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TRANSCRIPT
Ukraine:An Assessment of
the BusinessEnabling
Environment
Andrius NemickasBohdan Senchuk
Olexander Babanin
Survey Fieldwork Conducted by Ukrainian Marketing Group
in 2002
Survey and Sectoral Analysis Project in Ukraine
Funded by the Ministry of Foreign Affairs of Norway
October 2002
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TABLE OF CONTENTS
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Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Survey Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Executive Summary: Business Enabling Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
General Findings . . . . . . . . . . . . . . . . . . . . . . . . 10Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Inspections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Customs Procedures . . . . . . . . . . . . . . . . . . . . . . 11Certification and Standardization . . . . . . . . . . . . 11Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Barriers to Business in Ukraine: An Overview . . . 13Barriers to Business Development in Ukraine . . . . 13Regulatory Barriers in Focus . . . . . . . . . . . . . . . . 14Regulatory Environment in 2001 and 2000. . . . . . 14Regulatory �Time Tax� . . . . . . . . . . . . . . . . . . . . 17Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Perceptions of Taxation as a Barrier to Growth . . . 19Number of Taxes . . . . . . . . . . . . . . . . . . . . . . . . 21Tax Burden as a Share of Sales and Value Added . 22Unregistered Economic Activities . . . . . . . . . . . . . 24Most Troubling Taxes . . . . . . . . . . . . . . . . . . . . . 27The Simplified Taxation System . . . . . . . . . . . . . . 29Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Perceptions of Inspections as a Barrier to Growth . 31Inspections Basics . . . . . . . . . . . . . . . . . . . . . . . . 31Inspection Frequency . . . . . . . . . . . . . . . . . . . . 32Inspecting Agencies. . . . . . . . . . . . . . . . . . . . . . . 36Average Duration of Inspections . . . . . . . . . . . . . 36Enterprise Perceptions of Changes in the InspectionsProcess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Inspection Consequences . . . . . . . . . . . . . . . . . . 40Unofficial Payments . . . . . . . . . . . . . . . . . . . . . . 42Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Customs Procedures . . . . . . . . . . . . . . . . . . . . . . . . 45Perceptions of Customs as a Barrier to Growth . . . 45Import-Export Operations . . . . . . . . . . . . . . . . . . 46Procedural Difficulties with Customs . . . . . . . . . . 47Violations of Customs Procedures . . . . . . . . . . . . 48Unofficial Payments . . . . . . . . . . . . . . . . . . . . . . 49Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Certification and Standardization . . . . . . . . . . . . . . 52Certification Actitvity. . . . . . . . . . . . . . . . . . . . . . 52
Perceptions of Certification as a Barrier to Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Problems Encountered During Certification Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Certification of Imported Goods. . . . . . . . . . . . . . 55Certification in Practice . . . . . . . . . . . . . . . . . . . . 55Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Permits and Approvals . . . . . . . . . . . . . . . . . . . . . . 56General Aspects of the Premit Process . . . . . . . . . 56Legal Aspects of Permits and the Role of LocalAuthorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Number of Permits Required . . . . . . . . . . . . . . . . 57Perceptions of Permits as a Barrier to Growth . . . . 58Obtaining Permits in 2001. . . . . . . . . . . . . . . . . . 60Obligatory Permits . . . . . . . . . . . . . . . . . . . . . . . 61Timeframes for Receiving Permits . . . . . . . . . . . . 63Permits and Unofficial Payments . . . . . . . . . . . . . 64Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Perceptions of Licensing as a Barrier to Growth . . 66The Licensing Process . . . . . . . . . . . . . . . . . . . . . 69Legal and Regulatory Basis . . . . . . . . . . . . . . . . . 69Problems Encountered with Licensing . . . . . . . . . 70Licensing Violations . . . . . . . . . . . . . . . . . . . . . . 71Unofficial Payments . . . . . . . . . . . . . . . . . . . . . . 72Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Perceptions of Registration as a Barrier to Growth. 74The Registration Process . . . . . . . . . . . . . . . . . . . 75Legal Basis for Registration . . . . . . . . . . . . . . . . . 75Problems Encountered During Registration . . . . . . 75Registration Activity . . . . . . . . . . . . . . . . . . . . . . 77Time Required to Complete the Registration Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Costs to Register . . . . . . . . . . . . . . . . . . . . . . . . . 84Unofficial Payments . . . . . . . . . . . . . . . . . . . . . . 86Registration in Ukraine and Worldwide . . . . . . . . 86Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Annex 1: Sample Selection and Methodology. . . . 88Annex 2: Legal Framework . . . . . . . . . . . . . . . . . 92Annex 3: Supplementary Tables . . . . . . . . . . . . . 113
TABLE OF CONTENTS
he International Finance Corporation (IFC), established in 1956 as a member of the World Bank Group, pro-
motes sustainable private sector investment in emerging economies as a means to help reduce poverty and
improve people's lives. When Ukraine became an IFC member country in 1993, as the size of the coun-
try's private sector precluded direct investment, IFC began its work by delivering technical assistance projects, first
to help create the private sector and later to assist its further development.
In Ukraine, IFC has built a strong record as one of the most active providers of technical assistance for economic
development, particularly through programs targeted to small and medium enterprises. In addition to its investment
projects in the country, IFC has successfully completed programs of Small Scale Privatization, Divestiture of
Unfinished Construction Sites, Land Privatization and Agricultural Reform, and Mass Privatization (assisting enter-
prises undergoing voucher privatization). Currently, IFC is managing the following projects in Ukraine: Corporate
Development, Agribusiness and an SME-Toolkit providing internet-based assistance targeted to small and medium
enterprises.
IFC's efforts to deliver advanced services directly to SMEs began in 1994 with the Post Privatization Project, and
continued with the Business Development Project from 1996 to 2001. Within the scope of these projects, IFC
established eleven locally owned and managed, self-sustaining consulting centers throughout the country. These
centers - known as the Ukraine Consulting Network (UCN)1 deliver training and advisory services to SMEs and
individual entrepreneurs.
In 1996, as a part of the Business Development Project, IFC began conducting annual surveys of the SME sector in
Ukraine to analyze the overall business enabling environment for these firms. Particular focus has been paid to the
role of regulatory and administrative functions of government and their effect on business operations. The surveys
have been effective in promoting policy reform on private sector development issues, and have been used as a tool
to monitor the progress of various reforms and changes in the business environment.2
This report is published in English and Ukrainian, though the English version will prevail in the event of any ambi-
guity. While every effort has been made to directly translate the English version into Ukrainian, in certain instances,
form has been sacrificed to preserve substance.
This report has benefited from the insight and suggestions of a number of people, including: Andrei Mikhnev of the
World Bank, Volodymyr Zahorodny, Volodymyr Muzychuk of the State Committee on Regulatory Policy and
Entrepreneurship, Ihor Shpak of the IMF, John Thissen of SEFR-Ukraine, Irina Akimova, Nadia Mankovska, and
Martha Oleksiv of the Institute for Economic Research and Policy Consulting; Oleksandr Bilotserkivets of the
Institute of Economics; Oleg Denysenko of Sumy Business Center, Volodymyr Domrachev of the Institute of
Cybernetics; Volodymyr Dubrovsky of CASE-Ukraine; Petro Kalyta of the Ukrainian Quality Association; Dmyrto
Lutsenko of BIZPRO, Yuri Prylypko of the Science Research Institute of Statistics.
Special thanks to Elena Voloshina, Tania Lozansky, Darrin Hartzler, Motria Onyschuk-Morozov, Roman Zyla,
Sergey Triputen, Alexander Kobzev, Iryna Kotsko, Vladislava Ryabota, Ihor Kitela, Victor Gorbatenko, Oksana
Androshchuk, Vasyl Lytvynov, Natalia Shevchuk, Serhiy Rusnak, Valeria Gorban, Mykola Petrychuk and Dina
Nicholas of IFC for their incisive comments and helpful suggestions, to Serhiy Kysil and Irina Kravchenko for their
very thorough regulatory analysis, to Taras Tkachenko for comprehensive statistical analysis and Ivan Shevchenko,
INTRODUCTION
1 UCN consulting companies are located in: Cherkasy, Chernigiv, Chernivtsi, Dnipropetrovsk, Khmelnitsky, Luhansk, Mariupol, Simferopol, Sumy, Vinnytsia and Zhytomyr. More detailed information about UCN's activities is avail-able at the web site www.consulting.kiev.ua
2 All previous IFC reports on business in Ukraine are available at www.ifc.org/pep
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INTRODUCTION
T
Ksenia Marchenko, Julia Iskra, Irina Kirtak for their patience and professionalism in the translation work, and to
Andrei Gulay, Larissa Shidlovskaya and Lidia Warring for their suggestions on design and to Alexander Priven for
layout conception. This report has been edited by Olena Samoilenko and Dina Nicholas, and designed by
Vladislav Zakharenko and Vasyl Risny. The generous advice of Max Yacoub, throughout various stages of this
report, also deserves special mention.
The Government of Norway has generously provided funding for this survey through its Trust Fund with the IFC.
The survey field work for this report was carried out by the Ukrainian Marketing Group (UMG).
This report is not a comprehensive independent review by the IFC of the issues facing the small business sector in
Ukraine. Nor does it represent the views of the World Bank Group or Norwegian Government. Rather, it is a quan-
titative, factual representation of the views of Ukrainian entrepreneurs themselves, supported with analysis where
possible and applicable. In some cases, entrepreneurs' perception of the issues may not be fully aligned with the
existing legal base. However, these are nonetheless real concerns. These discrepancies, where they arise, point to
a need for better communication between the Government of Ukraine and the private sector.
Copies of this report in both hard copy and electronic format can be obtained at the following address:
International Finance Corporation International Finance Corporation
4, Bohomoltsya Street Private Enterprise Partnership
5th Floor 2121 Pennsylvania Avenue, NW
Kiev, 01024 Washington, DC 20433
Ukraine USA
Tel: +380 44 253 0539 Tel: +1 202 458 0917
Fax: +380 44 490 5830 Fax: +1 202 974 4312
www.ifc.org/pep www.ifc.org/pep
INTRODUCTION
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he sample selection and methodology used in thissurvey is similar to that used to conduct IFC's latestnationwide Business Enterprise Survey, published in2001. This section presents a succinct breakdown of the
firms covered by the survey.
The structure of the sample used for this report does not fully
reflect the overall structure of commercial activity in Ukraine.Instead, this report has a strong urban focus, and puts anemphasis on manufacturing firms, which, due to the nature oftheir business activities, are subject to a wide range of the reg-ulatory procedures described in this study. Detailed informationon sample selection and methodology can be found in Annex 1.
A detailed profile of survey respondents is presented in Figures 1-5 and Tables 1&2.
SURVEY SAMPLE
1 Other services include hotels, travel agencies and domestic services firms (drycleaners, hairdressers, etc.)2 Agricultural firms are firms engaged in farming, fishing and logging. Agricultural processing firms, however, were included in the survey and are listed with manufacturing firms for the purposes of this report.
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SURVEY SAMPLE
T
TIMING
METHOD
REACH
Survey fieldwork was carried out in April 2002.
This survey was composed of 3 questionnaires covering a total of 97 questions. One ques-tionnaire was presented in written format, while the others were conducted as personal inter-views. These three questionnaires covered the general, administrative and financial aspects ofeach firm's activities.
2,480 companies operating in the 23 oblast capitals of Ukraine and the capital cities ofKiev and Simferopol.
Manufacturing firms were used as the base for the sample, and represent 47% of all surveyedfirms. Distribution of respondents amongst cities is based on each city's proportionate shareof manufacturing firms nation-wide.
For all other sectors fixed quotas were used for each city to allow for cross-regional com-parison. Other sectors covered are trade, transportation, construction, financial services, pub-lic catering, and other services.1
Agricultural firms2 have been specifically excluded from the survey. The reasons for thisexclusion are based on the urban focus of this report, as well as on the unique conditions ofthe sector, which would have made cross sector comparisons difficult.
FIRM SIZE
FIRM ORIGIN
Small: less than 50 total employees;
Medium: between 50 and 250 employees;
Large: over 250 employees.
State-owned enterprises are those in which majority ownership is held by the government.
Privatized firms are formerly state-owned enterprises in which a controlling stake (not less than50%) has been divested to the private sector.
Private firms are new firms established after 1991, directly as fully private enterprises.
