The problem of de/shadowing the economy
It is in the context of systemic reforms - tax, customs, reform of the Criminal Procedure Code and the entire law enforcement system in relation to business, decriminalisation of economic crimes with the concentration of economic investigation on a single body - the BES - that we can talk about de-shadowing the economy, says Andriy Dligach. And the reason for the shadow economy, in his opinion, is not that business is bad and run by scoundrels, but the established "gangster-Komsomol model of the social contract" that we inherited from the Soviet era.
"I would like government officials to stop looking at business as dishonest. With all the ideas like 'bring them to light', 'white business club' and so on. I wish this would go away... It's hard to think of a more fake story about de-shadowing than the ‘white business club’. It is categorically not supported by business," assures Dlihach.
Corruption, he notes, is based on two problems: horizontal ties in society - don't break anything, it's always easier to act outside the rules; and the lack of real economic freedoms and protection of rights.
"Corruption, which is the result of the social contract we inherited from the 90s, the gangster-Komsomol model that still exists today, needs to be broken without inventing models like SMKOR (Monitoring system of risk assessment criteria) and blocking tax invoices or increasing pressure on business," the economics professor believes.
And yet, he said, 91% of entrepreneurs are currently helping the armed forces. Since the start of the full-scale invasion, Ukrainian business has created 1,500 defence industry enterprises.
"Is it enough to say that it is not infantile? 200 billion hryvnyas in donations. Suddenly, we may find that redistribution through tax increases will lead to a decrease in the effective flow of donations to our armed forces directly from our entrepreneurs.
Just calculate the effectiveness of redistribution from business directly to the brigades and battalions we manage and sending this money through public procurement and the state machine," emphasises Andriy Dlihach.
Instead, 48% of entrepreneurs have experienced pressure from regulatory or law enforcement agencies over the past two months. 28% say that pressure has increased now, during the war, he adds, citing research data.
"White business, among other things, receives all these greetings from the tax authorities, from the prosecutor's office, which makes white business turn grey," the head of the business community notes. And yet, he adds, entrepreneurs are afraid to confront the authorities and speak out publicly.
"Why not bribe this tax officer under the roof of the NABU and bring him to justice? Because this tax officer has relatives in the prosecutor's office and the Security Service of Ukraine who defend him. As the head of the business community coalition, I am constantly investigating these cases. Constantly," says Dlihach.
This is despite the fact that Ukraine has already lost 12% of its added value due to business migration.
"Business has been squeezed out of Ukraine. We can squeeze it out further and wonder why we have a lower GDP growth forecast for next year than this year," he adds.
How the tax hike will affect business
The increase in the military tax from 1.5% to 5% will further drive businesses into the shadows, says Andriy Dlihach.
"35% of salaries are in the shadow. We have done modelling for all industries, regions, business sizes and have a very clear figure. It is rounded not because we rounded it, but because it is 35%.
This 35% turns into 44% after the increase in the military tax. Why? Because this is behavioural economics. Together with chief accountants and financial directors, we calculate all this. The current burden on the payroll is 34%. If it increases, certain limits are crossed, and there is a greater interest in shadowing part of the salary. In order to de-shadow salaries, the burden on the payroll fund should be no more than 22%. Then we actually reduce the shadowing of wages to a minimum percentage," said Dlihach.
An alternative to the military fee, which will affect only those who receive official salaries, he believes, could be VAT, an increase of which by 2% "would minimise the shadowing of the VAT sphere and cause minimal inflationary processes." Instead, the increase in the military fee has already caused a flurry of criticism and talk of raising teacher salaries against this background.
The founder of the business community also criticises the approach to the formation of the military budget.
"It does not consist mainly of arms purchases. It's about how we have acted rather populist in providing for our military. Why didn't we propose some more rational economic ways? Now our research shows that the military buys ammunition with their salaries. The military buys dollars with their salaries, and the military buys gambling services with their salaries. We could offer this money not in gambling, but in the stock market. Which doesn't exist, but it could. We could have taken care of the families of the military. And it would definitely not be a matter of the military budget, but of the social budget. We could have managed the money from grants and international aid. We could have done things differently," says the founder of Advanter Group.
According to his estimates, systemic economic reforms generate about three times more state budget revenues than targeted reforms.
"Do I understand that systemic changes are not the responsibility of the Ministry of Finance? Of course I do. But here we are allies in demanding these changes together - business, public experts, the Cabinet of Ministers. And I think we will find an understanding with the Verkhovna Rada on these systemic changes," the businessman adds.
What is offered in return
"Only systemic tax and customs reforms, only privatisation, including in the banking sector, only total deregulation in the country, only working monopoly legislation will solve this problem of corruption in Ukraine. Not an increase in the number of tax officers. It's a tax system that allows businesses to pay taxes without being audited. Is it possible to build such a system? Yes, it has been developed by think tanks and proposed," says Andriy Dlihach.
He assures that business is not against tax increases. But there are other, more effective options besides the military tax.
"Asset tax. This has been discussed many times. When the registers and land cadastre are put in order. Let's do it. Business is in favour and supports this idea.
This should be the main source of revenue, not an increase in income taxes," the economics professor believes.
Next up is economic booking.
"There are 200 billion hryvnyas every year that are just lying around and allow us to de-shadow about 200-300 thousand salaries in the country. Why are we not using it? I am convinced that it is difficult to find a person among the economic bloc of the Cabinet of Ministers who would be against this idea," said Dlihach. However, in his opinion, the right moment to implement such a decision was lost due to delays.
"We have lost. 80 billion hryvnyas of corruption in this area. 200 billion hryvnyas is the economic effect for the state budget if economic booking is introduced. It is not being implemented. This is not a matter of discussion. In any audience with the military, we show and prove all this. The trouble is that it is only a matter of making a decision. Because we delayed this decision, it has become such a problem for a long time. And 80% of businesses have no bookings," commented the businessman.
He also reacted to Finance Minister Serhiy Marchenko's statement that the increase in the military tax was a necessary step to survive:
"As a strategist, I will say: those who seek to survive do not survive. Because in 2025, exactly one year from now, we will be discussing even worse problems because we did not make systemic changes in 2024. We will need to raise taxes even more, and the reserve has already been exhausted.
Now is the best time to accelerate customs reform, accelerate tax reform, accelerate the reform of the Tax Code and introduce economic booking. Because this will ultimately give us an additional UAH 500-600 billion next year. And this will lead to the fact that in a year's time we will not need to complain again that we need to raise the military tax by 2%," says Andriy Dlihach.
Finally, he noted that there was little investment in Ukraine before the large-scale aggression, so the issue is not the war, but the fact that investors do not choose Ukraine as a jurisdiction.
"Why? With all our specific advantages and opportunities, why don’t they choose us? Because there is no trust, no growth, no capitalisation. And all this rests on the unimplemented liberal reforms that did not result in the Maydan victory in 2014. Therefore, we have systemic reforms ahead of us. And the vision of Ukraine is not an interpretation of outdated textbooks, but a different understanding of what we want.
Ukraine is a country of opportunities. And if we don't build tools in every system - customs, tax, regulatory - to turn Ukraine into a country of the best opportunities for investors, businessmen, talent, anyone, we will not overcome the degradation of the population, business, or investors. And victory will be our defeat. Therefore, it is not about survival, but about thinking strategically ahead," emphasises the Chairman of the international business community Board.