Bridging Taxation Worlds: Ukraine’s Path to Harmonize with the EU Tax Legislation and Modern Administrative Practices

In the realm of tax legislation, as Ukraine advances towards European integration, the harmonization of its tax system with European Union (EU) standards becomes a complex undertaking. This process entails adapting national tax laws to EU norms, which are continuously evolving. It is a journey that calls for close collaboration, commitment, and learning from the EU member states, particularly those with well-established tax systems.

Paulius Majauskas
Head of the Tax and Customs Duty Administration Division
Ministry of Finance of the Republic of Lithuania

Recently, I had the privilege of meeting with representatives from the Ministry of Finance of Slovakia together with the Leadership of partners EU4PFM project – the Ministry of Finance of Ukraine (MoF), the State Tax Service of Ukraine (STS) during the study visit to Bratislava, Slovakia in September, to delve into the country’s extensive experience in implementing EU Directives as well as to enhance mutual cooperation of the governmental agencies. The visit was aimed at fostering knowledge exchange, facilitating discussions on overall approaches for the preparation for Ukraine’s EU accession to comply with the EU acquis, and learning from Slovakia’s best practices on the development and implementation of taxation policy, also solutions enhancing the strategic and risk management-based approach in tax administration.

Harmonization of national legislation to the EU acquis

One of the hallmarks of the EU tax systems is harmonization achieved through a rigorous process. This process is leading to the alignment of tax rules among the EU Member States for a better business environment enjoying the single market advantages. The fair competition and transparent taxation rules, joint countries’ efforts in fighting tax evasion are fostering economic stability in each Member Country and in the Union as a whole.

The series of meetings provided valuable insights for the Ukrainian way forward taking into consideration the Slovakian experience in the implementation of the EU standards to the national tax legislation and administrative practice. Slovak colleagues presented general mechanisms applied by the EU Member States to comply with the EU requirements, including challenges for candidate countries that arise during the preparation for joining the Union.

After accession, the tax system in Slovakia has undergone quite substantial reforms, which have brought significant changes in taxation, inter alia ensuring such basic principles as efficiency, neutrality, and justice of the tax system. Joining the EU in 2004 had a great impact on Slovakia and other East-European countries on the continuous weighty growth in GDP.

EU acquis on taxation has two main components: indirect taxation, which affects the free movement of goods and the freedom to provide services in the single market, and direct taxation, which mainly remains the responsibility and competence of Member States. Besides, there are rules on administrative cooperation ensuring proper functionality of the taxation system.

Indirect taxation

On indirect taxation, the EU coordinates and harmonizes laws on VAT and Excise Duties. It ensures that competition in the internal market is not affected by big differences in indirect taxation rates and systems, giving businesses in one country an unfair advantage over others.

It should be admitted that indirect taxation has a much higher harmonisation level compared to direct taxes. Besides, countries should establish complex corresponding administrative practices to be in line with the technical requirements equally or similarly applicable within the whole single market. Thus, Slovak colleagues presented the national system of VAT and Excise Duties that implements the common EU requirements. The discussion followed afterward focused on the composition of taxes and operational IT solutions to be implemented by each Member State.

Direct taxation and administrative cooperation

The field of direct taxation is not directly governed by EU legislation. Nevertheless, several directives and the broad case law of the Court of Justice of the European Union (CJEU) establish harmonised standards for the taxation of business, moreover, member countries have taken joint measures to prevent tax avoidance and double taxation.

Administrative cooperation and mutual assistance involve tax authorities from European Union member countries working together through the exchange of information, carrying out control measures, and assisting in the recovery of unpaid taxes. Close cooperation among competent authorities is vital to detect and reduce tax fraud.

Slovak colleagues explained the core principles of designing a national direct taxation system in the context of the EU membership. Non-discrimination and equal treatment should be always considered when implementing tax incentives as well as potentially harmful tax treatment in reference to the EU Code of Conduct criteria.

Also, Slovak representatives shared their practical experience in the implementation of the EU directives on direct taxation and administrative cooperation focusing on the most challenging solutions such as the introduction of the General Anti-Abuse Rule (GAAR), other elements of the Anti-Tax Avoidance Directive, ensuring effectiveness and transparency in administrative cooperation among tax authorities.

The advantages and opportunities to tackle tax avoidance and fraud schemes through the successful implementation of the Directive on Administrative Cooperation in tax matters were presented in detail.