In order to present data for different types of firms, respondententerprises have been subdivided by firm size and origin. It isimportant to note that the State Statistics Committee of Ukrainedoes not currently define either large or medium enterprises,and therefore the sample was not structured so as to include a
specific portion of firms of a particular size. For the purposes ofthe report, respondent firms have been divided into small,medium and large enterprises based on their number ofemployees.
SURVEY SAMPLE
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Figure 1
Respondents by Sector of Business Activity
(% of all respondents)
Manufacturing
Trade
Construction
Public catering
Transport
Financial services
Other services
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90
80
70
60
50
40
30
20
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0
48
6
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3
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Figure 2
Respondents by Firm Size
(% of all respondents)
Small (up tp 50)
Medium (51-250)
Large (more than 250)
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23
18
%100
90
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50
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SURVEY SAMPLE
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Figure 3
Respondents by Firm Origin
(% of all respondents)
State-Owned
Privatized
Private
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36
41
Table 1
Respondents by Legal Status
Legal status Share of Total
Sole proprietorship 26.1%
Joint stock company 21.4%
Limted liability partnership 21.2%
Closed-end joint stock company 9.8%
Collective enterprise 9.5%
State-owned enterprise 6.5%
Communal enterprise 3.0%
Other 2.5%
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%
SURVEY SAMPLE
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Table 2
Respondents by Region
City Share of Total
Kiev 6.9%
Donetsk 5.6%
Dnipropetrovsk 5.5%
Kharkiv 5.2%
Simferopol 4.3%
Lviv 4.2%
Odesa 4.2%
Zaporizhia 4.0%
Luhansk 3.9%
Kherson 3.6%
Mykolaiv 3.6%
Uzhgorod 3.6%
Ivano-Frankivsk 3.5%
Sumy 3.5%
Zhytomyr 3.5%
Poltava 3.5%
Rivne 3.5%
Ternopil 3.5%
Khmelnytsky 3.5%
Cherkasy 3.5%
Chernihiv 3.5%
Chernivtsi 3.5%
Kirovohrad 3.5%
Vinnytsia 3.4%
Lutsk 3.4%
SURVEY SAMPLE
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Figure 4
Respondents by Management Level
(% of all respondents)
Director
Deputy Director
Chief Economist
Chief Accountant
Other
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28
10
9
7
Figure 5
Respondents by Gender
(% of all respondents)
Male
Female
58
42
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%100
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great many issues impact a nation's business enablingenvironment, serving to assist or to hinder constructivedevelopment of the private sector. These include politi-cal and economic stability, financial markets, infrastruc-
ture, labor skills, and many more. Yet one of the cornerstones ofa healthy market economy is a reasonable and predictable reg-ulatory and administrative environment.
This report focuses attention on the regulatory setting inUkraine, attempting to analyze many of the regulatory functionsof the state from the viewpoint of enterprise managers who dealwith such issues on a daily basis. This year 2,480 Ukrainiancompanies - from a variety of sectors of business activity andlocated in 25 urban centers of Ukraine, participated in thestudy. In the tradition of IFC's previous surveys of the Ukrainianbusiness environment, this year's report pays particular atten-tion to and highlights the specific experience of small and medi-um enterprises (SMEs).
In May 2001, IFC published Ukrainian Enterprises in 2000: AnIFC Survey of Ukrainian Business, which covered a broad rangeof topics - from the financial aspects of enterprise performanceto the specifics of local business planning and the availability ofconsulting services. This year attention is focused on the regu-latory environment, and specifically on the aspects of this envi-ronment that businesses perceive to be barriers to their growthand development. This has been done so as to provide a sub-stantially more detailed description of the regulatory setting inwhich Ukrainian enterprises function and operate. Throughoutthe report, comparisons to prior-year results will be providedwhere available.
General Findings
6 Between 2000 and 2001, improvements have takenplace in enterprise perceptions of many governmentregulatory activities; in addition, a number of positivechanges have occurred in the regulatory environmentin Ukraine.
6 Despite these improvements, administrative barriersremain significant and regulatory procedures continueto be complex, lengthy, opaque and therefore open tocorruption.
6 The typical Ukrainian company spends 16% of itstime dealing with government regulatory procedures.
This regulatory �time tax� amounts to nearly a full dayof every business week.
6 Taxation issues and frequently changing regulations ofbusiness activities persist as the most significant barri-ers to business growth.
6 Conspicuous regional variation exists in enterpriseappraisal of nearly all administrative procedures,underscoring the substantial degree of control thatlocal authorities exert over the regulatory process.
6 Unofficial payments, often required of enterprises tocomplete regulatory activities, remain an acuteproblem.
Taxation
6 Taxation was rated the most serious obstacle to busi-ness development in 2001, as it was in 2000. This isdespite a notable drop in the share of firms describ-ing the taxation system as a major or significant bar-rier to their business, from 83% to 70%.
6 The typical Ukrainian firm paid an average of 10 dif-ferent taxes in 2001, down from 11 in 2000. Thisdrop in average number of taxes paid is mostly dueto small firms switching to the simplified tax system.
6 By 2001, 61% of firms eligible for simplified taxationhad switched to unified tax, compared to 52% in2000.
6 Companies report that the tax burden as a share ofsales has actually increased from 23% to 28%between 2000 and 2001, and as a share of valueadded from 53% to 55%.
6 The estimated average share of sales concealed fromtaxation rose from 16% in 2000 to 26% in 2001.
6 All firms, regardless of their size or origin, areunanimous in citing the Value Added Tax (VAT) as themost troubling tax for their business. The VAT refundprocedure is the biggest problem with nearly 62% ofexporters claiming that it is a major or significantobstacle.
EXECUTIVE SUMMARY
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A
EXECUTIVE SUMMARY: BUSINESSENABLING ENVIRONMENT
Inspections
6 Nearly half of respondents (45%) cited inspections asa significant or major barrier to their growth anddevelopment in 2001.
6 While business opinion of the inspection system hasbecome slightly more critical, survey results show thatfirms underwent fewer inspections in 2001 -- an aver-age of 12 per year, down from 14 in 2000. Their dura-tion also decreased in 2001 to an average of 23 work-ing days per year, down from an average 27 in 2000.
6 Significant regional differences exist in inspectionsintensity, though regions appear to be converging.
6 In total, 41% of inspected enterprises were sanctionedin 2001, compared to 44% last year. The issuing offines as a result of infractions, however, increased dra-matically, with 61% of sanctioned firms paying a finein 2001, compared to just 6% in 2000.
6 Enterprises are challenging the decisions of inspectorsmuch more frequently; 60% of sanctioned enterprisesstaged a formal challenge in 2001, compared to just23% the year prior.
6 Unofficial payments made during the inspectionprocess remain a serious problem. Survey results showthat between 32% and 43% of firms are likely to bemaking such payments, depending on the inspectingbody involved.
Customs Procedures
6 Forty-one percent of surveyed enterprises cited cus-toms procedures as relevant to their business activi-ties. Nearly half of these firms, however, claim thatcustoms procedures are a serious barrier to theirgrowth, ranking customs as the third most problemat-ic regulatory procedure.
6 Specifically, firms find the customs process too costly,too time consuming, and far too complex.
6 Currently, 22% of firms are engaged in import-exportoperations.
6 According to survey results, violations of customs pro-cedures occur most commonly with completing cus-toms documents, dealing with customs controls, andbusiness border crossings. About one-fifth of firmsengaged in import-export operations reported viola-tions during each of these processes.
6 The incidence of reported violations during customsprocedures is higher for SMEs than for large firms.
6 Survey results suggest that nearly one-quarter (23%) ofthe time, unofficial payments are made during thecustoms process - down from 30% in 2000; thosemaking such payments usually pay up to an additional25% over the official cost of each procedure.
Certification and Standardization
6 Just over 40% of surveyed Ukrainian enterprises con-sider certification of their products to be a significantor major obstacle to the growth of their business,which remains virtually unchanged from last year.
6 More than 22% of firms surveyed encounteredproblems while completing certification procedures in2001; the problem most frequently mentioned is anoverall lack of transparency and simplicity inprocedures, cited by 54% of firms encounteringdifficulties.
6 Just 13% of all firms and 20% of manufacturers haveadopted or plan to adopt a quality management sys-tem which helps to ensure that the enterprise meetsproduct certification standards; another 17% of firmsengage in or plan to engage in voluntary certificationof production.
6 Survey results suggest that unofficial payments aremade by over one-fifth (22%) of firms trying to haveimported goods certified.
Permits
6 There has been no significant change in businessperception of the permit process, with the share ofrespondents citing it as a major or significant barri-er dropping slightly, from 44% in 2000 to 41% in2001.
6 Despite this lack of change in general perceptions,survey results show that, for firms obtaining permits in2001, the process has become increasingly difficult formost permit types.
6 Obtaining permits remains slightly more problematicfor small and medium sized companies.
EXECUTIVE SUMMARY
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6 Attitudes toward the permit process differ widely byregion, and this disparity has grown larger between2000 and 2001, underscoring the influence exerted onthe process at the local level. A number of cities showexceptional improvements in local perceptions of theprocess, while others have suffered marked declines.
6 The time required to receive permits is longest forland allocation (27 working days), construction (17),and renovation (14), with all other permits obtainedin less than 10 working days.
Licensing
6 With the enactment of the Law on Licensing in late2000, a number of important improvements have beenmade to the licensing process; this has resulted infewer firms considering it a significant or major bar-rier to their business - 35% of firms participating inthe survey cited licensing as a barrier in 2001, com-pared to 43% in 2000.
6 However, continual changes in legislation - 14changes in 19 months since passage of the Law onLicensing - confuse enterprises and undermine otherprogress made.
6 Twenty-one percent of respondents obtaining a licensein 2001 reported experiencing problems during theprocedures.
6 Licensing officials often exceed legally imposed dead-lines for completing the licensing process - at least41% of enterprises encountered excess delays in atleast one of stage of the process.
6 The need for unofficial payments during the licensingprocess decreased by nearly one-third when comparedto 2000; most of the decline in such payments wasexperienced among small enterprises.
Registration
6 The registration and re-registration processes rank asthe lowest overall regulatory barrier to enterprisedevelopment. In 2001, only 21% of respondentsclaimed that the process was either a significant ormajor barrier to business, down from 25 % in 2000.
6 In 2000-2001, nearly 40% of respondent firms wentthrough registration procedures - either registering orre-registering their business, or changing their compa-ny�s constituent documents.
6 Registration remains a lengthy, opaque, multi-stepprocess requiring formal engagement with at least 8different agencies.
6 To complete the full process of registering their com-pany, entrepreneurs require about 40 working days ifthey attempt to do it alone or just over 15 workingdays if they hire an intermediary that provides full,"turnkey registration."
6 Deadlines for receipt of the registration certificate arenot typically adhered to: 61% of companies experi-enced delays.
6 Extreme variations in registration duration and costsexist among both regions and government bodies, sug-gesting strong, independent influence and control ofthe process by regional and local authorities.
6 By law, the cost of obtaining a registration certificateis UAH 119 (US $22). Survey results show, however,that businesses pay an average of UAH 369 (US $66)to obtain this certificate. Meanwhile, the entire regis-tration process, including pre-registration, registration,and post-registration formalities, costs entrepreneurs anaverage of UAH 1,408 (US $262) before they canlaunch their company.
EXECUTIVE SUMMARY
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BARRIERS OVERVIEW
his overview summarizes the key barriers to businessdevelopment in Ukraine, as they are perceived by com-panies. It presents two types of barriers faced byUkrainian business - general barriers, broadly defined,
and regulatory barriers in particular. Regulatory barriers aregovernment regulatory activities which, by the manner in whichthey are conducted, stifle rather than regulate firm growth anddevelopment in the eyes of local business.
First, attention is given to all general barriers to business growthcited by survey respondents. The focus is then narrowed to thespecific difficulties that local firms find within the regulatoryenvironment in Ukraine. Finally, a regulatory/administrative"time tax," is discussed, which represents companies' estimates
of the portion of management and staff time spent dealing withregulatory issues.
Barriers to Business Development inUkraineSurvey respondents were asked to separately rate the serious-ness of a number of issues as potential barriers to the develop-ment and growth of their firm. The results are presented inFigure 6.
