The IMF is against tax cuts in Ukraine

Ukraine’s recovery and reconstruction will require immense financial resources, including from taxes and duties. In view of this, the IMF opposes their reduction in Ukraine during and after the war.

"Ukraine’s recovery and reconstruction will require enormous financial resources, as illustrated by the recent Damage and Needs Assessment. The international community is willing to share part of the burden, but Ukraine needs to continue to play its part by strengthening its domestic revenue mobilization to finance increasing social and infrastructure needs," said Vahram Stepanyan, the International Monetary Fund (IMF) Resident Representative to Ukraine.

The World Bank, the UN, the European Commission, and Ukraine have estimated that the recovery and reconstruction of Ukraine after a year-long full-scale war would require $411 billion, which is 2.6 times more than the country’s expected gross domestic product in 2022. Cutting taxes to revitalize businesses would simply deprive the government of the money needed to finance social programs and rebuild infrastructure, which would negatively affect the possibility of sustained economic growth after the war.

The new Ukraine’s program with the IMF is focused on reinforcing fiscal discipline. Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine and the author of the concept of the "10-10-10" tax reform, to which some Ukrainian politicians have already responded, believes that the paragraph in the Memorandum that stipulates the development of the National Revenue Strategy (NRS) provides for "actually a tax reform that will ensure Ukraine’s long-term economic growth."

"Of course, we have a tactical commitment to not introduce any individual additional tax exemptions. We need to lift the exemptions we have introduced on a case-by-case basis for the period of martial law. In particular, this includes the 2% turnover tax and exemptions from VAT on some types of imported products. I support this, because such exemptions indeed distort the structure of the economy. But it’s a fact that we need to develop a new taxation model, in cooperation with the IMF and international partners, that will give the economy a thrust for the next 10 years," said Rostyslav Shurma.

Vahram Stepanyan explained that the development of the NRS will help align the mobilization of revenue with government development priorities and medium-term spending needs, including reconstruction and social needs.

"To maintain the revenue base in the short term, the focus will be on lifting measures introduced under martial law, and on reforms in tax and customs. The NRS will become a comprehensive roadmap, which includes clear revenue and other policy targets covering both policy and administrative reforms," he noted.

The strategy will include:

• measures to strengthen tax and customs services;
• a revised simplified tax regime to address the erosion of labor taxes;
• alignment of VAT and excise duties with the EU acquis;
• strengthened anti-corruption measures and governance procedures to address integrity risks;
• tax reforms for post-war reconstruction and investment.