Tax system reforms in the Visegrad Group countries and the significance of these reforms for the situation in Ukraine

The second process was to make the taxation system compatible with European Union legislation. This could be achieved, for example, by raising excise tax rates to the minimum level required by the EU and abolishing VAT exemptions. This process was stretched over many years to avoid inflationary shocks. The third process was launched to increase the complexity of the taxation system through the proliferation of various exemptions in order to ensure the achievement of various social and economic goals, for example, increasing demand for education, housing construction, research and development expenditures, and so on. This led to high costs of implementing these provisions, problems of interpreting legislation and abuse by taxpayers. Only Slovakia was able to eliminate this problem to a large extent through the introduction of a single flat VAT rate and the simultaneous cancellation of most tax exemptions. The problem of overloading the taxation system with special tasks was reinforced by the notorious changes to the taxation system during the budget discussion process. This means that most important amendments to various legislative acts on taxation were approved during the discussion of budget laws. These changes were intended to meet various needs, as noted above. Corporate income tax underwent especially many changes, but changes to VAT and personal income tax were also substantial and important in all four countries. This process made the taxation system unpredictable and costly for both tax authorities and taxpayers.

In recent years (since 2000), a tendency to limit special regimes and exemptions in the taxation system could be observed. This tendency aims to reduce tax rates, mainly corporate income tax and personal income tax. This means that the principle of efficiency of the taxation system has again begun to be taken seriously.

(Nota bene: the principle of efficiency of the taxation system presupposes a taxation system in which the decisions of economic agents do not depend on taxes. In other words, if the taxation system did not exist, economic decisions would be the same).

The issue of the taxation system is given great attention in the main legislative acts, namely: the Constitution of Poland provides that only the parliament of the republic may introduce taxes. Thus, under tax legislation, the powers of the executive branch are limited only to the technical elements of the taxation system. This limits the possibility of introducing changes to legislative acts on taxation, but does not solve the problem completely.

Main problems Tax administration is the biggest challenge for taxation system reforms. Taxes played a limited role in the planned economy. They were part of the distribution system along with fixed prices, subsidies and credits. The number of taxpayers was low, and the degree of freedom of tax inspectors was high. Taxpayers, mostly state-owned enterprises, had no significant economic incentives to reduce their tax liabilities (read: to look for oversights in tax legislation). This situation changed radically during the transition period. Now there are many private companies operating in market conditions and thus having a strong motivation to reduce their tax liabilities.

The costs of reforms in the taxation system also included the costs of tax administration in the form of staff training and capital investment at the first stage of tax reform. There is another aspect to this issue. The costs and efficiency of tax administration depend on the quality of staff training and equipment of tax administrations, as well as on the design of taxes, the system for appealing tax inspectors' decisions to courts and provisions on the work of civil servants. Insufficiently developed tax rules that are unclear and ambiguous increase the taxpayer's costs of complying with legislative provisions. At the same time, tax administration is open to corruption, and the costs of maintaining such administration are quite high.

The problem of complex and unclear tax legislation remains perhaps the most important in these countries, especially in Slovakia, which introduced large-scale reforms in the taxation system in 2004. Slovakia introduced a flat personal income tax rate of 19% and abolished most tax exemptions. At the same time, a single VAT rate was introduced. This meant that the reduced rate was completely eliminated, and all goods and services would be taxed at a single 19% rate. Finally, the corporate income tax rate was reduced to 19% to match the personal income tax rate.

This problem is to some extent limited by administrative courts, which can annul or change administrative decisions of tax inspectors. However, the main problem remains the interpretation of tax rules and norms.

The creation of local self-government units is an important part of the transformation. They were delegated state obligations, but the state did not fully provide their financial revenues. Local taxes provided only part of the revenues for local self-government bodies, and state grants remain the main form of revenue. Moreover, the rules for granting grants were changed, which limited the ability of local self-government bodies to plan multi-year projects. The ratio of tax revenues to GDP in all countries is very high given their level of economic development. At the same time, they have a budget deficit. This means that reducing tax revenues through lowering tax rates or the tax base must be done gradually and very carefully.

The list of taxes, fees and other tax obligations that make up the taxation system of the Visegrad Group countries is very long. Some of them bring extremely limited state revenues while at the same time causing high costs of complying with legislative provisions and administration.

Harmonization of tax legislation or, as EU member states see it, integration of tax legislation may be a factor capable of limiting the possibilities for further steps in reforming the taxation system, even if a new directive on harmonization of legislation is not adopted. There are several ways for this. First, EU member states can exert pressure on other countries to limit tax competition, for example, regarding corporate income tax. Second, the European Court of Justice has approved several decisions on taxation systems based on the rules of non-discrimination and free movement of capital, goods, services and labor contained in the Treaty establishing the European Community. As a result, the European Court of Justice protects these rules and prohibits certain tax decisions that impede the implementation of these rules.

However, national executive authorities can pursue state policy regarding the capacity of tax administration and improvement of tax legislation.