Taxation is clearly the most troubling of all issues, with over 70percent of firms citing it as a major or significant barrier to busi-ness development. As discussed later in the report, this relates
not only to tax rates, but also to the number of separate taxes,instability of the tax legislation, reporting requirements, and toaccounting rules and procedures, which do not allow firms towrite off a significant portion of their costs. These factors com-bine to explain the general level of frustration with the taxationsystem on the part of Ukrainian entrepreneurs.
Taxation was also ranked as the most serious obstacle to enter-prise development in 2000. The share of firms citing it as amajor or significant barrier has nevertheless declined to 70 per-cent in 2001 from 83 percent in 2000.
In 2001, firms rated the regulatory environment in Ukraine 7thof a list of 10 general barriers to business, placing it exactly in
the same position as in 2000. The overall share of respondentsciting it as a major or significant barrier to growth has declinedhowever, from 44 percent to 38 percent of all firms surveyed.
Apart from a broad decline in the severity of firm perceptionstowards general barriers to growth covered in the survey, fewchanges have occurred between 2000 and 2001. An exceptionis the share of firms citing the difficulty of obtaining externalfinancing as a notable obstacle, which has almost doubled overthe past year. This result points to a growing severity in enter-prise appraisal of continuing deficiencies in the development ofboth financial markets and the banking sector in Ukraine.
BARRIERS TO BUSINESS IN UKRAINE:AN OVERVIEW
T
Figure 6
Barriers to Business Development
(distribution of responses for all firms, ranked by major and significant obstacle)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
Taxation
Insufficient local purchasing power
Inflation
Anti-competitive practices
Obtaining external financing
Corruption
Regulatory environment
Shortage of resources in related sectors
Underdeveloped infrastructure
Criminal pressure
-100% -75% -50% -25% 0% 25% 50% 75% 100%
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Table 3
Comparison of Barriers to Business Development, 2001 and 2000
(ranked by major and significant obstacle in 2001)
BARRIERS OVERVIEW
1 The following 4-point scale was used by respondents to rank each issue: 1 -"No obstacle", 2 - "Minor obstacle", 3 - Significant Obstacle", 4 - Major obstacle".2 Tax inspections are not included in references to inspections in this section.
Issue 2001 2000
Taxation 70% 83%
Insufficient Level of Local Purchasing Power 59% 70%
Inflation 45% 65%
Anti-competitive Practices 45% 53%
Obtaining External Financing 42% 24%
Corruption 39% 46%
Regulatory Environment 38% 44%
Shortage of Resources in Related Sectors 25% 35%
Underdeveloped Infrastructure 25% 39%
Criminal Pressure 13% 15%
Most of this report will devote its attention specifically to theregulatory environment in which Ukrainian firms operate.However, the taxation system will also be covered, due to itsstatus as the most serious barrier to firm growth, and the fact thatthe taxation regime, as distinct from many of the other barrierscited by surveyed firms, is within the direct control of govern-ment policies. Improvements in the areas of taxation and in reg-ulatory procedures would allow for the creation a much morefavorable environment for enterprise growth and development.
Regulatory Barriers in FocusA total of eight regulatory issues and procedures were coveredin the survey. Survey respondents were asked to rate each gov-ernment regulatory procedure based on the level of difficultythat it presents to business development. Survey results havebeen classified based on the average "score" given to each pro-cedure, determined as a simple average of all responsesreceived.1 Figure 7 presents a breakdown of Ukrainian enter-prises' assessment of the extent to which each administrativeissue is a barrier to business development, with proceduresranked by average score of difficulty. Table 23 in Annex 3 pres-ents detailed results, by firm size and origin.
Frequent regulatory changes, inspections2 and customs proce-dures present the most significant difficulties for local firms,About 50% of respondents cited each of these issues as major or
significant obstacles to business operations and enterprisegrowth. Frequent regulatory procedures received an average dif-ficulty rating of 2.6, while companies rated both inspections andcustoms procedures as presenting an average level of difficultyof 2.4 (Table 4).
Regulatory Environment in 2001 and 2000 When the results above are compared to data obtained in 2000,improvement can be seen in a number regulatory issues inUkraine. Survey respondents softened their perceptions of near-ly all regulatory procedures, citing them as less of a barrier tothe growth of their firm.
Frequently changing regulations for business were ranked as themost difficult regulatory issue in 2001, as they had been the yearprior. Businesses have become less critical of this issue, as theaverage score dropped from 2.9 in 2000 to 2.6 in 2001.
Inspections has supplanted customs as the second most prob-lematic regulatory issue in 2001. Inspections is the only issuecovered in this report for which business attitudes have wors-ened between 2000 and 2001.
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3 Respondents were asked to rate each procedure on a 4-point scale, from 1 - "no obstacle" to 4 - "major obstacle" to the growth of their business. Figure 7 ranks procedures by average score of difficulty.
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Significant improvements can be seen in the relative rank of both theprocess of obtaining permits and in licensing procedures. In 2000,permits were seen as the 3rd most difficult regulatory issue, while in2001 this relative result has improved, with firms ranking permits6th out of 8 issues. Licensing is a similar case, improving from 5thto 7th most problematic obstacle. At the same time, the mean ratingof difficulty that these procedures received has only slightly
improved between 2000 and 2001, emphasising that smallimprovements in absolute terms can lead to substantial differencesin relative rank. This is due to a situation in which other procedures,such as certification and requirements for "voluntary" contributionswitnessed no changes in appraisal year-on-year. Table 4 displayscomparative results for each regulatory procedure in 2001 and2000.
Òable 4
Regulatory and Administrative Barriers to Business Development, 2001 and 2000
(distribution of responses for all firms, ranked by average rate of difficulty)
BARRIERS OVERVIEW
Figure 7
Regulatory and Administrative Procedures as Barriers to Business Development
(distribution of responses for all firms, ranked by average rate of difficulty3)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
Frequent regulatory changes
Inspections, except for tax inspections
Customs procedures
Certification procedures
Requirements to make "voluntary" contributions
Obtaining permits/ approvals
Licensing procedures
Firm registration/ re-registration procedures
-100% -75% -50% -25% 0% 25% 50% 75% 100%
Issue 2001 Rank 2000 Rank
Frequent changes to regulations covering business activities 2.6 1 2.9 1
Inspections, not including tax inspections 2.4 2 2.3 4
Customs procedures 2.4 3 2.5 2
Certification procedures 2.3 4 2.3 6
Requirements to make "voluntary" contributions 2.3 5 2.3 7
Obtaining permits / approvals 2.3 6 2.4 3
Licensing procedures 2.2 7 2.3 5
Firm registration/ re-registration procedures 1.8 8 1.9 8
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Regulatory and Administrative Barriers, byFirm Size and OriginSurvey respondents were subdivided by firm size and origin, inorder to analyze regulatory procedures from the viewpoint ofdifferent types of enterprises. A relative level consistency can beobserved with regard to the severity of opinion for each proce-dure or issue (Table 5).
A notable aspect of the survey results, however, is that smallfirms consider many regulatory issues as a greater barrier todevelopment. This is true for all but the three most acute stateregulatory activities in Ukraine, which received identicalassessments from businesses, regardless of the size of the firm.It is also worth mentioning that in no cases did small firmsassess a regulatory issue as less problematic than their largercounterparts.
The greater level of difficulty found amongst small firms under-scores a lack of uniformity in regulatory procedures, or at leasta lack of consistency in the application of the regulations whichgovern them. Nevertheless, as will be seen in the body of thisreport, survey results point to most procedures becoming moreequitable across firm size and origin characteristics. It is ratherat the local and regional level that significant disparity in resultstends to emerge.
All survey questions dealing with regulatory issues as barriers tobusiness development allowed respondents to cite each proce-dure as either applicable or not to their business activities. Theresults are displayed in the '% Applicability' column in Table 5.For seven of the eight procedures investigated, at least two-thirds of all surveyed enterprises cited that they are relevant totheir business activities. Table 24 in Annex 3 displays detailedresults, by firm size and origin.
BARRIERS OVERVIEW
%Applicability
AverageScore* State-
ownedPrivatized Private Small Medium Large
Firm Origin Firm Size
Frequently changing regulations 90 2.6 2.6 2.6 2.6 2.6 2.6 2.6
Inspections, not including 95 2.4 2.5 2.4 2.4 2.4 2.4 2.4tax inspections
Customs procedures 41 2.4 2.3 2.4 2.5 2.5 2.4 2.4
Certification procedures 64 2.3 2.2 2.3 2.4 2.4 2.2 2.3
Requirements to make 79 2.3 2.2 2.2 2.4 2.4 2.3 2.2"voluntary" contributions
Obtaining permits/ approvals 90 2.3 2.1 2.2 2.4 2.4 2.3 2.2
Licensing procedures 67 2.2 2.1 2.1 2.3 2.3 2.1 2.2
Firm registration/ 81 1.8 1.7 1.8 1.9 1.9 1.8 1.8re-registration procedures
Table 5
Regulatory and Administrative Barriers to Business in Ukraine,by Firm Size and Origin
(distribution of responses for all firms, ranked by average rate of difficulty)
*Respondents were asked to rate each barrier on a 4-point scale, from 1 - "no obstacle" to 4 - "major obstacle" to the growth of their business. The score noted is the average of all responses.
Issue
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Regulatory "Time Tax"It is inevitable that firms spend some portion of time dealingwith government regulatory activities - inspectors must ensurethat facilities are safe for workers, businesses must rightly acquirepermission to conduct certain business operations, etc. Yet it isclear that that time spent dealing with such issues earns enter-prises no money, often causes them to incur additional costs,and exacts an opportunity cost by not allowing firms to engagein the business activities for which they were created.
Time tax estimates allow an appraisal of the efficiency of gov-ernment officials in carrying out regulatory procedures. They
also point towards the clarity, stability and predictability of theregulatory base - the fewer changes to regulations, the less man-agement time spent gathering information and advice on how tocomply with government requirements.
In 2001, enterprise managers estimated that the average shareof their time spent on regulatory matters was 16 percent, just asit was in 2000 (Figure 8). In perspective, this is the equivalent ofnearly one full day of each business week. This "time tax" issimilar for all sizes of business and remains level across mostindustries. Table 25 in Annex 3 displays detailed �time tax�estimates, by firm size, origin and sector of business activity.
BARRIERS OVERVIEW
Figure 8
Enterprise Manager Time Tax, by Sector of Activity in 2001(as a % of all firms)
Transport
Other Services
Manufacturing
Construction
Public Catering
Trade
Financial Services
0% 5% 10% 15% 20% 25%
Average
Regional Variations in "Time Tax"
Variations in regional time tax estimates emphasize differencesin the efficiency of administrative procedures amongst oblastcenters in Ukraine. This is especially notable as the great major-ity of regulatory procedures are carried out and enforced at theregional level.
As shown in Figure 9, the time firms spend dealing with regulatoryprocedures varies significantly amongst the regions of Ukraine. Atone extreme lie Zaporizhia, Odesa and Kherson, where regulatoryissues take more than 20 percent of total management time. InChernihiv and Chernivtsi, however, managers spend less than 10percent of their time dealing with regulatory matters - less than halfof the figure for the most time-consuming regions.
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Conclusions Ukrainian firms have softened their perceptions of almost all bar-riers to their development. The same can be said for enterpriseattitudes towards the majority of government regulatory proce-dures, which were considered slightly less problematic in 2001than in 2000, with the single exception of inspections. However,the difficulties to business growth in Ukraine have not disap-peared - enterprises are consistent in rating a number of issues asserious obstacles to their development.
The taxation regime is the largest single barrier to firm growth,with almost three-quarters of all firms surveyed citing it as a seri-ous problem to development and expansion. Amongst regulato-ry procedures, firms continue to site constantly changing regula-
tions as presenting the most notable difficulty for their opera-tions, although each of the specific procedures covered in thisreport remains problematic for a significant portion of Ukrainiancompanies. At the same time, the typical Ukrainian companyspends and average of nearly one full day of each working weekdealing with government regulatory matters.
All of this points to a number of difficulties inherent in the waythat regulatory procedures are carried out in Ukraine. As will beemphasised in the body of this report, this is often a result ofnumerous factors: regulations are often confusing or unclear;many regulatory activities lack a comprehensive legislativebasis; information about regulatory requirements is lacking; andprocedures are typically overly complex.
