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Why the Exit Capital Tax should be implemented, rather than just keep struggling with corruption and fostering/upgrading qualification of tax authorities as yet

07 November, 2018 Blog

Alexander Minin

Alexander Minin

Senior Partner at KM Partners

Lately one may often hear that the corporate profit tax is not so bad by default, while the problems with it are not the drawback of this particular model of taxation, but the officer’s shortcomings/abuse/imperfection and so on. Accordingly, it is not necessary to change the model itself, but simply struggle with corruption in the tax authorities/upgrade their skills and level of responsibility/remove from the political influence and influence of some oligarchs etc.

Yes, it is possible and obligatory to be done. However, if the goal that is to release business from excessive and unjustified administrative pressure and, at the same time, neutralize the schemes for elimination of profits from taxation in Ukraine, may be achieved on the system level by changing the model, then perhaps this option should be preferable. The proportion between resources expended and the result within a certain model, paradigm is limited and does not guarantee the achievement of a result above a certain limit. Only a paradigm shift may provide a breakthrough. For example, if you walk on foot, then, even doubling or tripling your energy, you will not overtake a cyclist, although he puts much less effort for that. Therefore, in order to achieve a new level, it is necessary to open mind for a new paradigm.

The system of exit capital taxation instead of the traditional corporate income tax model is such a new paradigm.

As an example and analogy we may recall the following issue: how long did we struggle with corruption, abuse and disadvantages within the VAT refund system? For years, despite all the declared efforts, this topic had remained the most painful one, especially for exporters. Then the change of the refund procedure since 2017 entailed almost magic transformation, and now the refund works without large scale criticism. Today, this is probably one of the most successful and striking examples of positive changes in the Ukrainian tax system. Meanwhile, we could have made no fundamental change, and only continued “fostering” the tax authorities to work properly. Indeed, in theory, the previous refund system could work in due manner under proper treatment of tax authorities; and similar systems work likewise in few other countries.

However, change of the system itself provided a real breakthrough in Ukraine in resolving the issue of the VAT refund. If we had simply continued to “foster” the tax authorities on this matter as before, then the problem would probably have remained at the same level, having been corruptive, opaque target for traditional criticism.

So, the issue of profit taxation is worth resolving in the systematic way as well via change of the paradigm instead of continuous efforts on convincing the “wolves” to become vegetarians. Just the paradigm shift is likely to provide appropriate changes more swiftly. One should recall that the countries that had already implemented such systems, have reached the top of the tax competitiveness rating among the OECD countries.

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