Bread-Basket To Basket-Case

By Global Tax Weekly

It used to be known as the bread basket of the Soviet Union. Now Ukraine is more like the economic basket case of Europe. What’s happening in the east of Ukraine right now is truly tragic. But leaving aside that ethnic conflict, the other tragedy is that things ought to have turned out so much better. When Ukraine gained independence from the Soviet Union, it was generating one-quarter of the USSR’s agricultural output while its diversified industrial sector was one of the bloc’s main workshops. But instead of building on this base, successive governments seem to have squandered Ukraine’s economic potential to the point where it has probably gone backwards rather than forwards. A huge problem is that corruption is rife and pervades the public and private sector at all levels. Surviving as a business very much depends on who your friends are, and while some well-connected business people are able to avoid paying taxes entirely, others end up paying two or three times more than they need to, with the excess usually going into the pockets of poorly-paid tax officials. Fail to pay these almost obligatory bribes and expect a visit from the Tax Inquisition. And don’t even bother going to court because the judiciary is just as bad, pressured as it is by the Government to arrive at the “right” decision in many cases. Corruption was the major reason given by European businesses for their reluctance to invest in Ukraine in a recent report by the US State Department and is probably the reason why FDI has been so dismally low in recent years compared with other emerging economies. Not that attempts haven’t been made to modernize. Indeed, the country’s flirtation with the EU was seen as a significant step in the right direction. However, the tug-of-war between East and West over Ukraine has probably been just as damaging for the country as its weak and self-interested governments. Surprisingly then, we award Ukraine an encomium this week, after Prime Minister Arseniy Yatsenyuk ordered a tax reform which has as one of its goals the reduction of corruption within the tax service. Although it has to be said that his motives for doing so aren’t exactly driven by a sense of idealism. What he is trying to achieve is to ensure that more tax revenue actually reaches the Government’s coffers so it can afford to fight the Russian-backed rebels in the east. Shame though that it has taken such a crisis for action like this to be taken.

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