BARRIERS OVERVIEW
Figure 9
Enterprise Manager Time Tax, Regional Variations in 2001
(as a % of all firms)
Zaporizhia
Odesa
Kherson
Kirovohrad
Uzhgorod
Zhytomyr
Cherkasy
Lviv
Luhansk
Dnipropetrovsk
Donetsk
Kiev
Simferopol
Poltava
Kharkiv
Ivano-Frankivsk
Rivne
Vinnytsia
Khmelnytsky
Ternopil
Sumy
Mykolaiv
Lutsk
Chernihiv
Chernivtsi
0% 5% 10% 15% 20% 25%
National Average
6 Although the share of firms describing the taxationsystem as a major or serious barrier to their businessdecreased from 83% to 70% between 2000 and 2001,taxation was still rated the most serious obstacle tobusiness development in 2001, just as it was in 2000.
6 Improvements have also taken place in firm percep-tions of the three most troubling aspects of taxation:frequent changes in tax legislation, tax rates andnumber of taxes. In 2001, about 75% of firmsnamed these major or significant obstacles to busi-ness growth - about a 10% decline from the previ-ous year for each barrier.
6 By 2001, 61% of firms eligible for simplified taxationhad switched to unified tax, compared to 52% in 2000.
6 In 2001, the typical Ukrainian firm paid an averageof 10 different taxes, down from 11 in 2000. Thisdrop in average number of taxes paid is mostly dueto small firms switching to the simplified tax system.
6 Companies report that the tax burden as a share ofsales has actually increased from 23% to 28%between 2000 and 2001, and as a share of valueadded from 53% to 55%.
6 The estimated share of sales concealed from taxationrose from 16% in 2000 to 26% in 2001.
6 All firms, regardless of firm size or origin, are unan-imous in citing the Value Added Tax (VAT) as themost troubling tax for their business, both in terms ofaccrual and payment as well as in receiving VATrefunds for exported goods.
For more than a decade, the taxation system has been a majorproblem hampering business development in Ukraine. This per-ception persists despite the fact that tax rates in Ukraine are rel-atively reasonable when compared to other European countries.Yet enterprise managers consistently rate taxation the most sig-nificant barrier to the growth and development of their business.This level of frustration reflects the complete enterprise experi-ence with taxation, including the number and incidence of tax-es, frequent changes in tax rates and procedures, and the signif-icant administrative burden associated with tax demands.
The following section explores the reasons for this strong, thoughsoftening negative opinion, and highlights the experience ofenterprises with taxation in Ukraine. A more detailed descriptionof the legal and regulatory aspects of the tax system can be foundin Annex 2.
Perceptions of Taxation as a Barrier toGrowthWhile taxation is still seen as the most significant obstacle for busi-ness in Ukraine, there has been some progress between 2000and 2001. The share of firms describing the taxation system as amajor or significant barrier has decreased substantially, from 83percent to 70 percent (Figure 10) of all companies surveyed.
TAXATION
1Use of the term "taxes" in this report refers to taxes, duties, and other mandatory payments. 2 In this section, respondents are all surveyed enterprises, unless otherwise indicated.
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TAXATION1
Major Obstacle Significant Obstacle Minor Obstacle No Obstacle
In 2001
In 2000
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Figure 10
Perceptions of Taxation as a Barrier, 2001 and 2000
(as a % of all firms2)
However, enterprise frustration with the tax regime remains bothcomprehensive and multifaceted. For Ukrainian companies, oneof the most troubling aspects of the tax regime remain the frequentchanges in tax legislation (Figure 11). Putting this into perspec-tive, in 2001, Ukraine made 116 separate changes to tax laws andregulations, including 44 changes by Parliament, 25 by theCabinet of Ministers, 27 by the Customs Department and anoth-
er 20 by the State Tax Administration. Overall tax rates and num-ber of taxes are also problematic for nearly three-quarters of allenterprises. Another 50 percent of respondents claimed that taxinspections, privileged tax treatment for competitors, and changesin tax reporting are also major or significant barriers to the growthof their business. Sentiment is largely the same across firms of allsizes, origins and sectors of business activity.
When these results are compared to enterprise sentiment in2000, improvements are apparent in enterprise perception ofnearly all aspects of the tax regime. Figure 12 displays the per-centage of all surveyed firms who found each aspect a major orsignificant barrier to business development. Between 2000 and
2001, there has been a sizeable drop in the share of firms feel-ing overburdened by the three most problematic aspects of tax-ation: tax rates, instability of tax legislation, and number ortaxes. These improvements were widely felt by firms of all sizesand origins.
TAXATION
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Figure 11
Specific Aspects of Taxation as Obstacles to Business Development in 2001(distribution of responses for all firms, ranked by major and significant obstacle)
Major obstacle Significant obstacle Minor obstacle No obstacle
Tax rates
Frequent changes in tax legislation
Number of taxes
Privileged treatment for untaxed shadow sector
Changes in tax forms and procedures
Better tax regimes for competitors
Tax inspections
Filling out tax forms
Information on tax payment procedures
-100% -75% -50% -25% 0% 25% 50% 75% 100%
(as a % of all firms)
TAXATION
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In 2001 In 2000
Tax rates
Frequent changes in tax legislation
Number of taxes
Privileged treatment for untaxed shadow sector
Changes in tax forms and procedures
Better tax regimes for competitors
Tax inspections
0 10 20 30 40 50 60 70 80 90 100%
Number of Taxes In Ukraine, 23 taxes are applicable to commercial enterprises.Of these taxes, the typical firm paid an average of 10, downfrom 11 separate taxes in 2000. Firm size has a good deal to dowith this figure, with small firms predictably paying the fewesttaxes on average (8) and large firms paying the most (13 taxes).The year-on-year decrease in average number of taxes, how-ever, benefited firms of all sizes (Table 6).
When results are analyzed amongst various sectors of businessactivity, nearly identical averages emerge. The exception is thepublic catering sector, which in 2001 paid one tax more thanthe national average. This sector is also the only one to haveexperienced a notable rise in average number of taxes paidbetween 2001 and the year prior. Meanwhile, a reduction inaverage number of taxes can be seen for manufacturing, trans-portation, and construction firms. Table 26 in Annex 3 presentsdetailed results, by firm size, origin and sector of activity.
Figure 12
Perceptions of Tax Issues as Obstacles to Business Development,
2001 and 2000
Tax Burden as a Share of Sales and ValueAddedWhile looking at the number of taxes paid may detail the inci-dence of taxation and suggest a significant administrative bur-den resulting from tax demands, the most critical measure of taxburden is financial. Below we look at two different measures offiscal tax burden - first as a percentage of company sales andthen as a share of value added.
As can be seen from Figure 13 below, the tax burden as a shareof sales is highest for SMEs, with medium-sized firms reportingthat taxes take up more than one-third of total revenue. Figure13 also reveals that the average tax burden, when measured asa share of sales, has actually increased from 24 to 29 percentbetween 2000 and 2001. It is notable that the increase wasshared by firms of all sizes and nearly all sectors (Figure 14).Table 27 in Annex 3 presents detailed results for tax burden asa share of sales.
Table 6
Average Number of Taxes by Sector of Activity, 2001 and 2000
TAXATION
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Firm SizeSector
2001 2000
Figure 13
Tax Burden as a Share of Sales by Firm Size, 2001 and 2000
Medium
Small
Large
0 5 10 15 20 25 30 35 40%
Small Medium Large Average Average
Manufacturing 8 11 13 10 12
Construction 8 12 12 9 11
Transportation 7 12 13 9 12
Trade 8 12 13 10 10
Public Catering 8 12 13 11 9
Financial Services 7 13 11 9 n.a.
Other Services 8 11 14 10 10
2001 Average 8 12 13 10
2000 Average 11
2001 2000 2000 Average 2001 Average
TAXATION
3 The estimate of value added was not reported directly by respondents. Rather, it was calculated by the authors' using reported figures for sales and costs, which, while not an exact measure, provides a reasonable estimate. Salesfigures were reported not as actual numbers but as a "band" of sales for which band midpoints were used to generate overall sales estimates.
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The construction industry is the only sector for which tax burdenas a share of sales has reportedly decreased. Meanwhile, manu-facturing firms and transport companies are hardest hit, both in
terms of 2001 burden and in relative change from the previousyear.
In looking at the tax burden as a share of value added, surveyresults show the average tax burden to exceed half of the valuecreated by the average company (55 percent).3 This share hasalso increased between 2000 and 2001, although not as sharplyas in the case of sales. Taken as a share of value added, the tax
burden differs substantially when analyzed by firm size, originand sector. Medium sized firms are hardest hit, particularly inthe case of medium-sized manufacturing enterprises, whichreport paying nearly 95 percent of their value added in taxes.Table 28 in Annex 3 details these results.
Figure 14
Tax Burden as a Share of Sales by Sector, 2001 and 2000
Figure 15
Tax Burden as a Share of Value Added by Firm Size, 2001 and 2000
2001 2000 2000 Average 2001 Average
Medium
Large
Small
0 10 20 30 40 50 60 70 80%
2001 2000 2000 Average 2001 Average
Manufacturing
Transport
Trade
Other Services
Public Catering
Construction
0 5 10 15 20 25 30 35%
TAXATION
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Unregistered Economic ActivitiesIt should be emphasized that, in the eyes of Ukrainian enter-prises, there are two principal problems with regard to tax bur-den - its high level and its inconsistency. This perception, whichpervades any study attempting to measure sentiment towardstaxation in Ukraine, exists due to factors that go beyond num-ber of taxes and tax rates, and deal specifically with the finan-cial impact of numerous facets of the taxation system on localenterprises. It is also notable that some enterprises in Ukraine(and sometimes even entire sectors and regions) take advantageof additional tax privileges, having their tax debts written off,while others do not enjoy such opportunities. "Unprivileged"enterprises are unable to compete on such terms and are com-pelled to consider other methods of survival, such as off-booktransactions, illegal barter and other forms of tax evasion.
While enterprise managers will not typically answer directquestions about their own illegal activities, they are often will-
ing to answer indirectly. Nearly eight in ten respondents report-ed some level of unofficial activity in 2001 (up from 75 percentin 2000) when answering the question, "What percentage of thevolume of sales do you think companies like yours hide fromtaxation?" It must be emphasized that the information reportedis enterprise managers' assessment of the possible actions ofothers, and not of their own.
The average assessment of the share of sales concealed fromtaxation rose from 16 percent last year to 26 percent in 2001.When this data is analyzed by firm size, origin and sector, itbecomes apparent that large firms believe their peers to be hid-ing a greater share of sales, as shown in Figure 17. Among sec-tor types, the same is true for construction firms and servicefirms. Construction and service firms also experienced some ofthe sharpest increases in estimated hidden sales between 2000and 2001, as can be seen in Figure 18. A detailed summary ofall information received can be found in Table 29 of Annex 3.
Figure 16
Tax Burden as a Share of Value Added by Sector, 2001 and 2000
Manufacturing
Trade
Construction
Public Catering
Other Services
Transport
0 10 20 30 40 50 60 70 80%
2001 2000 2000 Average 2001 Average
TAXATION
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Figure 17
Respondents Reporting Similar Enterprise Share of Sales Hidden from Taxation, by Firm Size, 2001 and 2000
Figure 18
Respondents Reporting Similar Enterprise Share of Sales Hidden from Taxation, by Sector of Activity, 2001 and 2000
Construction
Other Services
Manufacturing
Trade
Transport
Public Catering
0 5 10 15 20 25 30 35 40%
Large
Small
Medium
0 5 10 15 20 25 30 35 40 %
2001 2000 2000 Average 2001 Average
2001 2000 2000 Average 2001 Average
TAXATION
4 A weighted average (of proceeds from sales) was determined for every city, showing how large a portion of the volume of sales is likely to be hidden from taxation, according to company managers.
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Regional variations in responses to this question are presentedin Figure 19.4 Firms believe that hidden sales have increasedover the past year in every city except Sumy and Lutsk. Somecities, including Uzhgorod, Zaporizhia and Chernivtsi, reportestimated year-on year increases of nearly 300 percent.
Overall, strong variability of opinion exists on the level ofshadow sector activity, with enterprises in Donetsk reportingan average of 12 percent of sales as hidden, and firms in Odesa
stating that this average is closer to 37 percent.Dnipropetrovsk, meanwhile, provides an interesting dichoto-my with over 40 percent of respondents believing that sales arenot hidden and one-third claiming that firms hide more than 60percent of sales from taxation. Table 30 in Annex 3 presentsdetailed responses on the average estimate of sales concealedfrom taxation for each region.
