Rationalizing the State Bureaucracy: The Weberian Option

With respect to Max Weber's characteristics of bureaucracies, Michael Mann has stated that ‘Bureaucratic offices are organized within departments, each of which is centralized and embodies a functional division of labour; departments are integrated into a single overall administration, also embodying functional division of labour and centralized hierarchy.’Footnote ³ Mann also has identified autonomous state power as relating to enhanced territorial centralization, a concept central to state capacity.Footnote ⁴ In short, for Mann and for Weber, being able to implement certain tasks requires a state structure imbued with a certain amount of autonomy, so that fairly consistent rules can be applied without undue and incapacitating interference from outside groups.

The administrative reforms in the Polish tax system have sought to ‘rationalize’ the role of state bureaucrats and to limit the degree of discretion afforded to tax officials in order to constrain corruption. The structures and the human resources provided, together with the use of historical reference points, combine to produce mixed bureaucratic rationalism on the part of the tax administration in Poland. It is the appropriate choice and application of past institutional models – a structural design infused with flexibility and constraints and the availability of personnel trained and capable – that enables the Polish tax system to function well in implementing its policy goals. That being so, the tax bureaucracy is more capable of building a healthy relationship with the public, enabling long-term goals to be accomplished.

Empowering the State Bureaucracy: The ‘Power in a Pure Form’ Option

In applying Oleinik's concept of ‘power in a pure form’ to Russia today, the descriptions of Valeri G. Ledyaev, who argues that President Vladimir Putin's regime is one of ‘bureaucratic authoritarianism’, and of Oxana V. Gaman-Golutvina, who finds that the bureaucracy today is even farther from the Weberian ideals than it was under the Soviet Union, are quite apt.Footnote ⁵ For Ledyaev, the application of the concept of the ‘power vertical’ through administrative and bureaucratic mechanisms enables the state to expand its control over society. Similarly, Gaman-Golutvina argues that widespread patronage, lack of transparency and low levels of public sector discipline, alongside extremely high levels of corruption, have enabled Russia's administrative apparatus to operate as its own business group at the expense of society, particularly outside business sectors. The significant lack of ‘Weberianness’ in the bureaucracy, which has led to the rise of a bureaucratic authoritarian state, can be seen both in the state administrative organs as a whole and specifically in the tax agencies.

With respect to the tax administration, not only have the reforms in this sector not led to substantial improvements on the Weberian scale, but also the tax administration itself has become a primary tool of the bureaucratic authoritarian state – through its day-to-day contact with the public as well as more specific and targeted political use of the tax bureaucracy. As will be shown below, in contrast to the processes in Poland, the administrative reforms in the Russian tax system have brought about the ‘empowerment’ of the state, by increasing the state's ability to impose its control over society, while failing to limit the degree of discretion afforded to tax officials. The task of building a healthier relationship with the public simply does not exist for the Russian tax administration.

Indeed, in the 2011 Russian Public Officials Survey, 22 per cent of tax officials stated that if an enterprise were to fulfil all the demands of the tax organs, it would be ruined – that is, nearly one in four tax bureaucrats recognized that their system is excessive (see Appendix II, Question #2). (A similarly asked question found in 2001 that 58 per cent of Moscow tax inspectors and 52 per cent of Nizhniy Novgorod tax inspectors agreed that if enterprises paid all taxes they would have gone bankrupt a long time ago.Footnote ⁶)

An analogous tax administration design, accompanied by fewer administrative reforms, for the Ukrainian tax system has brought less control over society than in Russia while failing to eliminate tax bureaucrat discretion.

Poland's Tax Administration Structure

The history of how Poland's tax administration was constructed mirrors the history of Poland itself – with alternating organizational structures that reach back to the inter-war period. The origins of some of today's tax agencies trace back to the beginning of the Second Republic, when the Ministry of the Treasury was formed in 1919 with an internal structure similar to the Austrian example and was staffed by bureaucrats from the former Austrian territory. Similarly to today, tax chambers (izby skarbowe) and tax offices (urzędy skarbowe) were placed in charge of the collection of taxes, which included a personal income tax (PIT). After the Second World War, the tax offices and tax chambers returned until 1950, when they were liquidated,Footnote ⁷ and then, in 1983, they reappeared as subordinates to the Ministry of Finance.Footnote ⁸ That structure remained in place from the beginning of the transition until 1992, when the Sejm (the lower house of the Polish parliament) created the tax audit offices (urzędy kontroli skarbowe) and divided up the audit function.

In contrast to countries such as Russia and Ukraine in the late 1990s and the early part of the 2000s, the tax administration is not a separate entity, but is headed by the Ministry of Finance, an institution that has achieved a ‘comparable level of autonomy’ with respect to the parliament and government and whose powers in the budgeting process gives it ‘far-reaching control over government policy’.Footnote ⁹ Throughout the 1990s, there were 355 tax offices across Poland, collecting more than 85 per cent of the income of the state's budget.Footnote ¹⁰ The tax offices in each province (wojewódstwo) are subordinate to a tax chamber. Tax chambers and tax audit offices both number one per province and are subordinated directly to the Ministry of Finance. Unlike the case in other parts of the former communist bloc, the tax offices in Poland do not depend upon the local government, by law or in practice, which provides the system with a degree of consolidation.

After the territorial reform of January 1999, the numbers of tax chambers and tax audit offices were reduced from 49 to 16 each, reflecting the reduction in the number of provinces. In 2000, the 16 tax audit offices (also referred to as ‘fiscal control offices’) employed 8,501 people, the 16 tax chambers employed 4,147 employees, and the 355 tax offices was staffed by 37,475 people.Footnote ¹¹ The last figure is almost double that of the 19,310 workers employed in 1991 by the then 320 tax offices.Footnote ¹² The growth in staff can be attributed in part to the introduction of the new taxes.