National taxation policy and strategic and risk management-based approach in tax administration

Ukrainian representatives had the opportunity to engage in a high-level meeting with the leadership of the Slovak Republic’s Ministry of Finance to discuss national reforms in Public Finance Management. The Slovak colleagues shared their experience in the development and implementation of the medium and long-term national strategies on revenue mobilization in the context of Ukrainian ongoing challenges in the elaboration of the National Revenue Strategy. The outcomes of several Slovak tax reforms were discussed, with this regard Slovak counterparts admitted the importance of replacing broad tax exemptions and incentives with targeted subsidies while designing tax reform. Analytical surveys often show that the tax exemptions are costly and do not always meet the goals. Therefore, targeting certain types of taxpayers or businesses with well-designed expenditure or subsidy policies usually is a more efficient alternative.

The importance of the introduction of a modern tax administration system saving tax authorities’ and taxpayers’ resources was highlighted during the study visit. Investing in digital solutions in the administration of taxes nowadays is vital for increasing the effectiveness of the system and additional revenues. Taking into consideration the current initiatives being implemented within the Ukrainian tax authority with the support of the EU4PFM, Slovak experience in the introduction of operational and IT solutions for VAT Control, Risk Management, E-Audit, and Online Cash Registers was presented.

What has been done in Ukraine and the challenges remain?

The European Union’s economy embodies a complex and intertwined political-economic structure. This intricate system is continually shaped and executed through its interaction with the ongoing forces of globalization, as well as the unique political interests of individual Member States. Within this economic framework, tax policy in EU Member States emerges as an outcome of their distinct national economic strategies which are built taking into consideration the advantages and opportunities that are given by the membership in the EU.

As we navigate the complexities of aligning Ukraine’s tax system with EU standards, we recognize the immense work ahead. While Ukraine prepares for accession negotiations with the EU, a Ukrainian national tax law must be diligently adapted to the constantly evolving EU standards.

According to the European Commission, Ukraine has already made significant progress in harmonizing its indirect taxation laws with EU legislation. This progress is a testament to the efforts exerted during the implementation of the Association Agreement between Ukraine and the EU. However, the requirements for Member States go far beyond expectations from associated partners, therefore further harmonization with the EU VAT directive and legislation on excise duties is required.

A priority in direct taxation for Ukraine is the implementation of Directives aimed at preventing tax avoidance (ATAD 1 and ATAD 2), as the tax base safeguarding measures might be applicable without delay after adoption before full membership to the EU. This involves revising existing Ukrainian tax rules (such as Controlled Foreign Company taxation) and introducing new instruments (taxation of hybrid instruments and structures, GAAR, etc.). Notably, through the implementation of the BEPS Action Plan, Ukraine partially has integrated key anti-avoidance rules into its domestic law, and we are working diligently to align them with ATAD.

The EU4PFM provides comprehensive support throughout the journey towards international information exchange. Such collaboration has resulted in Ukraine becoming an active participant in the global information exchange network, aligning our legislation with EU tax law on administrative cooperation, which is among current priorities.

Thanks to the efforts of the MoF and the STS, Ukraine has made significant progress in implementing international standards on transparency and information exchange for tax purposes. Next year, Ukraine will execute its first global automatic exchange of information, in line with the Common Reporting Standard (CRS). To achieve this milestone, Ukraine has enacted comprehensive changes to its national legislation, enhanced the IT and administrative capacity of the STS, and is preparing for rigorous data confidentiality and security assessments. Thus, probably the most important and complex part of the EU Directive on Administrative Cooperation was transposed to the Ukrainian Tax Code by the implementation of the CRS. The short- and mid-term priority in the field is the further development of legal and administrative mechanisms ensuring gain for Ukraine from international cooperation with the EU competent authorities, first of all, via implementation of the rest of the provisions of the latter Directive.

The long-term goal is to establish a tax system that not only meets the requirements of Ukraine’s integration as a reliable tax jurisdiction into the global economy but also enables taxpayers to fulfil their obligations while supporting the state in financing its recovery. The modern, service-oriented, and risk-management based approach in tax administration should be continuously introduced within the Revenue Service.

We are deeply grateful to our Slovak partners and colleagues for their unwavering support and willingness to aid Ukraine’s European integration. The journey towards harmonization is arduous, but with our collective efforts and shared commitment to transparency and compliance, we will progress steadily toward our shared goal. The harmonization of Ukraine’s tax legislation with EU standards is a critical step forward on the path to a stronger, more resilient, and integrated Ukraine within the European community. At the same time sharing and introducing of the most recent progressive solutions in tax administration allows to ensure fairness and transparency in taxation, and additional revenues to the state budget without increasing tariffs or tax base.

By Paulius Majauskas, EU4PFM Key International Expert on Taxation