Odesa
Chernihiv
Kirovohrad
Uzhgorod
Rivne
Lviv
Poltava
Kiev
Kharkiv
Mykolaiv
Zaporizhia
Dnipropetrovsk
Chernivtsi
Kherson
Ivano-Frankivsk
Zhytomyr
Khmelnytsky
Sumy
Vinnytsia
Luhansk
Ternopil
Simferopol
Lutsk
Cherkasy
Donetsk
0 5 10 15 20 25 30 35 40%
National Average (26)
Figure 19Respondents Reporting Similar Enterprise Share of Sales Hidden
from Taxation, by City
Figure 20
Payment of Which Taxes/Duties is Most Problematic for Your Business?
TAXATION
5 The Global Competitiveness Report 2001, Oxford University Press, New York-Oxford, 2001.
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Most Troubling TaxesRespondents were asked to evaluate the system of taxation as itrelates to two aspects of their business - financial concerns andstrategic/administrative planning. All firms, regardless of their sizeor origin, are unanimous in citing the Value Added Tax (VAT) asthe most financially troubling for their business. Figure 20 pres-ents these results, while detailed information can be found inTable 31 in Annex 3.
Large firms report having even greater difficulty than most withVAT. Nearly one-third of large firms claim VAT as their most
acute financial problem, compared to about one-quarter ofsmall and medium enterprises. This reflects large firms' ori-entation towards exports, and the associated complicationswith having VAT returned. Without timely reimbursement, VATeffectively acts as a turnover tax for these companies. Whilereimbursement of VAT on exported goods is taken for grant-ed in European countries, Ukrainian tax authorities often seemto regard this refund as being less than a perfectly legal pro-cedure. "VAT in Focus" provides some insight into this longrunning problem in Ukraine.
Large Medium Small
VAT
Corporate profit tax
Payroll tax
Undecided
Local taxes, duties
Other
Excise duty
0 5 10 15 20 25 30 35 40%
VAT In Focus
The administration of VAT has been among the biggest problemsof the Ukrainian taxation system both in 2001 and in the lastdecade. The long-suffering Law On VAT has undergone morethan 200 changes and addenda, and additional changes are yetto come. Numerous proposals for easing tax pressure on certainsectors or regions always have a special chapter on exemptionfrom VAT. VAT rebate is a sore point for exporters. Governmentagencies still do not meet their commitments to exporters ofgoods and services to refund VAT owed to them. In June 2002,the total amount due in VAT refunds to Ukrainian enterprisesexceeded UAH 6 billion (US $1 billion), and the total amount ofsurcharges for overdue VAT rebates is approaching UAH 1.5 bil-lion (US $300 million).
In meetings with representatives of a recent joint mission of theInternational Monetary Fund and the World Bank, Ukrainiangovernment officials said the problem might not be resolved until2003, which would mean a delay in resolution of more thanfour years. Despite these "administrative delays", governmentofficials can usually push through a rebate if the enterprise is will-ing to accept between 20 and 30 percent of the amount due.
In terms of its value-added tax rate of 20%, Ukraine is ranked57th-62nd among countries included in the GlobalCompetitiveness Report, 2001.5 However, there is more to it thanjust the size of the rate. Countries such as Poland, CzechRepublic and Finland have a VAT rate of 22%, Slovakia 23%,Norway 24%, while Denmark, Hungary and Sweden have a VATrate as high as 25%; yet these countries have demonstratedsteady economic growth in the last five to seven years and haveno problems in refund delays.
TAXATION
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Figure 21
Calculating Which Taxes/Duties is Most Problematic for
Planning Your Business Activities?
Large Medium Small
Corporate Profit tax
VAT
Undecided
Payroll Tax
Local taxes, duties
Excise duty
Other
0 5 10 15 20 25 30 35 40 45%
Closely following VAT, and a unanimous second choice formost troubling tax is the corporate profit tax, which claims 30percent of a firm's profits. This tax rate would appear to be rea-sonable, and in this regard Ukraine is tied for 38th place among75 countries, according to The Global Competitiveness Report.However, there are a number of supplementary factors whichresult in a tax burden not reflected in the rate of the corporateprofit tax. Factors applicable to Ukraine include:
6 limitations on costs and expenditures deductible from thetaxable base for the profit tax (charitable activities, use ofcompany transportation, spending on presentations, etc.);
6 existing mechanisms of fixed asset depreciation; and
6 relatively high rates of mandatory returns to various socialfunds.
As displayed in this summary, while the corporate profit tax ratedoes not seem disproportionate in comparison with rates in
numerous European and North American countries, localspecifics lead to significant differences in the ultimate financialimpact on a firm.
Also interesting is the share of firms selecting 'None' as anoption to this question - 21 percent of small firms chose thisresponse, outnumbering both medium and large firms two toone. This figure can be largely attributed to small firms optingto switch to the simplified taxation method, discussed further inthis section.
From the standpoint of strategic planning and overall administra-tive burden, enterprises see the corporate profit tax as creating thelargest level of difficulty. As presented in Figure 21, VAT closelyfollows the corporate profit tax in this regard. It is notable that, forthis question as well, a significantly larger share of small firms(nearly 28 percent) selected 'None' as an option - while almost20 percent of medium firms and 16 percent of large firms agreed.Detailed information is presented in Table 32 of Annex 3.
TAXATION
6 Individual entrepreneurs also qualify as long as they employ no more than 10 employees and have sales of less than UAH 500,000 (US $93,000). Their contribution calculation is set by local councils but cannot exceed UAH 200(US $7) monthly.
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Figure 22
Participation in the Simplified Taxation System, 2001
(as a % of respondents eligible for simplified taxation)
The Simplified Taxation System
The taxation climate in Ukraine was substantially improved withthe introduction of a simplified system of taxation, accountingand reporting in 1998 (Annex 2 contains a full description of thissystem). In 2001, survey results show that over 60 percent of qual-ified firms have already switched to the new system.
Typically, firms pay and report each tax separately. These includethe corporate profit tax, value added tax, national payroll tax, aswell as a number of local assessments. The simplified systemallows qualified firms (up to 50 employees or annual sales ofunder UAH 1 million -- US $187,000) to pay a majority of taxes
as one tax, with one report, at a rate of either 6% of turnover withVAT payable separately, or 10% of turnover if they chose toinclude payment of VAT in the simplified scheme.6
Of surveyed respondents, about 36 percent said that they werequalified for the unified tax, up from 29 percent in 2000. Mostqualified firms find the system appealing - the majority (61 per-cent) have already switched to the simplified system, with anoth-er 13 percent planning to do so. The growing popularity of thesingle tax system can be seen by comparing these results to thoseof 2000, when only 52 percent of eligible respondents were usingthe single tax method to file. Figure 22 shows a distribution of theresponses of those eligible to switch to the new taxation system.
100%
80%
60%
40%
20%
0%
13
61
3
9
13
11 I do not know about the simplified systemNo, because of the red tape involved
Undecided
No, because the old system is just as good
No, but I intend to switch
Yes
TAXATION
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Conclusions The taxation burden in Ukraine, in both its fiscal and administra-tive aspects, continues to be seen as the single largest barrier tobusiness growth and development. While enterprise perceptionof the taxation system has improved between 2000 and 2001overall, survey results display a distinct rise in reported tax bur-den - and a corresponding increase in shadow sector activities.
With bank financing both expensive and difficult to qualify for,due to a severely underdeveloped banking sector with excessivecollateral requirements, enterprises are compelled to increasetheir internal source of growth, i.e. net profit. Firms that do notenjoy taxation privileges and pay all taxes, duties and mandato-ry payments in full find themselves at a competitive disadvan-tage while struggling to be profitable. With evaporated profits, alaw-abiding company has fewer opportunities to raise financing(as it will have less cash on hand to repay a loan or less in div-idend payouts than its tax-avoiding competitors) and to launchinvestment projects. Faced with these prospects, companiescontinue to hide at least part of company sales from taxation.
Proposals 6 Adopt, as soon as possible, the new Tax Code which is
currently being debated in Parliament. This will establisha simpler and more transparent process via a single codi-fied document determining the taxation system and all ofits procedures.
6 Reduce the overall number of taxes and expand the list ofcompanies eligible for the simplified taxation system.
6 Specify the scope of the application of local taxes andduties.
6 Revoke various uncompetitive tax privileges to particularenterprises.
6 End the practice of writing off debts of industrial enter-prises due to the pressure placed by enterprise manage-ment's lobby.
6 Improve the system of calculating tax liabilities of enter-prises undergoing reorganization.
6 Initiate appropriate bankruptcy proceedings against largeenterprises whose survival depends solely on takingadvantage of special tax breaks.
6 Reform the pension system and social benefits funds toestablish personalized accounts, thereby altering theopinion that contributions to these funds are incometaxes.
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INSPECTIONS
1 This figure does not include tax inspections, which 49% of survey respondents found to be a significant or major barrier.2 When describing overall firm perceptions of government inspections activity, this section excludes tax inspections.3 This excludes 5% of respondents, who noted inspections as not applicable to their business.
INSPECTIONS6 Forty-five percent of surveyed firms cited inspectionsas a significant or major barrier to their business oper-ations in 2001.1
6 While opinion of the inspection system has becomeslightly more critical, survey results show that firmsunderwent fewer inspections in 2001 -- an average of12 per year, down from 14 in 2000. Their durationalso decreased in 2001 to an average of 23 workingdays per year, down from an average 27 in 2000.
6 Significant regional differences exist in inspectionsintensity, though regions appear to be converging.
6 In total, 41% of inspected enterprises were sanctionedin 2001, compared to 44% in 2000. The issuing fofines as a result of infractions, however, increased dra-matically, with 61% of all sanctioned firms paying afine in 2001, compared to just 6% the year prior.
6 Enterprises are challenging the decisions of inspectorsmuch more frequently; 60% of sanctioned enterprisesstaged a formal challenge in 2001, compared to just23% the year prior.
6 Unofficial payments made during the inspectionprocess remain a serious problem. Survey results showthat between 32% and 43% of firms are likely to bemaking such payments, depending on the inspectingbody involved.
Perceptions of Inspections as a Barrier toGrowth
The government inspection2 regime continues to be one of themost vexing issues facing Ukrainian business. In 2001, it rankedas the second most troubling regulatory obstacle to businessdevelopment, up from fourth position in 2000. Nearly half of allsurvey respondents (45.4 percent) cited inspections as a signifi-cant or major barrier to growth, as can be seen in Figure 23. Thissection examines multiple characteristics of the inspectionsprocess and of business owners' experience with the govern-ment inspections system in Ukraine.
Figure 23
Perceptions of Inspections as a Barrier, 2001 and 2000
(as a % of all firms3)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
Inspection BasicsThe intent of the inspection process is to provide a means for gov-ernments to ensure that business activities are being carried outlegally and without threat to public health and safety, workerrights, or the environment. When properly administered, aninspections system allows private enterprise to thrive, while ensur-ing that violators of the public trust are given an adequate oppor-tunity to comply or are punished for disobedience of the law.
An inspection is a site visit by a public official to review thebusiness practices of an enterprise that fall within the realm ofthe inspector's authority. In general, there are three types of
inspections - planned, ad-hoc, and operational - each of whichis discussed below.
Planned InspectionA planned inspection is an inspection of a business entity's finan-cial and business activities which the responsible agency hasincluded in its annual work plan. The inspection is conducted atthe location of the business entity and must be scheduled with 10days prior written notice, specifying the date of inspection.Planned field inspections are conducted by all regulatory agen-cies on the same day, once per year. The date of this collectiveplanned inspection is determined by the State Tax Inspectorate.
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INSPECTIONS
4 Cabinet of Ministers Resolution No. 112, January 29, 1999.5 This calculation excludes 17 percent of respondents who did not state the exact number of inspections their enterprise underwent in 2001.
Ad-hoc InspectionAn ad-hoc field inspection is an inspection that is not includedin the work plan of a regulatory agency. Ad-hoc inspectionsmay occur if at least one of the following conditions exists:
6 inspection of one enterprise reveals violations at anotherbusiness;
6 the business entity does not file required reporting docu-ments in a timely fashion;
6 false information is identified in required documents filed bythe business;
6 the business files a complaint claiming violations by aninspecting body;
6 the regulatory agency needs to verify information receivedfrom a person that had a legal relationship with the businessentity, if the business entity does not provide an explanationand supporting documents at the regulatory agency's writtenrequest within three working days after the day of suchrequest;
6 the business entity is being reorganized or liquidated.
