What Is the Cost of Operating a Business in Ukraine?

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In 2016, the costs attributed to operating a business in Ukraine have been lower than in a respective index in 2015. In particular, during the past year, Ukrainians spent on average UAH 27,412 for the purposes of compliance with the effective regulatory requirements. This amount is UAH 2,349 lower than in 2015, which is primarily the result of the reduction of the costs incurred in connection with audits of businesses.

This information was published in the Annual Business Climate Assessment (ABCA), a report on the results of an all-Ukrainian survey of SME representatives. The survey was conducted from November 2016 to January 2017 by the Institute for Economic Research and Policy Consulting within the scope of USAID Program of Leadership in Economic Management.

What did Ukrainian entrepreneurs spend their money on? The cost items included official payments, fees for the lawyers and intermediaries, expertise and valuation costs, and bribes and voluntary contributions (“direct costs”). In addition, we took into account the time spent by the entrepreneurs to complete regulatory procedures (the so-called “indirect costs”). This amount includes the costs of the state registration, licensing, certification, sanitary and hygiene requirements compliance, and public oversight.

The statutory audits are the most costly item for the Ukrainian businesses. The expiry of the period of the moratorium on audits that “guarded” the businesses in 2014 and in the first half of 2015 increased the share of the SMEs that experienced the impact of attention on the part of the state authorities: In 2015, the oversight bodies audited 50% of Ukrainian SMEs, and in 2016 this share comprised already 68% of the existing businesses. The overall average duration of an audit during the year increased by one day and comprised 15 days. However, their frequency has remained almost intact and comprised 3.6 times per year (in 2015: 3.8 times).

There was a growth of the number of the SMEs forced to pay additional taxes and fines: the shares of the SMEs that paid fines, unofficial payments (i.e. bribes) or were subject to resolutions on products forfeit comprised 40% and 61% in 2015 and in 2016, respectively.

In the background of the increase of the frequency of the audits, there was a significant decrease in the amount paid by a SME in the course of its audit (average amount paid by a SME amounted to UAH 33 thousand and UAH 22 in 2015 and in 2016, respectively). This reduction can be primarily attributed to the fact that the costs became more “homogeneous”, i.e. payments reported by the SMEs became more standard in terms of size. In addition, there was a reduction in the unofficial costs.

The audits conducted by the State Tax Inspectorate (STI) resulted in the largest expenses for the SMEs. In 49% of instances, such audits ended up in fines. In 5% of the cases, the auditee was additionally forced to incur unofficial payments. In 2015, these indicators were slightly lower and comprised 43% and 4%, respectively, which means that the moratorium was not an absolute panacea for the most comprehensive audits. On the average, each SME paid UAH 27 thousand in connection with its audit, while 50% of the SMEs incurred only UAH 4 thousand or less. The amounts of the fines paid by businesses based on the results of the audits were quite different in sizes. Moreover, the fines accrued were often disproportionately higher than the magnitude of the offences committed. Businesses reported on the fines accrued in connection with negligence, errors in tax returns, and failures in the system itself. This may often go hand in hand with power abuses on the part of the tax inspectors. In particular, among other problems associated with the taxes administration, the issue of excessive amount of the penalties imposed for errors was on the third place in terms of its priority for the entrepreneurs. The share of complaints about such fines was the largest within total number of reports of the SMEs audited by the STI. In addition, the tax authorities are associated with such issues as burdensome audits, dependency on the preferences of the tax inspectors, and the need to negotiate and pay bribes.

There were some improvements in the licensing area: the total cost of the procedure (including indirect cots) comprised over UAH 13 thousands in 2016 versus UAH 14.7 thousands in 2015. This decrease is attributable to the reduction of the maximum term of issuance of a license to 24 days (in 2015: 36 days). Nevertheless, the costs of obtaining a license have increased: the direct payments were UAH 6.8 thousand in 2015 versus UAH 7 thousand in 2016. The situation with the unofficial costs has somewhat deteriorated (17% versus 15% in 2015). One in three SMEs has licensed its products or services in 2016.

Businesses spent on average UAH 5.3 thousand and 38 days to obtain their certificates of compliance of their products and services in 2016. In 2015, the cost of the procedure was higher and comprised UAH 6.2 thousands, while the duration was shorter, comprising 35 days. Every sixth SME obtained such certificates. The cost of obtaining the hygiene certificate reduced to UAH 2.1 thousand in 2016 from UAH 2.7 thousand in 2015. Such a certificate was also obtained by one in six SMEs. The duration of the procedure has not altered.

However, the procedure for registration or re-registration of a business became longer and more costly in 2016. An average company had to pay UAH 380 and spend 6 days in 2016 (instead of UAH 241 and 4 days a year earlier, respectively). The total cost of the procedure comprised almost 2 thousands (circa UAH 1 thousand in 2015). Despite the above change for the worse, the state registration is one of the most streamlined regulatory procedures, which is acknowledged by 60% of the SMEs that took part in the survey.

Furthermore, a significant share of the corporate expenses is incurred to administer and pay the due taxes. In particular, for tax accounting purposes, 51% of the SMEs must hire on average 2 full-time accountants, 16% of the SMEs – 1 part-time accountant, and 17% of the companies outsource their accounting personnel (1 person on average). Another 20% of the companies maintain their tax accounting records independently. In addition to the payment of the remuneration to the accountants, SMEs management is forced to spend 9% of their working time to address various taxation-related issues. Ukrainian SMEs regularly pay approximately a quarter of their annual revenues to honor their tax liabilities.

The improvements in the regulatory procedures are reflected in the index of changes in the regulatory procedures. To assess this index, SMEs were asked to evaluate the changes in the conditions and processes related to the performance of the regulatory procedures for the past three years. In all regulatory areas, positive responses are prevailing over the negative ones, and this index is immaterially different from the index of the past year. The only exception are the issues attributable to the commencement of use of premises, where the index of 2015 indicated deterioration of the situation in long-term comparison and comprised -0.06, while in 2016 the index grew to +0.12 (using the scale from -1 to +1).

These are the changes in the registration procedures that received the best positive evaluation of SMEs representatives (+0.59). In our opinion, this score is partially explained by the availability of the option of registration of businesses or any amendments in their statutory documents via the Internet. The companies that passed their registration online gave positive feedback more often. The changes in the public oversight area have also been evaluated positively by the SMEs that took part in the survey (+0.33).

The overall index of changes in the regulatory environment comprised +0.19 in 2016 (2015: +0.17). While this index has remained positive, it did not demonstrate any significant improvements in the state regulation area as compared to the previous period. The cost of operating a business has been reduced. This was, in particular, thanks to the reduction in audit-related expenses. At the same time, the tax audits and reviews by the representatives of the STI are still excessively frequent, burdensome and often result in imposing extreme fines imposed for small offences.

Viktoriya Bespalko
The Institute for Economic Research and Policy Consulting - Kiev