In 2015, in addition to the 16 tax audit offices, there were 16 tax chambers, 380 tax offices, 20 large (specialized) taxpayer offices, six National Information Offices that issue individual rulings and tax law advice via call centres, and a Tax Information Exchange Office that specializes in exchanging tax information with EU member states and other countries.Footnote ¹³ In 2013, over 39,000 were employed in the tax offices and over 3,780 were employed in the tax chambers; tax administration employees compose 35.3 per cent of all civil servants in the country.Footnote ¹⁴

The actual collection of taxes appears to be a very routine procedure. Most taxpayers file a declaration and pay taxes such as the PIT by themselves. (The social security office known as the Zakład Ubezpieczeń Społecznych, or ZUS, also provides some assistance to the collection process by automatically deducting taxes from pensions. Approximately 20 per cent of those surveyed in 2000, 2001 and 2002 had their tax returns filed for them by their place of employment or by ZUS.Footnote ¹⁵) If a taxpayer does not pay on time, he or she is given seven days to pay, after which a ‘title of seizure’ is issued. (In the mid-1990s, the Supreme Audit Chamber (Najwyższa Izba Kontroli, or NIK), however, found significant delays in issuing such ‘titles of seizure’ among the tax offices it surveyed.Footnote ¹⁶) Perhaps thanks to the ease of processing one's tax return, the tax office in one 1999 public opinion poll was viewed favourably by half of the respondents – the highest among public institutions in that survey.Footnote ¹⁷ (In contrast, in 2001, businessmen in Russia were asked to rate their attitude toward a variety of characters with whom they have to deal. Tax inspectors and tax policemen were given the least positive appraisals on the list, with the exception of a ‘bandit’.Footnote ¹⁸)

In addition to registering and collecting taxes from all taxpayers, tax offices usually conduct audits of taxpayers with little tax due. Tax audit offices audit taxpayers (usually large firms) with significant liabilities. Appeals from the initial audits of both the tax offices and the tax control offices are made to the tax chambers. From there, a second appeal can be made to the Chief Administrative Court (NSA), which judges whether the tax chamber has infringed a law or ordinance. Hence, the tax offices and tax audit offices are known as offices of ‘first instance’, while the tax chambers are referred to as offices of ‘second instance’, a concept of Polish administrative law that dates back to the inter-war regime.Footnote ¹⁹

Informal cooperation does exist between the heads of the tax chambers and the tax audit offices, but owing to the unique structural arrangement between the two organizations, some incongruence, lack of coordination, and lack of sharing of information on audited economic entities does arise – a phenomenon that Poland's NIK has noted on several occasions.Footnote ²⁰ While the tax chambers supervise the tax offices, they do not supervise the tax audit offices, from which they receive cases. This situation was characterized by a vice-director at a tax chamber as ‘a strange formation, [by which] the tax chamber does not possess control over the tax audit office and can not issue to it a decision whereas the tax chamber can give its records directly to a tax office for review’.Footnote ²¹ The tax audit offices, which act as a form of tax police, are distinguished in that, unlike a regular tax office, the inspector functions as an organizational unit himself, empowered to make decisions on his own. Hence, employees of the tax chamber can have direct contact with individual tax audit office inspectors on cases, but they do not have direct contact with the entire tax audit office.

In addition, the tax audit offices also have a different timeline for the appeals process. At the tax office, a taxpayer has twenty-one days to make an appeal, whereas this period is only three days at the tax audit office. ‘Whether a taxpayer has three or twenty-one days for appeal is at times in general not important’, commented the vice-director, ‘but at times it is very important – as it depends on what the audit affirms.’Footnote ²²

Moreover, a tax chamber may regard the tax offices directly subordinate to it as being better qualified than the tax inspectors at the tax audit office. For example, within one province in 2000, while the tax chamber repealed 38.5 per cent of cases originating in the tax offices, it repealed 63.3 per cent of decisions from the tax audit office.Footnote ²³ Also telling is the fact that NIK in 2000 regarded the level of cooperation between the tax audit offices and the tax chambers and offices in the sharing of information in the cases conducted by tax audit office inspectors as insufficient and ineffective.Footnote ²⁴

While the initial goal of separating out the tax audit offices was to draw more attention to large cases, at the end of 2001 plans appeared within the Ministry of Finance for dissolving the tax audit offices, placing the inspectors in the tax chambers and tax offices in such a fashion that the line of command is more direct and competition between the different bodies is eliminated.Footnote ²⁵ Thus, with the exception of the relationship between the tax audit office and the tax office, the tax administration does appear to have a clear, disciplined structure subordinate ultimately to the Ministry of Finance, as well as some consistent practices for collecting tax revenue.

Russia's Tax Administration Structure

In March 1991, the State Tax Service of Russia (STS) was formed on the basis of the USSR's State Tax Service, then part of the Ministry of Finance.Footnote ²⁶ (In the Soviet Union, taxes existed in a narrow sense, with turnover tax and enterprise payments tax the most common.) The STS, which became responsible for collecting all revenue for federal and regional budgets (except for customs duties), was separated from the Ministry of Finance later in 1991 as an independent agency. In December 1998, the STS was upgraded in status as the Ministry of Taxes and Dues. In 2004, the Ministry was eliminated, and the Federal Tax Service put in its place under the Ministry of Finance.Footnote ²⁷

The STS grew from 50,000 to 60,000 employees at the beginning of the transition to 161,790 in 1995 to around 180,000 in 2003 (with around 1,100 in the central apparatus and territorial organs.)Footnote ²⁸ In July 1995, the STS had 710 employees in the central apparatus and 161,790 bureaucrats in its offices across the country; despite the mid-1990s target goals of a staff of 200,000, Tax Minister Gennadiy Bukayev (2000–2004) stated in 2001 that the tax agencies’ staff just numbered above 160,000, suggesting that there had not been that much growth in recent years.Footnote ²⁹ IMF representatives found there to be less than 1,000 employees in the STS's headquarters in Moscow in 1999, regarding the number as far short of what was needed.Footnote ³⁰ In 2003, there were 82 directorates for the then 89 regions of Russia, plus inter-regional inspection offices in the seven new federal districts (okrugi), which control and supervise the directorates.Footnote ³¹

Traditionally, Soviet institutions that were spread out across the vast country were accompanied by a strict hierarchical system of control, usually led by the Communist Party. However, in the 1990s, relaxed relations between the regions and Moscow and the rise of locally elected leaders weakened intra-institutional control. Such was also the case with the tax administration. At a minimum, as a US Treasury official who had worked with the State Tax Administration (STA) for several years in the late 1990s observed, there existed very little communication across the immense bureaucratic organization, in which only one-third of one per cent of the employees worked in the centre.Footnote ³²

At worst, especially in the 1990s, dual subordination existed, whereby local tax officers served two masters, Moscow and the regional governments, which often supplied infrastructure facilities (such as housing and health-care services), as well as, in some cases, trying to finance local tax offices through regional budgets.Footnote ³³ ‘As a result’, the IMF has written, ‘[local tax offices] exerted more effort in collecting taxes for local governments than for the national government, e.g., collecting first those taxes where the local take was highest; did not remit to the federal government all that it was owed; and provided more favourable tax treatment to locally based enterprises.’Footnote ³⁴ ‘With a tax inspectorate located in just about every local political unit across Russia’, Richard Highfield and Katherine Baer found, ‘the existing organizational setup appears to largely reflect local tax considerations, notwithstanding that local taxes constitute a minute proportion of the overall taxes collected…This has led to the emergence in practice of a…variable system of revenue sharing in place, [with tax officials] often competing for tax revenue from the same pool of taxes. This problem is compounded by a headquarters’ administration that emphasizes the optimal collection of federal budget revenues, rather than the collection of all federal and regional taxes.’Footnote ³⁵

After Mikhail Fradkov became prime minister in March 2004, a consolidation plan for all the Russian Federation's ministries began to be implemented, and the Ministry of Taxes and Dues was eliminated and its functions transferred to a newly created Federal Committee for Tax Control (later named the Federal Tax Service), placed under the Ministry of Finance. Indeed, the transfer of the tax functions to the Ministry of Finance was part of a revived attempt at administrative reform, which began under Putin back in 2001 and which proceeded at a relatively slow pace. The outward goal of the reforms is to reduce the number of ministries. However, the entire project actually appears to be part of Putin's plan for creating a tightly centralized state with the bureaucracies under greater control, as described in Chapter 3.