Operational InspectionThis is an on-site inspection of a business to check that correctprocedures are followed during cash and non-cash transactionswith customers, and may include a check on the following: use ofcash registers and invoices and that cash limits are observed;financial accounting documents; registration documents; licens-es; trade patents; excise duty stamps; premises; and other aspectsof business activity that current legislation allows inspecting bod-ies to check on. Ukrainian legislation still does not regulate theprocedure for conducting operational inspections.
Who Can Inspect and With What Legal Basis?Well over one hundred separate government bodies maintainauthority to conduct business inspections, although inspectionsare only carried out in practice by about 30 of these agencies.Article 32 of the 1991 law "On Enterprises in Ukraine" containsa partial list of government organs responsible for oversight of dif-ferent business activities, including inspections. In addition, the1998 Presidential decree "On Some Measures for Deregulationof Business Activities," attempts to systematize the activities ofregulatory agencies and specifically grants state authorities theability to conduct planned and unplanned inspections.
The following agents have inspection powers:
6 31 central state authorities, the Council of Ministers of theAutonomous Republic of Crimea, 24 regional administra-tions, the Kiev and Sevastopol city administrations;
6 all fiscal bodies with respect to tax, duty and other budgetpayments at all levels;
6 bodies responsible for ensuring environmental safety andprotection of human health;
6 state law enforcement bodies;
6 local governments; and
6 other bodies in cases stipulated by current legislation.
A number of agencies are entitled to conduct inspections of acompany's financial and business activities, within the scope ofauthority explicitly granted to them. The procedure forcoordinating these planned inspections was established by theCabinet of Ministers in 1999.4 This is the only governmentnormative act that specifically governs the inspection of anenterprise's financial and business activities, and the issues theresolution addresses are rather limited. Some state authoritiesare explicitly precluded from conducting inspections over issuesunder the governing power of a different state authority.However, in reality, cases of overlapping authority are quitefrequent.Therefore, while certain legal foundations are in place to governthe inspections regime, current law is inadequate tocomprehensively govern the practice. A situation is createdwherein the gaps and inconsistencies that exist in defining legalauthority can result in inspection bodies finding significantleverage to misuse these loopholes. These systematicweaknesses have also led to a practice of "resolving problems"or "answering questions" by making unofficial payments andproviding other services.
Inspection FrequencyNearly all surveyed firms (94 percent) were inspected at sometime during 2001, with the typical enterprise inspected nearlyonce every month, or on average 11.7 times per year.5 Whilethis number remains high, it does represent a nearly 20 percentdecline from 2000, when firms averaged 14.4 yearly inspec-tions. Half of all survey respondents reported 8 or fewer inspec-tions in 2001. Looking at the extremes of the inspections expe-rience, 10 percent of firms had just one inspection visit, whileanother 10 percent reported more than 27 visits.
When these results are analyzed by firm size and origin, it isclear that neither small firms nor private enterprises benefitedfrom the drop in inspections activity. In fact, private enterpriseswere placed under greater state scrutiny, undergoing on average11.9 inspections in 2001, compared to 10.9 in 2000. Small firmssaw literally no change, with an average of 11.5 inspections ineach of the last two years.
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The drop in the average annual number of inspections was con-fined primarily to large, state-owned and to privatized enter-prises. Large firms experienced a 42 percent decline in the aver-age number of inspections, dropping from 20.4 in 2000 to 11.8in 2001. The number of inspections at privatized firms
decreased by one-third and at state-owned firms by 29 percent.Medium sized firms also benefited, but not nearly as much astheir larger counterparts. The typical medium sized firm saw12.2 inspections in 2001 compared to 16.8 the year prior.Figure 24 displays inspections results by firm size and origin.
INSPECTIONS
Figure 24
Average Annual Number of Inspections, by Firm Size and Origin, 2000 and 2001
2001 2000 Average-2001 Average-2000
Number ofinspections
Small
Medium
Large
State-owned
Privatized
Private
Firm
SIze
Firm
Origin
0 5 10 15 20 25
The inspections regime appears to have become more equi-table, with firms experiencing approximately the same numberof inspections annually, regardless of size or origin. However,this represents a greater relative burden for small firms, whichhave fewer people and financial resources to deal with regu-latory matters. Typical inspection visits require the full-timeattention of at least the business owner and the chief account-ant as well as assistance from other employees. Often, smallfirms must effectively shut down their business during aninspection, as key personnel are devoting full attention toresolving regulatory matters. Larger firms can more easilymanage this process without interrupting business activities.
Inspection Frequency by SectorThe inspection regime affects industries with different levels ofintensity. Transportation and public catering companies, due toevident health and safety issues, face inspections more fre-quently than firms in other sectors. At the same time, financialand other service companies enjoy significantly less scrutiny onaverage. Results differ within each industry depending on bothfirm size and origin, though no consistent patterns are discern-able. Table 7 displays industry-specific results.
Compared to 2000, the most significant changes are visibleamong manufacturing enterprises, which dropped from 15.5 to
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INSPECTIONS
11.4 inspections per year, and public catering firms which hadalmost 3.5 fewer inspections annually. The only sector to report
an increase in the number of inspections when compared to 2000is construction.
Table 7
Average Annual Number of Inspections, by Sector
Manufacturing 11.4 15.5 11.3 11.1 12.2 12.6 11.0 11.1
Construction 11.7 10.3 12.7 9.0 10.9 10.5 12.3 11.5
Transport 15.7 17.8 14.7 17.1 16.7 17.6 13.2 16.6
Trade 12.6 14.0 12.5 12.5 13.0 10.8 13.9 12.3
Public Catering 14.0 17.4 12.5 17.8 12.6 13.7 11.3 16.2
Financial Services 7.0 n.a. 5.8 14.6 5.1 7.6 7.3 6.5
Other Services 9.2 11.4 8.4 12.6 7.6 8,8 8.0 10.6
State-Owned
Privatized Private
Firm Size Firm Origin
Large
Regional Dynamics of Inspection FrequencyBroad regional differences persist in the average annual numberof inspections, though the spread of variation has decreased sig-nificantly from last year. Enterprises in Zhytomyr and Lviv canexpect to be inspected least often (9.1 times per year) while inLuhansk and Cherkasy, firms face the most aggressive inspec-tion regimes, averaging 15.2 and 15.6 visits annually. Regionaldifferentiation was spread over 6.5 visits in 2001, compared to12.6 visits last year, highlighting a trend toward the mean.
Some regions have displayed remarkable progress since lastyear. Sixteen regions have reduced their average annual number
of inspections, with 14 of these outperforming the national aver-age decline. The most significant progress was made inZhytomyr, which made a remarkable last-to-first jump, reducingthe number of annual inspections from 21.4 to just 9.1. Othernotable progress was made in Poltava, Chernivtsi,Dnipropetrovsk, Odesa, and Vinnytsia which each reduced theaverage number inspections by at least 6 visits. Nine cities reg-istered an increase in the number of inspections, with the mostsignificant changes taking place in Lutsk (2.2), Cherkasy (2.4)and Uzhgorod (3.0). Table 8 presents a detailed look at region-al inspections activity, in 2000 and 2001.
2001 2000 Small MediumSector
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INSPECTIONS
Table 8
Average Number of Inspections, Regional Variations, 2001 and 2000
2001 2000
Average Rank Average Rank
Zhytomyr 9.1 1 21.4 25 -12.3
Lviv 9.1 2 11.3 6 -2.2
Odesa 9.9 3 16.0 16 -6.1
Ivano-Frankivsk 10.3 4 10.1 4 0.2
Sumy 10.5 5 8.8 1 1.7
Chernivtsi 10.5 6 17.3 23 -6.8
Khmelnytsky 10.8 7 14.3 12 -3.5
Kiev 10.8 8 12.9 8 -2.1
Dnipropetrovsk 10.8 9 17.0 22 -6.2
Kherson 10.9 10 16.0 17 -5.1
Mykolaiv 10.9 11 10.7 5 0.2
Vinnytsia 10.9 12 16.9 21 -6.0
Chernihiv 11.6 13 15.6 14 -4.0
Zaporizhia 11.7 14 16.1 19 -4.4
Kirovohrad 11.8 15 16.0 18 -4.2
Poltava 11.9 16 21.1 24 -9.2
Lutsk 11.9 17 9.7 2 2.2
Rivne 12.0 18 16.3 20 -4.3
Uzhgorod 12.7 19 9.7 3 3.0
Kharkiv 12.8 20 15.7 15 -2.9
Ternopil 13.4 21 12.1 7 1.3
Simferopol 13.8 22 14.8 13 -1.0
Donetsk 14.4 23 14.0 10 0.4
Luhansk 15.2 24 14.0 11 1.2
Cherkasy 15.6 25 13.2 9 2.4
National Average 11.7 14.4 -2.7
City Change
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INSPECTIONS
Inspecting AgenciesThe most common inspecting bodies are the Tax Inspectorateand Fire Department, which visit about three-quarters of allenterprises, followed by the Sanitation Department and PensionFund, which inspect six out of every ten enterprises. Figure 25displays results for a subset of the most common inspecting bod-ies in 2001. Compared to results received in 2000, a lower pro-portion of respondents now mention inspections by the TaxInspectorate, the Pension Fund and State Labor ProtectionDepartment. The incidence of inspections by the
Unemployment Fund increased, however, while other regulato-ry agencies remained relatively unchanged. A review of inspec-tion activity for each agency by firm size and origin revealed nosignificant differences.
The most common inspecting agencies also happen to be themost aggressive. The average annual number of inspections perenterprise is largely composed of visits from the TaxInspectorate (1.4 visits yearly), Fire Department (1.3) andSanitation Department (1.1).
Average Duration of InspectionsAnother important indicator of regulatory behavior is the timerequired by enterprise managers to cope with the inspectionsprocess. As with the number of inspections, inspection durationhas also declined from the previous year. In 2001, enterprisemanagers spent an average of 22.7 days dealing with inspectors,a 15 percent decline from the 26.6 days required in 2000. Halfof all firms, however, reported that annual site visits frominspections agencies lasted an average of 14 or fewer days in2001.
Inspection Duration by Firm Size and OriginWhen results are analyzed for variations by firm size and origin,it is clear that firm size is directly related to the duration ofinspections. Both large and state-owned enterprises undergolonger inspections than either privatized or private firms. Theduration of inspections has increased between 2000 and 2001for both small firms and private enterprises. Small firm inspec-tions lasted a total of 21.8 days in 2001, up from 19.3 days in2000. Private enterprises fared worse, with the total time spenton inspections rising from 19.3 to 22.9 days.
0 10 20 30 40 50 60 70 80
Tax inspectorate/ police
State Fire Department
Sanitary and Epidemiological Service
Pension Fund
Unemployment Fund
State Labor Protection Department
Social Insurance Fund
Consumer Rights Protection Department
Figure 25
Inspection Agencies' Activity in 2001
(% of surveyed companies visited)
State Electric Power andHeat Consumption Inspectorate State Supervision of Standards,
Rules and Regulations
%
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Inspection Duration by SectorSurvey data reveals that the average annual duration of inspec-tions at a firm is also dependent on the sector of business activ-ity of the enterprise. Public catering firms spend by far thelargest amount of time dealing with inspections (33.1 daysannually) followed by transportation firms (27.0 days), whileservice firms are the least scrutinized. When changes in compa-ny statistics between 2000 and 2001 are subdivided by sector of
activity, sizeable reductions can be seen in the total number ofdays firms spend under inspection across all sectors, with theexception of those in public catering and trade. Manufacturingenterprises have gained back the largest number of days (8.4)while public catering companies have lost the most (5.9). Figure27 displays the average inspection duration for 2000 and 2001for all major industry types.
The overall decline in inspection duration has primarily bene-fited large firms, which reported a 44 percent drop to 24.5 daysof inspections in 2001. Medium-sized enterprises also spent
significantly less time dealing with inspecting agencies, withtheir average duration declining 31 percent to 23.5 days. Figure26 displays inspection duration results by firm size and origin.
