Systemic issues of the State Tax Service of Ukraine: challenges for the new leadership - Dmitry Alekseenko.

The appointment of a new head of the State Tax Service of Ukraine (STS) on December 31, 2024, occurred during a time when the agency faced a series of serious challenges. Long-standing issues, chronic inefficiencies in tax administration, and a critically low level of trust from the business community create a situation that demands systemic and decisive steps for reforming the service.

The newly appointed head of the STS, Ruslan Kravchenko, is the first leader since May 2021 who will not serve in an "acting" capacity. It is noteworthy that Kravchenko's appointment was made without a competitive selection process, which significantly differs from the practices used for appointing leaders of other economic and anti-corruption agencies. Specifically, the heads of the State Customs Service and the Bureau of Economic Security are expected to be elected this year through transparent competitions involving international experts. The new STS head lacks relevant experience in the tax sector, having spent nearly his entire career in prosecutorial positions, and from 2023 to 2024, he led the Kyiv Regional State Administration.

Critical Issues of the STS in Interaction with Business and Tax Administration

The scale of the problems that the new leadership of the STS will have to address is staggering. According to World Bank research conducted in 2024, Ukrainian businesses spend an average of 74.4 person-days and over 100,000 UAH annually just to comply with tax procedures. For large enterprises with a turnover exceeding 80 million UAH, these costs reach 400 person-days and nearly 900,000 UAH per year, indicating excessive regulation and bureaucratization.

There are serious concerns regarding the quality of the tax service's work. According to a survey, 46.1% of entrepreneurs have encountered a lack of quality consultations from STS employees. About a third of respondents rated the effectiveness of tax inspectors negatively. Only 41.8% of respondents positively assessed the overall effectiveness of tax officials, while 31% rated it negatively, and 24.6% were undecided or refused to answer.

There are also significant complaints about the quality of the STS's electronic services. Although approximately 75% of businesses submit tax reports electronically through the Electronic Taxpayer Cabinet, users report issues with its convenience and technical malfunctions. Over 20% of respondents complained about the quality and timeliness of electronic messages from the STS, 17.1% noted that the electronic cabinet does not save filled forms, and 15.2% experienced issues obtaining certificates online.

The research also revealed significant problems with compliance with tax legislation. According to respondents' estimates, such enterprises reflect only 61.1% of actual annual income and 52.2% of salaries in their tax reporting. This indicates a high level of shadow economy and the need for systemic measures to combat it.

A particularly acute issue remains the system for blocking tax invoices. Mass problems for VAT payers began in 2022 after changes were made to the monitoring system for compliance with tax invoice risk assessment criteria (SMKOR). According to the Business Ombudsman Council, in 2024, the highest number of complaints about the STS's operation concerned the failure to comply with court rulings regarding the unblocking of VAT invoices. Notably, most court cases are decided in favor of taxpayers, which adds additional pressure on both businesses and the state budget.

Challenges of Tax Reform and International Commitments

By the end of 2024, the situation was complicated by the passage of a law increasing taxes. The military tax was raised from 1.5% to 5%, a military tax for individual entrepreneurs was introduced at 10% of the minimum wage, and profit tax rates for banks and non-bank financial institutions were increased against a backdrop of doubtful explanations from the government and parliament regarding a lack of funds. In reality, according to data from the State Treasury, by the beginning of 2025, state account balances reached record levels—over 100 billion UAH in the single treasury account and 163 billion UAH in foreign currency accounts.

According to the International Monetary Fund's forecasts, tax revenues in Ukraine in 2025 will amount to 35.6% of GDP, a high figure even for developed countries. For developing countries, this figure averages around 20%. The volumes of already provided and promised assistance from international partners to Ukraine will be sufficient to meet the budget for 2025 even without tax increases, raising significant doubts about the current tax policy of the government.

In its sixth review of the "Extended Fund Facility" program, adopted on December 20, 2024, the IMF identified several key commitments concerning the tax system. In particular, it is necessary to amend the simplified taxation system to limit abuses, introduce reporting for digital platform operators in accordance with EU requirements, and strengthen the protection of tax information. However, a clear roadmap for reforms is still lacking.

The success of reforms within the State Tax Service will largely depend on the ability of the new STS head to strike a balance between budget replenishment and creating favorable conditions for business development.

It is essential to establish a constructive dialogue with the public, business associations, and taxpayers, which was absent under the previous leadership of the tax service. Quality feedback from the tax service to businesses is a necessary condition for any successful reform.

For successful reform of the tax service, it is crucial to focus on several key areas. First and foremost, a comprehensive reform of the VAT administration system is needed, with the introduction of transparent risk assessment criteria and the elimination of opportunities for corrupt abuses. The digitization of tax services and modernization of the Electronic Taxpayer Cabinet are equally important.

Special attention should be paid to reforming personnel policy and enhancing the professional level of STS employees. According to survey data, Ukrainian enterprises spend significantly more time interacting with tax authorities compared to EU countries. It is also essential to significantly improve interaction with taxpayers by creating an effective consultation system and simplifying tax procedures.

An important aspect of the reform should be the introduction of a risk-oriented approach to tax control. According to survey data, the share of enterprises subjected to tax audits has not significantly changed between 2021 and 2023—about 14% of enterprises. Meanwhile, large enterprises are audited much more frequently: 40.1% of companies with more than 50 employees reported tax audits.

At the same time, it is necessary to avoid further unjustified increases in the tax burden, focusing instead on improving tax administration and reducing the shadow economy. Only a systematic approach to reforming the STS will create an effective tax service that ensures a fair balance between the interests of the state and businesses.