Hence, while being part of the government's overall administrative reform plans to reduce the number of ministries, the March 2004 elimination of the Ministry of Taxes and Dues was thought to be part of a move to consolidate tax policy within the Ministry of Finance so that there is a single voice on the issue.Footnote ³⁶ Nevertheless, the transition has been said not to be smooth, as the International Tax and Investment Centre (ITIC), an independent non-profit foundation that provides tax and investment policy information to businesses and also trains key policy makers in the former Soviet Union, remarked repeatedly in its monthly bulletins that the process was fraught with disorganization, slow integration, and ‘continued uncertainty among many key staff positions’.Footnote ³⁷ The process also was delayed because a new law was required to abolish the Ministry of Taxes and Dues and to integrate it into the Ministry of Finance.Footnote ³⁸ Even the World Bank has cited in its own reports that the slow reorganization was a reason for the delays and lack of progress in the second phase of the transition.Footnote ³⁹ However, while the process has been slow and somewhat chaotic (and late in comparison to the subordination of tax administrations to the finance ministries much earlier in other countries such as Poland), the effort may be beneficial down the road, leading to better supervision of tax collection activities.

In recent years, at least seven to nine specialized inter-regional tax inspections have been established that focus on particular types of large-scale business activity (such as oil and banking).Footnote ⁴⁰ Moreover, such specialization has taken place within Moscow, where the 45 or so tax inspection offices, each of which once concentrated on a particular geographical area of the city, now focus each on a particular type of business or personal income activity.Footnote ⁴¹ (In Poland, a smaller country, by 2011, there were some 20 such national specialized large taxpayer offices.Footnote ⁴² Meanwhile, Ukraine opened a central office for large taxpayers in Kyiv in May 2012.Footnote ⁴³) It appears that Russia's recent reform efforts have been the result of available technical assistance and of redoubled efforts by ministerial leadership to improve the efficiency of tax collection. Nevertheless, the greatest problem in Russia remains the fact that the tax system is target-level driven rather than compliance-driven (in contrast to Poland), which provides different incentives for tax inspectors.

Ukraine's Tax Administration Structure

The Ukrainian STA, like other state institutions, can trace its origins as a weak tool of the state back to the early 1990s, when the main headquarters of all Soviet-era governing ministries remained in Moscow, and Ukraine thus had to build new ones in Kyiv, essentially from scratch.Footnote ⁸¹

As in Poland, the tax administration in Ukraine was founded on the basis of the Soviet Ministry of Finance's financial and revenue offices, which existed in every district throughout the country.Footnote ⁸² While the law ‘On the Taxation System’ was adopted on 25 June 1991, former Soviet Union regulations existed from the very beginning until the tax and financial system of the new country was fully formed. Initially, until 1992, Ukraine's tax service was a division of the Ministry of Finance, although most revenue agents were said to come from internal security.Footnote ⁸³ In the early days of the 1990s, the few firms that did exist were likely to have been more cooperative with the state. One regional tax official in an oblast commented that at the beginning of the 1990s, ‘the work was a lot, but such words as “arrears” we almost never heard as enterprises and organizations transferred adequate funds to the budget in a timely manner.’Footnote ⁸⁴ Nevertheless, a few years into the decade saw economic instability, hyperinflation of the country's currency up to September 1996 (the Ukrainian karbovanets) and chronic state budget deficits, which did affect the tax administration's activities as well as its internal resources.

Already in the 1990s, criminal groups were alleged to have close ties to the tax administration in Ukraine that they used to extort money from businesses, which found it cheaper to pay the groups than the tax authorities.Footnote ⁸⁵ The weakness of the STA as it interacted with society contributed to a feeling of less fear of the state and the tax authorities than in Russia. This was the case even as President Leonid Kuchma and STA chief (and more recently finance minister and then prime minister under President Viktor Yanukovych) Mykola Azarov began to turn the STA into a stronger tool in the second half of the 1990s by establishing a strict hierarchical structure, which has been widely referred to as zhorstkoyu kontrol’ (cruel or strict control), putting political pressure on larger firms while letting smaller and medium-sized firms fall under the discretion of local tax officers. Anders Åslund regarded the STA as having been the ‘main repressive organ of the state’ under Azarov.Footnote ⁸⁶ Such changes coincided with the formation of the STA, replacing the Ukrainian tax service, in 1996. In short, Ukraine built a tax system based on a mixture of coercion and bureaucratic discretion.

In the years that followed, Azarov's successors, who led the STA under Kuchma before the Orange Revolution, varied in the degree to which they created a more ‘Weberian’ tax bureaucracy in order to strengthen the state. A former STA official stated that STA head Yuri Kravchenko gave more autonomy to his subordinates, whereas his successor, Fyodor Yereshenko, a protégé of Azarov who earlier had served as his first deputy, was said to have taken away any personal initiatives on the part of the STA staff in a manner more like a ‘Beria’ – a reference to Lavrenty Beria, the notorious Soviet secret police boss who carried out purges under Stalin in the 1930s and 1940s.Footnote ⁸⁷ (In March 2005, Kravchenko was found shot twice in the head, with a suicide note, on the day that he was to be questioned by the prosecutor regarding the murder of the Internet journalist Georgi Gongadze.) Meanwhile, the corruption of the Kuchma years most likely did not help raise public support for the STA. Before the 2004 election, for example, corrupt VAT refund schemes were rumoured to have been employed in the nation's regions for political campaigns by both sides.Footnote ⁸⁸

After the Orange Revolution, the STA continued to have an ambiguous status because it reported only to the president, giving the government little authority to change its behaviour and practices and enabling it to continue to be a political tool of sorts.Footnote ⁸⁹ In early 2006, a constitutional amendment addressed the subordination issue, making the STA accountable directly to the central government. Yet even after this amendment (but before the August 2006 selection as prime minister of Yanukovych, who quickly named Azarov's protégé, Anatoliy Brezvin, as the new STA chief), the STA was subordinated in practice to President Viktor Yushchenko, who once in office appointed a friend, Oleksandr Kireev, as its head.Footnote ⁹⁰ Kireev was seen by local analysts as wanting to see the STA become a partner with society rather than a mere tax collector, but politics did become a factor, because his position enabled him to ‘punish’ some more than others.Footnote ⁹¹

