Kyiv runs into strong opposition on tax hike to fund the war

KYIV — Ukraine’s government is running into a fierce blowback from foreign and domestic businesses over its draft proposal to hike taxes to pay for the war effort.

The idea had been to impose a 120 billion hryvnia (€2.7 billion) tax increase on an already hard-pressed population.

“The war has been going on for the third year, and the government has been doing everything possible not to raise taxes for business. Today, all other sources for increasing the funding of the defense forces have already been exhausted,” Ukrainian Finance Minister Sergii Marchenko said in a statement on Wednesday.

However, businesses heavily criticized a draft tax law introduced to the Ukrainian parliament earlier in July.

“The search for additional revenues through the introduction of new taxes will greatly burden business,” the Ukrainian Chamber of Commerce said in a statement on Monday.

“Against the background of Russian aggression and the destruction of infrastructure and the reduction of markets and the outflow of personnel, additional fiscal pressure on Ukrainian business makes economic stability impossible,” the statement added.

The pressure to not raise taxes also came from beyond Ukraine.

“The United States is encouraging the Ukrainian government to increase revenues primarily by reforming customs and combating gray markets,” Penny Pritzker, the U.S. special representative for the economic recovery of Ukraine, at a briefing in Kyiv on Monday.

“There is also a huge source of profit in the gray markets of cigarettes, alcohol, or electronics that can be sold on a large market. And that’s why we encouraged the Ukrainian government to focus on this,” Pritzker added.

Ukraine allocated roughly 37 percent of GDP, or nearly $40 billion, on defense, almost entirely covered by taxation this year. | Simon Wohlfahrt/Getty Images

The American Chamber of Commerce urged the Ukrainian government not to squeeze additional taxes from law-abiding businesses and instead work to shrink Ukraine’s large and untaxed shadow economy.

“AmCham Ukraine firmly believes that the source for additional tax revenues is in combatting evasion and ensuring equal rules for all, not increasing taxes on legitimate taxpayers who already bear the highest burden,” the chamber said.

The Ukrainian government met with businesses on Wednesday but the two sides were unable to reach an agreement, kicking the issue into next week.

“We agreed that this is the beginning of a dialog,” Prime Minister Denys Shmyhal wrote after the meeting.

Danylo Hetmantsev, chairman of the parliament’s tax committee, said that a tax hike was “painful but necessary.”

The Ukrainian government says it needs to increase revenues by 500 billion hryvnia, three-quarters of that from new borrowing with the rest coming from higher taxes. Once raised, 60 percent of the cash will pay military salaries and the remaining 40 percent will be spent on weapons.

The draft tax bill would increase the war tax paid by Ukrainian residents as well as hike duties and excise taxes on goods like fuel and tobacco.

The extra money is desperately needed.

Ukraine allocated roughly 37 percent of GDP, or nearly $40 billion, on defense, almost entirely covered by taxation this year.

The last year has strained public finances as Kyiv was forced to use its own funds to buy weapons due to the months of delay in the U.S. Congress over passing a $61 billion military aid bill, finally approved in April.

“The provision of weapons from international partners at the beginning of 2024 was significantly less than needed and promised,” said Oleksandra Betliy, a research fellow with Kyiv’s Institute for Economic Research and Policy Consulting.

Marchenko, the finance minister, said the decision on a tax hike should be made by September.

“The issue of providing these funds is an absolute necessity. The state’s defense capability depends on it,” Marchenko said.