2001 2000 Average-2001 Average-2000
Days
Small
Medium
Large
State-owned
Privatized
Private
0 5 10 15 20 25 30 35 40 45 50
Figure 26
Inspection Duration by Firm Size and Origin, 2001 and 2000
(in number of days)
Firm
SIze
Firm
Origin
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Figure 27
Average Duration of Inspections by Sector, 2001 and 2000
(in number of days)
2001 2000 Average-2001 Average-2000
Days
Public Catering
Transport
Trade
Construction
Manufacturing
Other Services
Financial Services
0 5 10 15 20 25 30 35
Regional Dynamics of Inspection DurationAnnually, enterprises in Kherson and Lviv spend the leastamount of time dealing with the inspections process, 17.1 and19.4 days, respectively. These are also the only cities with annu-al averages below 20 days. The inspections process is most timeconsuming in Cherkasy, averaging over 32 days per year, whichis 5 days more than in any other region of Ukraine (Table 9).
The greatest progress between 2000 and 2001 was made inPoltava, which cut more than 15 days off the annual averageduration of inspections. Firms in Dnipropetrovsk and Zhytomyr
also benefited, spending about 12 fewer days on the process peryear. Impressive gains were also found in Lviv, where the aver-age duration of inspections was reduced by 4 days. This is par-ticularly notable as these improvements were made despiteLviv's rank last year as the 7th least burdensome city for inspec-tions duration.
In other regions the results are less encouraging, with business-es in Cherkasy and Uzhgorod spending two full additional workweeks dealing with inspectors in 2001, despite the fact that bothof these regions were among the top six performers in 2000.
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Table 9
Average Duration of Inspections, Regional Variations, 2001 and 2000
2001 2000 2001-2000
City Average Rank Average Rank Change
Kherson 17.1 1 26.9 12 -9.8
Lviv 19.4 2 23.4 7 -4.0
Mykolaiv 20.3 3 20.2 4 0.1
Zhytomyr 20.4 4 32.5 22 -12.1
Ivano-Frankivsk 20.4 5 23.7 8 (3.3
Kirovohrad 20.5 6 26.1 10 (5.6
Dnipropetrovsk 20.6 7 32.9 23 -12.3
Chernihiv 20.8 8 28.0 18 -7.2
Kiev 21.0 9 26.7 12 -5.7
Poltava 21.0 10 36.3 25 -15.3
Khmelnytsky 22.0 11 29.9 20 -7.9
Luhansk 22.1 12 24.3 9 -2.2
Lutsk 22.4 13 19.6 3 2.8
Zaporizhia 22.6 14 27.8 17 -5.2
Rivne 22.9 15 31.3 21 -8.4
Ternopil 23.3 16 21.4 5 1.9
Chernivtsi 23.3 17 26.4 11 -3.1
Vinnytsia 23.7 18 27.6 15 -3.9
Odesa 23.9 19 33.2 24 -9.3
Sumy 24.7 20 18.5 2 6.2
Simferopol 24.8 21 27.3 14 -2.5
Kharkiv 25.4 22 27.7 16 -2.3
Uzhgorod 26.3 23 17.0 1 9.3
Donetsk 26.9 24 28.2 19 -1.3
Cherkasy 32.3 25 22.2 6 10.1
National Average 22.7 26.6 -3.9
(in number of days)
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Enterprise Perceptions of Changes in theInspection ProcessEnterprises were asked to report their perception of whether thenumber of inspections has increased between 2000 and 2001,decreased or remained the same. As the Tax Inspectorate is usu-ally the most frequent inspecting body, and correspondingly thatwhich most enterprises single out in their criticisms, we dividedthe sample into two groups - responses toward tax inspectionsand non-tax inspections. Most firms reported that the number ofboth tax and non-tax inspections remained unchanged from2000 (68 percent and 76 percent, respectively). The remainingfirms were equally split with as many claiming an increase as adecrease. So, on balance, we find that while the average numberof inspections per enterprise has declined slightly, the share ofenterprises facing inspections has remained steady.
Among those reporting a reduction in tax inspections, 30 percentthink this is the result of their switch to the new simplified tax sys-tem, which makes tax calculation and reporting much easier andmore straightforward. Another 18 percent felt that it was the use ofan inspections journal, which requires full documentation of eachinspection, thereby providing a basis for making inspecting agen-cies more accountable for each site visit.
For enterprises reporting an increase in tax inspection activity, themajority of firm managers claim that the most likely cause is pres-sure by local councils on the inspecting bodies to raise moremoney for local budgets through fines and other penalties.
Inspection ConsequencesIf an inspecting body finds a violation during the course of aninspection, the enterprise may face a number of penalties. Thepotential consequences range from payment of a basic fine, torevoked licenses and asset confiscation. A full 41.2 percent ofrespondents undergoing inspections in 2001 faced some sort ofnegative consequence as a result.
The most common (61 percent of sanctioned firms) conse-quence is for firms to pay a fine. However, nearly one-quarter offirms faced a follow-up inspection while about 10 percentreported that their assets had been put under a tax lien, theirbank account was frozen or they endured a direct loss of profit.Figure 28 provides a summary of these results.
A strong shift toward the payment of fines took place between2000 and 2001, as these are now used largely in place of the'kartoteka-2' system, abolished in early 2001. The kartoteka sys-tem had allowed inspecting bodies to directly debit any arrearsowed to the state from a company's bank account, if infringe-ments were identified during an inspection. The use of repeatinspections has also increased, rising from 17.4 percent in 2000to 24.2 percent in 2001.
Figure 28
Inspection Consequences, by Type of Sanction Imposed
2001 2000
Fines
Repeat inspections
Lost profits
Frozen bank account
Property under a tax lien
Other
Kartoteka-2
0 10 20 30 40 50 60 70
(as a % of firms experiencing negative consequences as a result of inspections)
%
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6 82% of firms claiming lost income as a result of inspections activity provided en estimate of this figure.
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Value of Penalties Paid and Profits Lost toInspectionsIn 2001, nearly 85% of fined firms indicated the amount offines that they paid. The total amount of fines paid was UAH58.3 million or nearly US $10.9 million. Firms were also askedto assess the amount of income they lost as a consequence ofinspections activity. It is interesting that only about 5 percent ofall firms undergoing inspections in 2001 claimed that theyincurred some loss. This is most likely attributable to the stillwidely unknown or misunderstood economic concept of oppor-tunity cost. Business owners unfamiliar with the concept are notlikely to make a calculation for lost income as an opportunitycost for the number of days spent dealing with inspectors. Thosefirms which estimated income lost during inspections6 claimedthat total losses were in the order of UAH 9.2 million, or US$1.7 million.
Duration of Inspections SanctionsAnalysis of survey data shows that there has been a decrease inthe length of time businesses are subjected to sanctions as aresult of inspections. Repeat inspections now take an additional10 working days of a business owner's time, down from 15 daysin 2000. Survey results reveal that state enterprises and mediumsized firms bear the brunt of this burden. Frozen bank accountsaveraged 45 working days in 2001, with large firms undergoingthis type of sanction longer than others. This is down signifi-cantly from an average of 95 days in 2000. Tax liens on prop-erty are the sanction with the longest duration, lasting 80 dayson average, and in the case of medium-sized firms averaging135 working days in 2001. This result is also down significant-ly from an average of 174 days the year prior. Table 10 reportsthe duration of the three most common types of sanctions.
Small 8 71 37 16 120 53
Medium 15 135 11 16 203 132
Large 11 54 68 12 172 100
State-owned 20 85 52 14 147 118
Privatized 8 74 42 14 196 121
Private 8 81 42 15 101 29
Average 10 80 45 15 174 95
Table 10
Average Duration of Inspections Sanctions
(number of working days)
2001 2000
SecondInspection
PropertyUnder
Tax Lien
Frozen BankAccount
SecondInspection
PropertyUnder
Tax Lien
Frozen BankAccount
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INSPECTIONS
7 Survey field work was conducted in the weeks overlapping the March parliamentary elections. Before the actual election, a substantial number of firms refused to participate in the survey. In this type of an environment wherefirms may have serious concerns about participating, it is understandable that a greater share of those who did participate chose to answer such questions as 'confidential'.
Disputing SanctionsThe number of enterprises challenging the decisions of inspect-ing agencies has increased significantly year-on-year. In 2001,nearly 60 percent of all respondents staged a formal challenge,compared to just 23 percent in 2000. The primary reason forsuch a shift is likely to be the extraordinary increase in the issu-ing of fines over the last year. However, the increased responseto sanctions may also reveal a shift in attitudes, with entrepre-neurs having a greater understanding of regulations governinginspections, or turning to lawyers and consultants for assistance.
Unofficial PaymentsOne of the most sensitive aspects to conducting business inUkraine is the existence of unofficial payments as part of themeans of doing business. Given the illegal nature of such pay-ments, it is understandable that a significant share of firms con-sider such activity confidential. Firms were asked to report, foreach administrative body which had inspected them in 2001,whether or not they had made any unofficial payments duringthe process. In total, 4.3 percent of respondents admitted havingmade some form of unofficial payment during the inspectionsprocess. Results show that another 30 to 40 percent of enter-prises consider this activity confidential, and they reported it assuch.
Figure 29 displays the results for unofficial payments overall andfor each inspecting body. The incidence of unofficial payments,when 'yes' and 'confidential' responses are combined, hasincreased sharply in 2001 to 39.5 percent of respondents, upfrom 27.7 percent in 2000. Also of interest is that the share ofunofficial payments grew for all 20 agencies/departments carry-ing out inspections. It should be noted that, for nearly allinspecting bodies, the percent of firms answering 'yes' hasdecreased when compared to 2000, while a significant year-on-year increase can be observed in the share of firms reporting thatsuch information is confidential.
Interpretation of this activity is complicated. On one hand directacknowledgement of unofficial payments is decreasing.However, assuming that firms are more hesitant to reveal theirbehavior would help to explain the strong rise in the share of'confidential' responses.7 As noted above, when 'yes' and 'con-fidential' responses are combined, a significant increase in unof-ficial payments can be observed. Combined results suggest thatpayments are most commonly made to customs officials, fol-lowed by the Architecture and Construction Department, FireDepartment, and interestingly the Consumer Rights ProtectionCommittee. At the same time, the most frequent directlyacknowledged unofficial payments are made to the FireDepartment, followed by Sanitation and the Tax Inspectorate,which were also the most common recipients of unofficial pay-ments in 2000.
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8 'Yes' and 'confidential' responses combined.
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Figure 29
Likely Level of Unofficial Payments by Agency/Department, 2001 and 20008
(as a % of firms undergoing inspections)
Analysis also shows that the incidence of unofficial payments isinversely proportionate to firm size, with small firms bearing agreater share of the burden. This result is consistent with previ-
ous trends showing that small firms feel the negative effects ofsuch regulatory behavior more acutely than do their largercounterparts.
2001 2000
Customs Service
Fire Department
Consumer Rights Protection Committee
Tax Inspectorate/Police
Sanitary and Epidemiological Service
Licensing bodies
Ministry of Internal Affairs office
0 5 10 15 20 25 30 35 40 45 50 55 60
State Architecture and Construction Inspectorate
State Supervision of Standards, Rules and Regulations
City department of Industry and Consumer Market Development
%
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9 'Yes' and 'confidential' responses combined.
Figure 30
Firm Size and Unofficial Payments9
(as a % of firms undergoing inspections)
Large Medium Small
Customs Service
Consumer Rights Protection Committee
Sanitary and Epidemiological Service
Fire Department
Tax Inspectorate/Police
0 10 20 30 40 50 60
Proposals7 Pass a unified law to stipulate the basic foundations and
principles for conducting inspections, namely:
6 create an exhaustive list of types of inspectionsand of the agencies authorized to conduct them;
6 state principles for a uniform, standard inspec-tion procedure, inspections frequency, and theresponsibilities of officials conducting theinspection;
6 require inspectors to present documents thatprove their right to inspect;
6 require that all inspections be formally record-ed (for example, an entry may be made in theinspection mandate or in the firm's records tothe effect that an inspection has been conduct-ed by a representative of an inspectionsagency);
6 stipulate standardized documents that clarify themeans and methods of submitting explanations,comments, denials, etc. regarding conclusionsand actions of inspection bodies by inspectedentities;
6 define the procedure for approving decisionsbased on inspection results;
6 clarify the timing for implementation of newlegislative / regulatory changes;
6 state the term and procedure for challengingdecisions by inspection bodies;
7 Prepare and disseminate complete information on theinspections process, clearly stipulating the process and therights and responsibilities of all parties involved. Theserequirements should be made publicly available through theInternet and printed in brochures for circulation to firms andto business associations.