While, at times, the STA formally has been subordinated to the Ministry of Finance, problems of coordination existed in practice, even when the STA was underneath the Ministry. By the end of the Kuchma era, the tax administration was subordinated directly to the Cabinet of Ministers, but with the arrival of the Yushchenko government in 2005, the STA was brought under Ministry of Finance control.Footnote ⁹² Nevertheless, in that year, the Razumkov Centre noted that the Ministry of Finance's powers with respect to human resources management at the State Customs Service and the STA were limited.Footnote ⁹³ By 2006, when such subordination of the STA to the Ministry did exist, the Ministry of Finance and the STA already had a long-standing disagreement as to whether the Ministry could gain certain information from the STA – something that Yushchenko had yet to make a decision on whether to permit.Footnote ⁹⁴ And, in 2015, when the STA was no longer formally under Ministry of Finance control (as it is in Western countries), Åslund commented that the Ministry of Finance had control and information only on the STA's expenditures but not on revenues.Footnote ⁹⁵

Despite a significant lack of external structural restraints on the STA's activities, one of the improvements since the Orange Revolution has been the transfer in September 2005 of the authority to resolve disputes between the STA and taxpayers from the commercial courts to the administrative courts, which has provided greater protection of the rights of taxpayers.Footnote ⁹⁶ Hence, some alternation of the administrative design can affect the type and nature of citizens’ interaction with the tax system, providing a strengthening of trust in the state. Meanwhile, a ‘Charter of Tax Relations’ was drafted in 2005 by the National Commission on Fiscal Reform, consisting of deputies and representatives of the Presidential Secretariat, the Cabinet of Ministers, other state agencies and non-governmental organizations, calling for a number of bold new initiatives, including reduction in public spending on the tax service, improvement in the culture of service to taxpayers, elimination of the tax police, decentralization of tax revenues, expansion of the role of local budgets, merger of the tax and customs services and implementation of further activities under the control of the Ministry of Finance, which ultimately was unfulfilled.

Under Yanukovych, the signing of presidential decree 1085, ‘On the Systems Optimization of Central Executive Organs’, on 9 December 2010, did not bring any immediate changes to the tax administration, despite the fact that that administrative reform decree was expected to bring a reduction in the numbers of tax personnel. In fact, in 2011, one Ministry of Finance official complained that there was a lack of strategic policy documents at the Ukrainian government level on the main directions of the tax administration's development, and what few had been adopted seemed to be annulled by new, succeeding governments. In February 2007, the Cabinet of Ministers approved a Concept of reform that was cancelled in 2009, when the new government in December 2009 adopted a different tax system reform strategy, which in turn was cancelled by the new prime minister in June 2010, leaving the tax administration without a strategic document in 2011.Footnote ⁹⁷

During Yanukovych's presidency, an alternative ‘tax system’ also was created by which the country was divided up into a system of so-called ‘ploshchadki’ (or ‘playing fields’) – groups of enterprises that minimized their taxes through fictitious VAT refunds offered by the ‘optimization services’ of tax bureaucrats, who received a set percentage of fictitious transactions.Footnote ⁹⁸ Åslund has described something on a similar scale. ‘Billions of dollars have disappeared from the Ukrainian government each year, equivalent to an amount sufficient to cover the US$30 billion budget deficit run up during Yanukovych's term’, he has written. ‘…Billions of dollars are extracted each year out of the State Tax Administration and the State Customs Committee. Some appears to be sheer embezzlement, some is in the form of bribes passed on to the top, and some comes from commissions demanded on VAT refunds for exporters. A reasonable assessment of this embezzlement would be $3 billion to $5 billion a year.’Footnote ⁹⁹ Meanwhile, Ukrainian economist Vladimir Dubrovsky has said of the Yanukovych years that ‘The official public servants were stimulated to collect as much fines as possible and actually destroy business…This is a kind of institutional memory that cannot fade away quickly. It's selective enforcement of impracticable laws. At least some of the tax departments are corrupted 100 per cent.’Footnote ¹⁰⁰

After the EuroMaidan revolution, Tax Agency Head Oleksandr Klymenko, a close ally of Yanukovych, was suspected of large-scale corruption and became wanted on criminal charges. His successor, Igor Bilous, meanwhile, was suspended amid concerns of financial corruption in February 2015. After a probe indicated that the performance of tax and customs offices worsened under his watch, Bilous was permitted to continue, but resigned and was replaced through a competitive process by Roman Nasirov, who himself was accused of corruption for leaving off a London apartment from his list of properties.Footnote ¹⁰¹ Meanwhile, in 2014, the Ministry of Revenues and Dues was replaced, or renamed, as the State Fiscal Service of Ukraine, which was headed by Nasirov and which has begun a process of decentralization that will see more revenue going to local budgets. In August 2016, Ukraine's Prosecutor General Yuriy Lutsenko announced that U.S. $120 million was stolen by the tax service during Yanukovych's presidency under the leadership of Klymenko as the post-EuroMaidan leadership tried to recover funds lost during the previous regime.Footnote ¹⁰²

Collecting the New Taxes in Poland

Just as NIK and the tax offices harken back to designs from before 1989, the taxes collected in the 1990s are based on earlier taxes as well, even though the goals of taxation under state socialism and capitalism are entirely different. The commonalities of the taxes enabled the function and workload of those employed in the tax offices to share some similarities as they were being implemented. For the tax administration workers, many of whom still held the same jobs they had in the communist era, this made the task of collecting the new taxes less daunting. For example, the PIT replaced the payroll tax, the tax on pay collected from employers; the equalization tax, a rural tax that covers the income from certain types of farming; and the income tax for those who worked at their own expense.Footnote ¹¹¹ The CIT replaced a previous enterprise tax that dated back to 1989. Meanwhile, the VAT tax replaced the turnover tax. For some, VAT was viewed as being much easier to implement because the tax offices already had information about the firms and knew how many there were, and concretely who they were, due to past tax data on hand.Footnote ¹¹²

In the early 1990s, several administrative reforms designed to have the bureaucrats interact more constructively with the public were introduced by the Polish tax administration in order to ensure that the newly adopted taxes would be implemented appropriately. First, training of heads and managers of selected divisions of the tax offices was conducted by the tax chambers in 1991, with tax office workers being trained in the first two months of 1992 prior to the rollout of the PIT that year.Footnote ¹¹³ Similar training was conducted in 1992 and 1993 for the introduction of the VAT.Footnote ¹¹⁴

Second, a tax information campaign coordination unit was formed in the Ministry of Finance, which oversaw activities that disseminated knowledge about the new taxes to the public.Footnote ¹¹⁵ In advance of the introduction of the new taxes, the tax chambers published brochures and conducted a mass media program, including special tax broadcasts on radio and television. As part of their work, tax administration employees were interviewed. ‘On the one side, society was interested’, commented one tax chamber vice-director, who took part in such interviews. ‘On the other side, we were interested that the tax laws were understood and worked.’Footnote ¹¹⁶ In this regard, Poland truly was unique among the three countries in that tax bureaucrats really went out into the public to educate people as to what this newly founded thing called taxes was. That type of public interaction simply did not take place farther east.

