufficient compliance with safety regulations at work. In addition, Ukrainians are far from achieving gender equality in terms of equal pay and access to management positions.

The European Commission recommended the following steps to improve the situation:

• inspect all enterprises regarding undeclared employment,
• reduce the level of undeclared employment, ensure the real equality of rights of women and men.

In the area of free movement of workers, our readiness was also assessed at one point. The EU requires that Ukraine creates conditions, in which an employee living in any of the EU countries could easily come here and find decent working and living conditions.

How will we fulfil the requirements?

Judging by the statements of high-ranking officials of Ukraine, our country plans to fulfil the EU’s requirement to raise taxes and strengthen control over their collection.

Danylo Hetmantsev, Chair of the VR Committee on Finance, Tax and Customs Policy announced the return to the pre-war taxation system as early as this summer. Tax audits will resume at the same time. Also, every business entity must install a registrar of settlement transactions – RST.

In turn, the Finance Ministry of Ukraine announced the return to the pre-war taxation system. The government of Ukraine approved a new draft law specifically for this purpose. It provides for the abolition of benefits introduced at the beginning of the war.

“The draft law introduces changes to the Tax Code of Ukraine and a number of laws that provide for suspension of the effect of certain norms of legislative acts introduced for the period until the end or cancellation of the martial law in Ukraine, starting from July 1, 2023,” informed a representative of the Finance Ministry. This applies to the following: cancellation of the use of the 2% tax for individual entrepreneurs and legal entities that are flat-rate tax payers of the III Group, and cancellation of exemption from taxes for individual entrepreneurs that are flat-rate tax payers of the I and II groups; renewal of documentary audits, expiration of time limits specified by tax legislation, fines for violation of tax legislation, etc.

Oleksandr Okhrymenko, President of the Ukrainian Analytical Center, believes that the taxes must be raised, otherwise, the EU will not accept us.

“The USA and EU gave use money now to cover the national budget deficit; the amount is colossal – UAH 1.4 trillion. They do not understand why small and medium enterprises in Ukraine do not wish to pay taxes. So, the government will have to increase taxes in order to support the European course of the country and continue to receive financial support of the West,” says the expert.

He says that the tax authorities have already done a lot to increase fiscal pressure, and once, cash registers are introduced and preferences for flat-rate taxpayers are abolished, tax proceeds will increase manifold.

In turn, Ivan Nikitchenko, Director of Crane IP Law Firm, says that Ukraine does not have a choice. If the country wants to continue to receive financial support from Europe and become an EU member, it has to collect maximum available taxes on its own. In order to achieve that, the government needs to abolish preferences that were introduce at the beginning of the war.

Maksym Oryshchak, analyst at the Center of Exchange Technologies (CET), also believes that returning to the pre-war taxation system is a logical step, as Ukraine needs proceeds to its national budget.

If we fail to do this, we may have issues with obtaining foreign loans, because nobody will want to give money, if we haven’t exhausted our own resources. To ensure external support, Ukraine needs to collect taxes and increase tax revenues.

At the same time, there is a danger that as a result of return of taxes and inspections, part of the business will move into the “shadow”, and some companies will shut down altogether.

Thus, Oleksandr Boltyan, an analyst at the Esperio company, believes that increased control and pressure on those who evade taxes may lead to the closure of enterprises.

Oleksandr Boltyan, analyst at Esperio, believes that increasing control and pressure on those who evade taxes may lead to closure of companies.

There is also the danger that businesses will not take the change easily.

Okhrymenko says that the increase in taxes will cause dissatisfaction among businessmen. In his opinion, however, it is easier to implement the reforms in the conditions of war, you can always claim that all dissatisfied parties are agents of the FSB or the Kremlin.

At the same time, Nikitchenko believes that there will be businessmen who will suffer from the return to pre-war taxes. He also believes that no disaster will happen, and the increase of the tax burden will not be critical for Ukrainian businesses.

As for the fulfillment of the requirement on fighting shadow economy and undeclared employment, we have laws that allow inspections of undeclared work, according to Okhrimenko. The mechanism worked before the war, but now the inspections have been simply abolished. If they are reintroduced, there will be less undeclared work, and the proceeds from taxes on wages and unified social tax will increase.

As regards to fighting corruption, Oryshchak says that Ukrainians are welcoming anti-corruption reforms, because everyone can witness how the budget is being embezzled even during the war. Therefore, in conditions of weak reporting to creditors and the people due to the war, corruption remains the main issue that needs to be resolved. It is however, difficult to say whether this task can be tackled now, when it wasn’t even resolved in peacetime.

He believes that this is the most difficult requirement of the EU. Unfortunately, it has become customary in Ukraine to accept bribes. Therefore, it is not beneficial to the government to counteract corruption. A lot of violations in tax and budget spheres are committed by the officials. Sometimes, people run for the office just to line their own pockets.

Overall, experts believe that Ukraine must fulfil the EU requirements no matter how difficult it may be for some categories of the population.

“The EU is asking Ukraine to take the right steps, if the country wants to become a member. It is impossible for Ukraine to keep its rules and be accepted to the EU,” sums up the expert.

Korrespondent.net