Sustained progress and prosperity is only possible with taxes
By Dafina Gercheva, UNDP Resident Representative in Ukraine
Although more Ukrainians are paying, a massive gap remains
Taxation plays a fundamental role in raising resources for public services that help reduce poverty, promote education, ensure clean water and sanitation, safeguard personal health and well-being and providing security – to name a few. When companies – large and small, and the people who work for them, pay taxes, these resources are channeled through the public sector into building and sustaining the social and economic infrastructure that makes progress possible.
But when citizens or companies of any country cut corners on their tax obligations, the damage is two-fold – they undermine the maintenance of the very infrastructure they may have used to earn that money, such as the roads, and they hold back their fellow citizens and keep many of them in or near poverty.
All countries in the Organization for Economic Cooperation and Development are very much aware of this formula, and use it to their advantage. They collect on average 34 percent of their gross domestic product (GDP) in taxes. Developing countries only achieve about half that. In Ukraine, according to the World Bank’s statistics, the Government collected on average about 19% of its GDP over 2011-2021, which , represents some 15 percentage points gap with the OECD average.
On the right path
Ukraine is on the right path towards industrialized development and economic prosperity. To sustain its momentum however, more Ukrainian individuals and corporations will need to see taxes as not something to avoid, but rather as a moral and patriotic duty.
The good news is that an increasing number of Ukrainians are paying their taxes, even during the challenging months of the pandemic. According to Tax State Service, revenues to state and local budgets increased by 13.5 percent despite a decline in GDP of four percent in 2020. Yet, the estimated annual loss from tax evasion remains a staggering USD 7.7 bn. These resources are badly needed to help achieve the Sustainable Development Goals. The Secretary-General’s Strategy for Financing the 2030 Agenda for Sustainable Development (2018 – 2021) specifically calls on countries to “strengthen and increase the effectiveness of their tax systems to generate the domestic resources for funding the government contribution to meeting the SDGs.”
Tax revenue (% of GDP) - Ukraine
Sources: International Monetary Fund, Government Finance Statistics Yearbook and data files, and World Bank and OECD GDP estimates.
Catching missed opportunities
One of the Government's measures to further reduce this hemorrhaging of opportunity is through the recently-passed Base Erosion and Profit Shifting regulation, which aims to fight offshoring by tracking and taxing profits earned by Ukrainian citizens worldwide. The Government also is addressing the challenge of Ukraine’s underground economy, where up to 60 percent of the individuals and businesses are avoiding paying their taxes.
The Government can achieve more through a fair and effective domestic revenue mobilization system that ensures everyone benefits from public services and that no one is left behind. When such fair and efficient tax and service delivery system is in place, it can do much more than just generate resources. Combined with good public accountability, it can help build citizens’ trust in government and help the society to prosper.
We at UNDP have been working closely with the Government to improve governance even during the COVID-19 crisis. Through its Democratic Governance portfolio, UNDP is assisting Ukraine in addressing pandemic related restrictions on movement by developing effective eService systems, engaging civil society organizations in decision making on allocation of public resources, and incorporating human rights based approach to service provision, for instance, by brining public IT systems in line with Web Content Accessibility Guidelines (WACG). Through these programmes, public institutions are becoming more transparent and accountable, thus instilling more trust and confidence in government.
Corporate taxpayers should see the benefits of investing in the country in which they are doing business. The returns on these investments manifest in improved infrastructure, national security and regulatory frameworks that support continued economic growth – and thus continued profits and returns to their shareholders. At the individual level, Ukrainians should be proud to pay their taxes out as a manifestation of their patriotism inbuilding up their country.
I am sure Ukraine will continue to move in the right direction with its tax policies and obligations, and we at UNDP will be there with the government and people of this great country every step of the way, sharing best practices from other countries with the Government here, and in turn sharing Ukraine’s best practices with the world.