Third, inside the tax offices and tax chambers, ‘information points’ were established and staffed by employees who knew the laws. Already, in 2001, many tax offices and tax chambers had their own websites, which enabled taxpayers to write to their own tax offices.Footnote ¹¹⁷ This ties into the fact that many employees within the tax administration, when interviewed, described taxpayers as ‘clients’ whom they assisted. At the beginning of the 2000s, one large tax office even was sending out a survey asking its ‘clients’ how the tax office treated them and how they could be better served.Footnote ¹¹⁸

Fourth, the tax offices were instructed by the Ministry of Finance not to penalize taxpayers too harshly when these taxes were first being introduced.Footnote ¹¹⁹

Finally, the numbers of those working in the tax offices increased with the introduction of the new taxes. Hence, all of these Weberian reform programs were geared towards ensuring that tax bureaucrats would help the taxpayer comply with the new tax legislation and making the transition smoother for bureaucrat and taxpayer alike.

However, despite such preparation, an audit by NIK of selected tax offices revealed that 90 per cent of them had increased delays in bookkeeping regarding PIT information, which negatively influenced the reliability of budget reports.Footnote ¹²⁰ In defence of the tax office workers, many of the regulations, especially with respect to the VAT, were seen as being adopted too quickly and without preparation.Footnote ¹²¹ (In fact, nearly all of the bureaucrats within three tax chambers, six tax offices and three tax audit offices interviewed by this author in the fall of 2001 mentioned that the constantly changing and poorly worded new laws and regulations on taxes were the greatest problems in completing their work.)

Some of these problems aside, the tax administration's numerous efforts to make the transition to the new tax system smooth appear to have been successful. A year after the PIT came into existence, about half of taxpayers chose to file directly with their local tax offices, while the others chose to file through their employers, forgoing the opportunity to claim any deductions, but during the second year, queues would form at banks in mid-December as the state offered citizens the opportunity to buy government bonds in exchange for tax reductions.Footnote ¹²² ‘Today, in the seventh year since the introduction of the new tax requirements’, wrote Joanna Szczesna in 1998, ‘the average citizen has become a true expert in tax law…[O]ne thing is certain: the past six years have seen a period of fundamental legal education for the average citizen who, if more than 40 years old, could sense for the first time the workings of the law in a state living under the rule of law.’Footnote ¹²³

Collecting the New Taxes in Russia

In contrast to Poland, the work of the tax authorities in Russia has been more target-driven and less consumer-oriented – an emphasis that provides the tax bureaucrats with greater discretion, to the extent that the state can ‘impose’ its will over the public as the state's coffers are filled. This is noticeable especially in the manner in which the tax inspectors have been conducting audits. In 2005, the federal tax service deputy head, Tatyana Shevtsova, remarked, ‘Every tax audit visit must be 100 per cent effective. Otherwise the inspector has merely wasted his or her time.’ The comment provides a concise overview of how the tax service sees its own function, and Russian tax experts interpreted it as an explicit instruction for tax inspectors to increase the tax bill with each audit rather than to seek and verify taxpayer compliance.Footnote ¹²⁴ Moreover, it also implies that the tax administration views every firm as a tax violator and therefore expects that every company should be inspected.

Indeed, according to the Russian Public Officials Survey (2011), 48 per cent of tax officials – or nearly every other tax bureaucrat – stated that the job of tax inspectors was ‘to replenish the budget at any cost’ (see Question #4 in Appendix II), and 44 per cent of tax officials stated that their work was assessed by the ‘amount of taxes collected’ (see Question #7 in Appendix II.) Further, 47 per cent of these tax bureaucrats stated that the overwhelming reason for which penalties or sanctions have been given out to someone in their organization was ‘non-fulfilment or violation of duties’ (Question #13.)

The biggest issue with respect to audits is who is selected. Tax inspectors, pressed to reach target (plan) goals, mostly pursue legitimate taxpayers who have all their paperwork together, rather than locating companies that are paying no taxes at all.Footnote ¹²⁵ This was especially the case during the late 1990s, when more than half of local companies were bankrupt, many of which simply did not report income. ‘This non-reporting of income is facilitated by the Russian tax police's tendency only to scrutinize those taxpayers with the “cleanest financial records and transparent investments,”’ commented Jennifer L. Franklin in 1997. ‘Therefore, generating no paper trail with the State Tax Service almost guarantees that the tax police will not come knocking.’Footnote ¹²⁶ Further, the system even allowed unlimited time to return and do audits; multiple audits also could be conducted simultaneously.Footnote ¹²⁷ (Even in 2015, a firm could still be subjected to multiple audits, with the authorities able, if certain criteria were met, such as a higher tax authority reviewing the audit of a lower authority, to undertake more than one field tax audit with respect to the same taxes and the same tax period.Footnote ¹²⁸) By 2009, the Federal Tax Service was said to have introduced ‘a system of risk assessment which quickly became the guiding principle for selection of firms for additional auditing.’Footnote ¹²⁹

In the 2011 Russian Public Officials Survey, approximately one-third (32 per cent) of tax bureaucrats stated that inspectors are unable to ‘catch out’ those who fail to comply with the requirements of the tax organs – suggesting that it is far easier to demand payment, pre-payment or extra payment from firms known to exist and have funds than to seek out those that have interacted very little with the tax authorities (Question #3 in Appendix II). (In a similarly worded question asked in 2001, 52 per cent of Moscow tax inspectors and 66 per cent of Nizhniy Novgorod inspectors concurred that tax inspectors are unable to catch those who avoid paying taxes.Footnote ¹³⁰) Also, in the 2011 survey, over 30 per cent of tax officials thought that anyone could easily hide income from the authorities (Question #5 in Appendix II).

