Good morning, ladies and gentlemen, and it is a real pleasure to be with you here at Parkovyy in Kyiv.
The World Bank welcomes a summit focused on tax reform and anti-corruption as both are very important to achieve the multiple objectives that Ukraine is currently pursuing as it fights an all-out invasion by Russia while keeping its economy afloat and rebuilding following damages caused by Russia’s war.
Tax reform and tax administration always have several, and sometimes competing, objectives.
Clearly resource mobilization is a key objective, especially now and in light of a needed fiscal sustainability framework.
Efficiency gains is another which has to do with the administration of taxes and the enforcement of tax collections.
Tax reforms also play a major role in facilitating economic growth, particularly in attracting investment and increased activation of the private sector.
Since 2015, Ukraine has been undertaking steps to reform its tax system and these efforts were still ongoing at the time of when the war started in February 2022.
So despite several years of tax reforms, Ukraine continued to struggle with the right balance between fiscal sustainability, improving social standards and stimulating the economy.
As we meet here today, the war has substantially impacted economic output, disrupted labor allocations, and destroyed productive capital.
The authorities enacted emergency tax reforms at the onset of the war to ease the compliance burden on firms and facilitate tax administration.
In the coming months, there is an opportunity discuss and design tax reforms that can:
Contribute to closing the fiscal gap during the war, and
Enable a more efficient, equitable and competitive tax system to support post-war growth.
The fiscal outlook in the medium term will likely require substantial resources both to sustain social services and ensure post-war reconstruction and recovery.
While foreign aid will likely play an important role in these efforts, domestic revenue mobilization will also need be strengthened to ensure sustainability over the medium-term.
This makes it difficult to envisage any tax measures that entail revenue reductions, in the short run.
EU accession also creates an opportunity to improve the efficiency of Ukraine’s tax system and eliminate inefficient tax expenditures.
Our experience in other countries show that:
Careful reduction in some rates such as VAT, accompanied by an elimination of certain exemptions, can increase tax revenues by broadening the base.
A broad-based tax system (e.g., New Zealand) has proven to be performing best.
In general, it is important to clearly establish eligibility criteria for tax incentives and have a gatekeeping function of the MoF for any new tax policy proposals.
Furthermore, tax incentives should be revokable or time-bound, and all recipients should participate and file returns.
There is also a need to balance equity and efficiency.
For example, VAT exemption is a complex and often ineffective mechanism for tax relief.
Finally, the outcomes of any tax exemptions should be closely monitored and those that are found not to achieve their intended objectives should be eliminated.
Our experience shows that one of the most important elements of a strong and effective tax system is system integrity (or anti-corruption measures) which are critical to build trust and transition to corruption-free tax administration system.
Increased transparency, limited discrepancy in tax administration and functional justice systems are all critical for integrity and will do a lot to attract increased private sector investments.
The private sector wants and needs stability and strong adherence to rule of law is often the most important business enabler for the private sector.