Lessons of reforms 1. The Visegrad Group countries had a full-fledged strategy for their transition period at least since the signing of the EU accession agreement. It was clear what institutional environment needed to be created. Thus, the prospect of EU accession was not only an instrument for developing certain solutions for indirect taxation but also an instrument for building the tax administration process and creating an institutional environment. This was perhaps the most important factor in reforming the taxation system. Ukraine ratified the agreement on the creation of a Single Economic Space between Belarus, Kazakhstan, Russia and Ukraine in 2004 and at the same time clearly declared its desire to gain membership in the European Union. Such dualism in the choice of strategic goals will complicate reforms in the taxation system. For the Visegrad Group countries, a clear political perspective was an instrument of progress in reforming the tax system. On the other hand, Ukraine properly applies the main taxes and should not replace them or introduce new main taxes. Such steps would reduce the country's investment attractiveness and make the taxation system opaque. 2. The main achievement of these countries was the shift of the main budget revenues from direct taxes, mainly profit taxes, to indirect taxes, mainly VAT and excise duties. This reduced the risk of sharp fluctuations in state revenues throughout the economic cycle and ensured greater economic efficiency of the taxation system. It also became an instrument for attracting foreign investors. In recent years, Ukraine has significantly reduced its revenues from corporate income tax. However, the country still has potential for further rate reductions. The current corporate income tax rate in Ukraine is still too high compared to neighboring countries. 3. In recent years, there has been a clear tendency to broaden the tax base and reduce top marginal income tax rates. Such steps (increasing transparency in the taxation system) are considered more effective instruments for attracting foreign investors than tax holidays for investors. Ukraine can also implement such a policy. 4. In most Visegrad Group countries, problems in taxation systems still remain. The most important of them are ambiguity of legislation and tax administration. These problems are exacerbated by very frequent amendments to legislative acts on taxation, which are adopted at least once a year. 5. The problem of tax administration has been solved, in particular, thanks to staff training, hiring qualified personnel, and providing personnel with new equipment. Some legislative decisions aimed at ensuring the protection of taxpayers' rights have also been approved. The most important is the introduction of a decision according to which an appeal against a decision of tax authorities, which was considered final under the administrative procedure, can be filed with an administrative court. Such a decision has at least two advantages. First, taxpayers' rights are protected from the arbitrariness of tax inspectors. Second, the court's explanation serves as an interpretation of legislative acts on taxation. In Poland, there are 14 regional administrative courts and a Supreme Administrative Court. Approximately 40% of tax administration decisions are annulled by courts. Such a solution may be useful for Ukraine. 6. The problem of ambiguity of tax legislation can be reduced by adopting a constitutional decision that the parliament (Verkhovna Rada) cannot increase the state budget deficit determined by the Cabinet of Ministers in the draft state budget, including tax exemptions. Although this will not eliminate all risks of adopting unclear amendments to legislative acts on taxation. Ukraine can borrow Slovakia's experience on how to make its taxation system simple and transparent (to some extent this has already been done). 7. There is also an important problem regarding how to tax small enterprises. There is no universal answer to this question. The reform of the principles of small business taxation in Hungary, which began in 2004, may be a good example to follow or generally to introduce a simple presumptive tax with a simple tax base (for example, profits or number of employees). Under Act XLIII of 2002, Hungary simplified tax collection for entrepreneurs whose maximum annual sales revenue does not exceed 15 million Hungarian forints, including VAT, and who have been operating for at least two years under the same legal status. The tax rate is 15%, and it replaces VAT, the corporate vehicle tax, the private entrepreneur's income tax, dividend taxation, and corporate income tax. At present, the taxation system in Ukraine remains too complex, unclear and costly to maintain. 8. The problem of tax fraud, for example VAT refunds, can be solved through the introduction of information exchange between tax administrations from other countries. A good example is the existence of a special administrative unit that deals with major taxpayers, including exporters. In particular, Ukraine must address the problem of accumulating large tax arrears regarding VAT refunds. However, the first step must be taken in the direction of large taxpayers. 9. There are many problems regarding the powers of tax inspectors, for example, regarding the cancellation and/or deferral of collection of tax liabilities. Tax expenditures are part of state aid, and thus in the Visegrad Group countries they are regulated by EU legislation. Such problems also exist in Ukraine. The powers of tax service employees should be limited at each administrative level. 10. The taxation of energy carriers is largely harmonized in the European Union, and further steps in this area are also envisaged (for example, the introduction of an excise duty on electricity). The taxation of energy resources in Ukraine has two flaws. First, the state does not ensure tax collection. Second, the level of taxation is extremely low. Increasing taxes on energy resources may be linked to reducing taxes on labor, and thus this step may prove beneficial for the economy. 11. The semi-legal sector of the economy is relatively large and reflects weaknesses in tax administration, problems with the structure of the economy, lack of equilibrium in the economy (unemployment and an oversized small business sector) and a large regulatory burden. The best way to reduce the semi-legal sector is to ensure an adequate and appropriate institutional environment, that is, a clear and transparent legal system, strong and capable tax administration that creates competitive markets. This is easier said than done. In my view, the cost of reducing the semi-legal sector of the economy (which consists of very small and small enterprises and households) is high compared to the benefits of such a step. 12. In Europe, revenues from taxes and fees related to environmental pollution are growing. In the future, Ukraine may partially shift the sources of tax revenues from labor to natural resources. 13. The number of taxes and fees in the Visegrad Group countries, in particular in Poland, is too high by any standards. The same can be said about Ukraine.