Moreover, when looking at deductions during audits, the tax authorities lacked the ability to look through the substance and merit of a deduction, but instead often focused on paperwork – whether it was in order, completed, signed and stamped appropriately, in an attempt to throw out as many deductions as possible (and, most likely, try to reach the tax collection quota).Footnote ¹³¹ Before the tax code of 1999, there were many gaps in the legislation that were subject to interpretation, which enabled the tax authorities to interpret the legislation as they wanted it to be – sometimes in a very inconsistent manner within and between regions.Footnote ¹³² Similarly, today, the tax officers are viewed as intentionally creating problems in order to compensate for solving them. ‘Generally, [a] tax officer tries to create as many problems as possible, to be remunerated for a solution of the problem’, a former tax inspection officer has stated. ‘Creating obstacles is a cheap activity (in fact it is pronounced as protection of state interests) and remuneration is high, so it never ends.’Footnote ¹³³

Following the Kremlin's 2003 assault on the Yukos oil company and its ‘oligarch’ chief executive officer and owner, Mikhail Khodorkovsky, who was charged with fraud and tax evasion in a move deemed to be political, businessmen have viewed the affair as giving tax bureaucrats the go-ahead to interpret tax laws as they like. The tax service also has seen a so-called beneficial ‘Yukos effect’ on tax collection. Federal Tax Service Deputy Head Tatiana Shevtsova stated in 2005 that tax receipts had more than doubled within the previous year and a half, due to the fear generated in the business community by the Yukos case.Footnote ¹³⁴

Such arbitrary power, combined with a lack of detailed knowledge on the part of tax inspectors regarding the firms and industries they audit, has even allowed the prosecution of taxpayers for ‘bad faith’. Such a ‘rationale’ for prosecution has been seen as a creative necessity for the tax service officials, given the fact that Yukos’ efforts to reduce its tax liabilities before 2003 were deemed by the business community to be within the law.Footnote ¹³⁵ A further shock to the business community was the 2007 raid on Price Waterhouse Coopers’ Moscow office, which led to the international audit firm facing allegations of concealing evasion by Yukos in its 2002–2004 audit of the oil company; Deloitte & Touche, another leading international accounting firm, also had been brought up on tax evasion charges in 2004.Footnote ¹³⁶ Ernst & Young, a third of the ‘Big Four’ accounting firms, also received a U.S.$16 million back tax claim in 2008.Footnote ¹³⁷

In the late 1990s, when audits were not adequate in raising extra revenue to meet a quota, some tax inspectors were said to have contacted good companies requesting payment in advance because of the regional budget crisis or because the tax collector had a target plan that needed to be reached for him to receive his bonus.Footnote ¹³⁸ Furthermore, when a taxpayer went before a tax office with a view to paying arrears, some even have said that the tax inspector received 10 per cent of the extra revenue received.Footnote ¹³⁹ Historically, tax authorities have had an informal relation with taxpayers whereby each taxpayer was assigned to one person in the tax inspection office during ‘kameralny’ audits (audits at the tax agency office), which led to lots of issues being dependent upon personal relations. However, since the adoption of the 1999 tax code, which specified taxpayer rights, the relationship has been more formal than it used to be.Footnote ¹⁴⁰

In fact, by 2003, in Moscow (one of the sites of a reform program), there often was no direct interaction with the taxpayer, who dropped off his tax documents in a drop box. (Taxpayers would drop off two copies, one of which was stamped and returned.Footnote ¹⁴¹) Back in the mid-1990s, the situation was a bit different, as taxpayers were required in practice to appear before tax inspectors with their tax documents, and would be liable if the mail lost the documents or if the tax inspectors had any questions; this resulted in long queues on the two or three days a week in which Moscow tax offices received taxpayers (and in fines for delayed tax reports.)Footnote ¹⁴²

In 2005, the ITIC took note of the recent high-profile tax disputes involving Russian firms, stating, ‘Perhaps the greatest cause for concern is subjecting employees of companies to criminal liability that automatically arises from tax disputes that can themselves be the result of honest mistakes and disagreements with tax auditors…The tax auditors seem increasingly under pressure to find “problems” to report to their superiors. While many of these audit findings are overturned by administrative or judicial appeal, Russian legislation (Part I of the Tax Code) automatically triggers a ‘tax police’ (Ministry of Interior) criminal investigation. This poses a criminal liability for key company employees (both Russian and foreign.)’Footnote ¹⁴³

In a 2005 survey of large Russian and international firms published by Ernst & Young, some 80 per cent stated that they had had some type of dispute with the tax administration within the previous three years. Interestingly, though, some 92 per cent of those disputes were taken to court by the taxpayers, and 90 per cent of such cases were resolved to the satisfaction of the firms.Footnote ¹⁴⁴ Hence, for all of the coercive measures practiced by the tax service, the courts have become, at times, a remedial tool for private enterprises. That said, Russian firms and the tax service have different perceptions as to who wins in tax litigation. While firms claim victory if the court reduces even slightly the total amount of taxes due, the tax service will claim that it has won a case if not all of the taxpayers’ demands are accepted, enabling the vast majority of cases to be claimed as ‘won’ by both sides simultaneously.Footnote ¹⁴⁵ Further, the tax administration also initiates cases with the courts regarding tax offences, with fines ranging from 10 to 40 per cent of the amount unpaid usually collected through the courts. Almost 91 per cent of cases filed by the tax agencies at the Higher Arbitrazh Court from 1999 to 2004 were won by the plaintiffs, with most cases regarding defendants who refuse to pay taking no more than ten minutes of the court's consideration.Footnote ¹⁴⁶

After the 2014 judicial reform that unified the Supreme Court and the Higher Arbitration Court, when most Higher Arbitrazh Court judges were fired, firms were not finding the court system to be so favourable to them, as many judges, some of whom were said to be Federal Security Service (FSB) members also, appeared to rule in favour of a state that was urgently seeking revenue.Footnote ¹⁴⁷

As the new taxes were introduced throughout the 1990s, the tax authorities in Russia did not engage as much in public education campaigns as in Poland. According to some, the tax administration placed a low priority on educating taxpayers.Footnote ¹⁴⁸ For example, there were few or no seminars between tax officials and taxpayers. While the 1999 tax code allowed taxpayers to ask the tax authorities for explanations, the tax authorities were reluctant to provide them, and the responses were found by some taxpayers to be usually not very helpful, although courts at times have provided more stable answers.Footnote ¹⁴⁹

Nevertheless, beginning in the late 1990s, the tax authorities began to try to persuade the population of the necessity of paying taxes. Eighty-seven per cent of Russians surveyed in 1999, for example, had seen television advertisements urging them to pay taxes.Footnote ¹⁵⁰ In one very memorable television advertisement, a man clutches his head in frustration in a darkly lit bedroom with an attractive, frustrated woman awake in bed beside him when a caption displays the words: ‘Lost your drive? Pay your taxes and sleep peacefully!’Footnote ¹⁵¹ Other television adverts consisted of frightening cartoons aimed not so much at children as adults.Footnote ¹⁵² The encouragement in Soviet times to denounce one's neighbours still existed in 1998 when 10 per cent of the tax amount recovered was written into the Tax Code for those individuals who informed on others for evading taxes.Footnote ¹⁵³

And yet a significant portion of society did not know how to pay taxes. While admittedly most taxpayers do not pay their own PIT (because, especially since 2001, taxes usually are withheld from salaries by employers), the percentage of those who did not know the procedures for paying taxes increased, not decreased, throughout the late 1990s:

Q: Do you know in what way citizens of Russia ought to pay taxes on their income?Footnote ¹⁵⁴

A lack of basic procedural knowledge on taxes also is evident from the fact that the vast majority do not even realize that they are entitled to tax deductions. While 41 per cent of Russians surveyed in February 2002 had expenses the previous year for medical treatment or education, only 15 per cent knew that they had a right to receive a tax refund for such expenses and only 4 per cent had applied for such a refund.Footnote ¹⁵⁵ (By comparison, the numbers of Poles who utilized a tax exemption or tax allowance on their tax return grew from 10 per cent in 1993 to 65 per cent in 1997 – a relatively short time after the introduction of taxes there.Footnote ¹⁵⁶) Hence, even though the tax authorities have been engaging in active propaganda on the importance of paying taxes, sufficient education of the population on the mechanisms for doing so appeared to be lacking.

Proposed reforms during 2005–2006 further illustrate ambiguity within the government as to how coercive and client-oriented the tax collection system should be. In 2005, Finance Minister Alexei Kudrin, whose ministry took control of the STA in the previous year, proposed that each tax inspectorate should have a separate complaints department, an internal review for tax claims above a certain amount and further restrictions on the types of tax investigations and methods used.Footnote ¹⁵⁷ An additional measure suggested later was the imposition of a limit on the number of tax audits performed on a taxpayer within a year.Footnote ¹⁵⁸ Businesses were able to agree with the tax administration that there should be no more than two tax inspections per year, but the business community in mid-2005 was said to be unable ‘to identify which official body will sanction additional inspections of large companies.’Footnote ¹⁵⁹

Other proposals, however, would not restrict the ‘power’ of the tax bureaucrats or require them to be particularly ‘consumer-oriented’. In 2005, the government suggested giving the tax agencies the power to fine companies without a court decision, and in January 2006 such a law went into force, allowing fines to be levied, provided that the penalty for each tax was no more than 5,000 rubles for entrepreneurs and 50,000 rubles for firms.Footnote ¹⁶⁰ Furthermore, the tax authorities were said in 2005 to be turning to individual taxpayers and to be intentionally failing to inform citizens regarding property and car taxes so that fines for unpaid taxes were ‘accumulating like an avalanche’.Footnote ¹⁶¹ Back in 1995, tax collectors’ salaries also were said to be tied to the amount of fines they brought in.Footnote ¹⁶²

In 2005, there was some ambiguity with respect to whether the tax administration would still use tax collection ‘targets’ as a way of managing the activities of its tax inspectors rather than requiring tax inspectors to focus on seeking to ensure citizen compliance with the tax laws. Following President Putin's annual address to the nation on 25 April 2005, in which he renounced the use of such ‘targets’ in favour of broad ‘budget directives’, the Federal State Tax Service stated four months later that it was now giving its inspectorates ‘indicative indices’.Footnote ¹⁶³ ‘The change did not immediately benefit the tax agency’, Mikhail Pryadilnikov and Elena Danilova found, ‘as a number of inspectors complained that their bonuses were still tied to the plan fulfilment (renamed general budget directives).’Footnote ¹⁶⁴ To muddle the issue of targets further, the finance ministry's draft budget for 2006 was said in August 2005 to assume that an extra U.S.$1 billion would be collected through additional inspections of businesses by the end of 2005, and that more than double that amount would be collected through additional corporate audits in 2006.Footnote ¹⁶⁵ Meanwhile, a former tax inspector confirmed that targets were still in place after 2005 and that they still existed in 2016.Footnote ¹⁶⁶ Today, a collection ‘target’ is presented by the analytical department within a tax inspection that is the result of preliminary tax analysis of a firm to be audited, which is given to tax inspectors prior to making a field tax audit at the site of the firm. Meanwhile, the notion of a ‘target’ (or ‘plan’) refers to the general target plans for the entire tax inspection office and is based on the average sums of taxes levied from an average inspection.Footnote ¹⁶⁷ Hence, it appears that targets never really went away.

In any case, the frequency of audits has become a real issue for businesses in Russia in recent years. In 2010, Ernst & Young found that 6 per cent of firms were audited more than once a year, 23 per cent were audited once a year and 37 per cent were audited once every two years.Footnote ¹⁶⁸ In other words, two-thirds of all firms were audited at least once every two years. Further, nearly two-thirds (63 per cent) of firms surveyed in 2010 stated that they were charged with additional tax liabilities as a result of tax audits performed in 2009.Footnote ¹⁶⁹ Of these, 97 per cent were charged with additional profit tax (CIT) liabilities and 77 per cent were charged with additional VAT liabilities.Footnote ¹⁷⁰ Only 29 per cent agreed with the additional tax liabilities charged by the tax authorities as a result of on-site tax audits performed in 2009.Footnote ¹⁷¹ Such is Russia's approach to collecting revenue through labour-intensive audits.

And what the tax service has been unable to uncover during audits, it has tried to obtain through tax amnesties. One such amnesty, which took place in 2007 as a result of tax collections having decreased since the 2001 introduction of the PIT flat tax reform, left many taxpayers confused as to what safeguards or protections would be provided if they decided to participate.Footnote ¹⁷²

Thus, it perhaps should not be surprising that when asked which issues should be considered for reform by the Russian state, 76 per cent of firms in 2010 declared improving tax administration, which also was the second most cited issue three years in a row after requests to simplify tax legislation, and 44 per cent also cited the need to enhance control over the tax authorities.Footnote ¹⁷³

Collecting the New Taxes in Ukraine

Despite the fact that laws were being enacted in Ukraine in the first half of the 1990s, few tax inspectors actually were familiar with these laws, which enabled them to use ‘bureaucratic discretion’ in applying the rules to the process of tax collection.Footnote ¹⁷⁹ Hence, the nation's bureaucrats could define the rules by which they played rather than have the rules defined for them, as is typical in a Weberian bureaucracy. The newly appointed bureaucrats found an opportunity to behave as they had formerly done by selectively applying the law, enabling the public not to perceive that there was a ‘rule of law’ but rather to experience the rule of the nachal'nyk (the government official who acts as a boss rather than as a chynovnyk, or bureaucrat).Footnote ¹⁸⁰ Thus, this discretionary process focused less on ensuring actual compliance on the part of taxpayers and failed in the construction of healthier bureaucrat–citizen relations.

As STA head and creator of the existing tax administration, Azarov instituted a coercion-based approach to tax collection in Ukraine, which included setting tax collection targets by region and by tax type.Footnote ¹⁸¹ The number of fines and sanctions was even said to have targets.Footnote ¹⁸² Up until 1998, a provision was said to allocate 30 per cent of fines for STA development purposes, providing a further financial incentive to collect fines.Footnote ¹⁸³ In 2016, inspectors were still said to receive bonuses based on the fines they collected.Footnote ¹⁸⁴ Moreover, because a target-based approach to tax collection provides an incentive to return to those taxpayers who have paid their taxes, as they are known to have money, rather than to seek out those individuals and firms that have yet to pay their taxes altogether, Ukrainian firms have recognized that they can enter a Catch-22 of sorts because the more often one is audited, the more one needs to show a profit, and the more profit one has, the more one is audited so that the state can extract extra revenue.Footnote ¹⁸⁵

One common practice among Ukrainian tax inspectors as part of the ‘tough fiscal measures’ has been to request over-payment of income taxes (also known as ‘payment in advance’) to ensure that the state budget goals were achieved. Under the leadership of both Azarov and Kravchenko, tax inspectors collected taxes in advance from firms and individuals in order to fulfil targets (most likely based on plans for districts rather than for specific firms) – a practice that can place firms in the trap of being compelled to do so again and again after they once have paid ahead of schedule. So, in 2004, one finance ministry employee revealed that the implementation of the state budget was achieved through the overpayment of income tax, with tax overpayments amounting to 4.1 billion Ukrainian hryvnia in the first ten months of 2004 and to 7.2 billion for the first 11 months.Footnote ¹⁸⁶

Under the Yushchenko presidency, it is believed that collection of taxes in advance also occurred, but to a more limited extent from 2004 to 2006.Footnote ¹⁸⁷ The aftermath of the 2004 presidential election brought forth a need for the state to focus first and foremost on raising revenue to cover its debts from the previous regime, which may have provided a reason for maintaining a target-based collection approach. Indeed, because the STA had a need to fulfil this plan, several companies paid their taxes early, in August 2005 rather than in September.Footnote ¹⁸⁸ Some Ukrainian firms in 2006 maintained that such targets still existed, even though the STA had stated that they did not, suggesting perhaps that the targets might have been internal.Footnote ¹⁸⁹

Once the financial crisis hit in 2008–2009, similar practices continued, with the amount of overpayments of tax payments being 4.2 billion hryvnia in 2007, 8.6 billion hryvnia in 2008, 11.7 billion hryvnia in 2009 and 14.5 billion hryvnia for the first 9 months of 2010. Of course, making additional tax payments or payments deprives firms of their working capital and can lead to depressed economic growth and wage arrears.Footnote ¹⁹⁰

Such practices also are said to have continued into the post-EuroMaidan era. Dubrovsky in 2015 remarked that ‘Burdensome administration and other “implementation problems” hide the fact that the whole system is essentially grounded on blackmailing, which is the main tool for “mobilization of taxes” according to planned targets and to large extent regardless of the law. For example, Ukrainian firms were forced to pay “in advance” UAH 26 billion [Ukrainian hryvnia, or about USD $2 billion] by September 2014 allegedly as their CIT for some future times.’Footnote ¹⁹¹

Because Azarov was primarily concerned with focusing on big firms for political and economic reasons, he largely gave local STA offices more autonomy in how to handle small and medium-sized businesses.Footnote ¹⁹² Furthermore, one tax lawyer has speculated that Azarov's desire to utilize the tax system as both a political weapon and a method of dispensing political favours for the Kuchma regime gave him an incentive not to build a truly modern, efficient and transparent system.Footnote ¹⁹³ Hence, from its creation under Azarov in 1996, the system was not designed to create trust or focus on compliance on the part of the public; instead, it was constructed with both political and fiscal purposes in mind, leaving great discretion to local tax inspectors as they fulfilled their tasks. Moreover, because family prosperity is seen as a more important goal by Ukrainians than being caught evading taxes, given that the chances of being caught are deemed to be low, Ukrainians believe that even if one is caught, the practice of ‘bureaucratic discretion’ will enable them to negotiate (or bribe) local tax officials to escape full punishment.Footnote ¹⁹⁴

Some of this discretionary practice was said not to have changed after the Orange Revolution.Footnote ¹⁹⁵ In 2005, there was still a lack of proper monitoring, systems control, ability to audit electronically and general oversight.Footnote ¹⁹⁶ However, a new modernization project was aimed at reducing direct contact between tax bureaucrats and taxpayers by enabling more taxpayers to file their taxes electronically.Footnote ¹⁹⁷ And part of the reforms introduced in early 2015 was to make the VAT process electronic. This should have decreased the ability of tax bureaucrats to practice personal ‘discretion’ as to which firms were able to receive a VAT refund, reduced corruption and led to an end for the haphazard administration of VAT refunds that had plagued Ukrainian businesses for years.

As in Russia, full inspection audits of taxpayers were done much more frequently than in Western countries. Back in the mid-1990s, large firms were to be inspected once every six months, if there were enough tax personnel.Footnote ¹⁹⁸ Since then, the frequency of scheduled audits of taxpayers has been determined by the degree of risk associated with taxpayers’ activities. Taxpayers with low risk are included in the audit schedule, which is formed and approved by the STA in Kyiv, no more frequently than once every three years; with average risk, not more often than once every two years; and with high risk, no more than once per year.Footnote ¹⁹⁹ In 2008, research prepared by the GfK market research group illustrates the high frequency of audits, as their survey found that 81.9 per cent of some large firms, 68.2 per cent of medium-sized firms and 51.1 per cent of small firms stated that they had been audited by the STA within the previous year.Footnote ²⁰⁰ Meanwhile, during the financial crisis of 2008–2009, some taxpayers were given the option of paying their dues to the state in instalments.Footnote ²⁰¹

Even with all the political changes in recent years, there is still some question as to whether patterns of corruption have been altered significantly in the collecting of taxes. Corruption in Ukraine in general was said to have decreased in the first nine months of 2005, perhaps due to a psychological holdover from the Orange Revolution, but it began to increase in the fall of that year, after Yulia Tymoshenko was fired from the post of prime minister, and was said to have continued through the summer of 2006, when there was great uncertainty as to whether there would be a new government and what form it would take.Footnote ²⁰² While Tymoshenko was prime minister in the first half of 2005, she tried to fight corruption by increasing salaries, especially of those who headed tax offices and were responsible for making decisions.Footnote ²⁰³ Even so, in the opinion of one tax inspector, when internal anti-corruption campaigns seeking to ‘uncover’ bad inspectors do occur, with a ‘plan’ with respect to how many, there is a risk that attempts by the tax authorities to catch corrupt tax officials can sweep up good inspectors as well.Footnote ²⁰⁴

In any case, the level of tax collection was deemed in 2010 to have ‘low profitability’. That is, the costs of collecting 100 units in the domestic currency were judged to be higher in Ukraine by 3 to 4 times than in other EU member states, indicating that the tax service collects at a poor rate of efficiency.Footnote ²⁰⁵