%
CUSTOMS
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1 Respondents are those who stated that customs procedures are generally relevant to their business activities, or 41% of all firms surveyed.
CUSTOMS PROCEDURES6 Forty-six percent of respondents1 stated that customsprocedures are a major or significant obstacle to theirgrowth, ranking customs as the third most problemat-ic regulatory procedure.
6 Specifically, firms find the customs process too costly,too time consuming, and too complex.
6 Currently, 22% of surveyed firms are engaged inimport-export operations.
6 According to survey results, violations of customs pro-cedures occur most commonly with completing cus-toms documents, dealing with customs controls, andborder crossings. About one-fifth of firms engaged inimport-export operations reported violations duringeach of these procedures.
6 The incidence of reported violations during customsprocedures is higher for SMEs than for large firms.Results also point to a strong correlation between busi-
ness owners' awareness of regulatory requirements forcustoms officials and the incidence of procedural vio-lations.
6 Survey results suggest that nearly one-quarter (23%) ofthe time, unofficial payments are made during the cus-toms process - down from 30% in 2000; those mak-ing such payments usually pay up to an additional25% over the official cost of each procedure.
Perceptions of Customs as a Barrier toGrowthCustoms procedures are among the most problematic regulato-ry and administrative barriers to the growth of private enterprisein Ukraine, ranking third just behind inspections. In 2001, near-ly 46 percent of these enterprises found customs to be a seriousbarrier to their growth, which represents a slight improvementfrom the 49 percent found in 2000 (Figure 31).
Figure 31
Perceptions of Customs Procedures as a Barrier, 2001 and 2000
(as a % of firms citing customs procedures as relevant to their business activities)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
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As shown in Figure 32 below, the customs process affects firmsof all sizes about equally. However, private enterprises tend to
have more problems than either state-owned or privatizedfirms.
Import-Export OperationsTwenty-two percent of surveyed enterprises were engaged inimport-export operations in 2001, making customs one of the
least common regulatory procedures examined in this report.Not surprisingly, when survey results are examined on a sectoralbasis, enterprises from the manufacturing sector are the mostactively involved in foreign trade, nearly 36 percent in total.
Figure 32
Customs Procedures as a Major and Significant Barrier, by Firm Size and Origin
(as a % of firms citing customs procedures as relevant to their business activities)
Average-2001
%
Small
Medium
Large
State-owned
Privatized
Private
38 40 42 44 46 48 50
Average-2001
%
Manufacturing
Transport
Trade
Construction
Financial Services
Other Services
Public Catering
Figure 33
Enterprise Engagement in Import-Export Operations, by Sector of Business Activity
(as a % of all firms)
0 5 10 15 20 25 30 35 40
Firm
SIze
Firm
Origin
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Procedural Difficulties with Customs
In order to gain a more complete understanding of the customsprocess, we asked respondents engaged in export-import oper-ations to tell us which specific customs procedures created themost significant difficulties for them. The responses suggest that
enterprises find the process too costly, too time consuming, andtoo complex.
The first column in Table 11 ranks customs procedures in orderof difficulty, while the second column shows the percent offirms engaged in import-export operations for which each pro-cedure was applicable in 2001.
Table 11
Relative Difficulty of Particular Customs Procedures
(as a % of firms engaged in import-export operations in 2001)
VAT refund procedure 2.8 77
Tariff rates 2.4 79
Workload capacity of customs services 2.3 82
Formalizing customs documents (declarations, contracts, customs reports, payment documents) 2.3 92
Customs clearance procedure at the state border 2.3 86
Customs clearance procedure at regional customs checkpoints 2.3 85
Certification of imported goods 2.2 62
Sanitary control procedure 2.1 73
Obtaining licenses to engage in foreign trade 2.0 61
* Respondents involved in import-export operations were asked to rate each procedure on the following 4 point scale: 1-no obstacle, 2-minor obstacle, 3-significant obstacle, 4-major obstacle. The final score is an average of all responses.
Procedure Score*%
Applicability
The most troubling of all customs procedures is the VAT refundprocess, with nearly 62 percent of respondents citing it as amajor or significant obstacle (see Table 12). As described in the'Taxation' section of this report, VAT is the most problematic taxto deal with for a majority of surveyed enterprises, so theseresults are not surprising. In addition to the problems with VAT,companies generally find import-export tariffs too high (43 per-
cent cite these as a major or significant barrier), processing timestoo long, and procedures too difficult.
Ukrainian companies are generally in agreement, regardless ofsize or origin, on the overall level of difficulty presented by eachprocedure. One notable exception to this trend is that SMEs tendto find the process of gaining customs clearance at the bordermore troubling than larger firms.
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Table 12
Various Customs Procedures as Major or Significant Obstacles,
by Firm Size and Origin, 2001
(as a % of firms engaged in import-export operations in 2001)
Violations of Customs ProceduresUkrainian law regulates customs procedures, and governmentofficials are charged with completing customs processes withina given timeframe or according to specifically stated criteria.During the survey, companies were asked whether they hadidentified procedural violations in their dealings with customs.A large number of companies were not able to provide a defi-nite answer, stating that it was just too difficult to say. This is astrong indication that businesses are often not aware of proce-dural requirements under the law and of their own rights asbusiness entities.
However, survey data shows that the more often a businessowner is aware of the regulatory requirements for customs offi-
cials, the more often he or she identifies that a violation hasoccurred during customs procedures. This has been measuredby the share of firms not answering 'I don't know', and provid-ing a concrete 'yes' or 'no' response for whether violations ofprocedures took place during customs clearance.
Figure 34 presents the nearly direct correlation between 'yes'and 'don't know' responses, while Table 33 in Annex 3 presentsall results. It is important to note that the share of firms respond-ing 'no' remained between 50 and 64 percent, but did not showa direct relationship to either of the other possible responses.
61.7 60.8 59.2 65.5 61.5 63.2 60.7
43.4 44.4 45.7 40.1 45.6 39.2 41.9
43.3 45.2 39.8 46.5 40.7 50.5 42.5
42.0 42.9 40.4 43.4 41.8 43.9 40.6
39.9 38.9 40.7 39.4 41.7 41.3 33.3
36.9 33.3 37.1 38.8 36.1 38.4 37.9
36.5 36.4 34.8 38.8 35.9 34.3 40.6
31.1 29.5 34.1 28.1 32.8 26.0 32.5
28.6 30.0 26.1 31.4 28.1 29.3 29.5
VAT refund procedure
Tariff rates
Workload capacity of customs serv-ices
Formalizing customs documents
Customs clearance - state border
Customs clearance - regionalcheckpoints
Certification of imported goods
Sanitary control procedure
Obtaining licenses to engage in foreign trade
Small Medium Large
Firm SizeFirm Origin
Ave
rage
Procedure State Privatized Private
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Figure 34Firm Identification of Violations by Customs Officials
(as a % of firms engaged in import-export operations in 2001)
Yes, a violation occurred I don't know
Formalizing customs documents
Customs control
Crossing the state border
Sanitary control
Certification of imported goods
Obtaining a certificate of product origin
Obtaining quotas
Veterinary control
0 5 10 15 20 25 30 35 40 45 50 55 60%
Exceed 15-day deadline to process import license
Exceed 15-day deadline to process export license
Unofficial PaymentsEnterprises were asked whether or not they had paid additionalsums (more than the official price) to complete any of a numberof separate customs procedures. Consistent with the findings forother regulatory activities, more than one-third of respondentsdid not deny having engaged in such actions during completionof customs procedures.
Table 13 presents the incidence of unofficial payments duringcustoms operations. Combining 'yes' and 'confidential' respons-es suggests that nearly one-quarter (23 percent) of the time, an
unofficial payment is made during the customs process. This rep-resents a decrease over the 30 percent incidence of unofficialpayments in 2000.
Survey results show that the three procedures during which pro-cedural violations were most often noted are the same three pro-cedures for which unofficial payments are most often made -customs control, completing customs documents, and crossinginternational lines. For many procedures, the incidence of unof-ficial payments mirrors the frequency with which process viola-tions occur.
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Table 13
Frequency of Unofficial Payments for Various Customs Procedures, 2001
(as a % of firms engaged in import-export operations in 2001)
Customs control 61.7 23.5 7.3 7.5 31.0
Formalizing customs documents 63.5 22.6 6.4 7.5 30.1
Crossing the state border 64.2 22.0 8.4 5.3 27.3
Sanitary control 62.8 19.2 14.2 3.8 23.0
Obtaining a certificate of product origin 67.5 18.2 10.0 4.2 22.4
Certification of imported goods 61.5 18.2 16.1 4.2 22.4
Obtaining an import license 60.9 18.4 17.9 2.7 21.2
Obtaining an export license 64.2 17.7 15.1 2.9 20.6
Obtaining quotas 62.4 16.2 19.0 2.4 18.6
Veterinary control 58.2 14.6 24.3 2.9 17.5
Average 62.7 19.1 13.9 4.3 23.4
* No specific 'Yes' option was provided. This represents the share of respondents who provided a specific payment estimate.
** This is the sum of the 'Yes' and 'Confidential' columns.
NoProcedure Yes* Implicit Yes**Confidential Hard to
Say
Businesses, when required to make side payments to customsofficials, can complete such actions in one of two ways: bypaying either more or less than the official price. Survey resultsshow that nearly one-fifth of the time (19 percent) customsofficials apparently "cut a deal" with businesses. In these casesthe firm pays no official fee and instead gives the customs offi-cial an amount "off the books" which is less than the official
cost. Figure 35 provides details of unofficial payments by typeof customs procedure. These deals are cut most often (39 per-cent of the time) when firms are attempting to gain a share ofmaterials distributed via a quota system, but occur with rea-sonable frequency with export licensing and receiving certifi-cates of goods origin.
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Figure 35
Level of Unofficial Customs Payments Relative to Official Cost
(as a % of firms stating that they made unofficial payments during customs procedures)
Over 25% above official cost Up to 25% above official cost Less than official cost
Customs control
Certification of imported goods
Crossing the state border
Formalizing customs documents
Veterinary control
Obtaining an import license
Sanitary control
Obtaining an export license
Obtaining a certificate of goods origin
Obtaining quotas
0 10 20 30 40 50 60 70 80 90 100%
Proposals To improve current customs practices, the following measuresshould be implemented:
6 Harmonize customs procedures and relevant documenta-tion with EU and other international standards;
6 Proscribe clear, consistent, transparent, and easily acces-sible procedures for customs clearance and customs
inspections. Currently, even customs professionals suchas brokers and attorneys are often uncertain about whichdocuments are required given the frequency with whichrequirements change.
6 Assign specific customs regulation functions to individualagencies and do not allow regional customs authorities toestablish their own rules.
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1 This figure is the sum of respondents reporting either 'yes' or that such information is 'confidential.' For details, please see the Customs section of this report.
CERTIFICATION AND STANDARDIZATION
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
Figure 36
Perceptions of Certification as a Barrier, 2001 and 2000
(as a % of firms citing certification as relevant to their business activities)
6 Just over 40 percent of surveyed Ukrainian enterpris-es consider certification procedures a major or signif-icant obstacle to the growth of their business. Thisremains virtually unchanged from last year.
6 More than 22% of firms surveyed encountered prob-lems while completing certification procedures in2001; the problem most frequently mentioned is anoverall lack of transparency and simplicity in proce-dures, cited by 54% of firms encountering difficulties.
6 Just 13% of all firms and 20% of manufacturers haveadopted or plan to adopt a formal quality manage-ment system which helps to ensure that the enterprisemeets product certification quality standards; another17% of firms engage in or plan to engage in volun-tary certification of production.
6 Survey results suggest that unofficial payments aremade by over one-fifth (22%) of firms trying to haveimported goods certified.1
Certification ActivityThe certification process is a government regulatory procedureintended to ensure product quality to protect the health andsafety of the public. This section describes mandatory certifica-tion of imported and domestic goods as well as voluntary certi-fication of products.
New legislation has recently been passed in an attempt to bringUkraine in line with European standards for product certifica-tion. In 2001, the following new laws were adopted: "OnConformity Assessment," "On Standardization," and "OnAccreditation." However, until new technical product specifica-tions, required by these laws, are approved by the Cabinet ofMinisters, the Decree On Standardization and Certification dat-ing from 1993 remains in force.
The Decree of the Cabinet of Ministers On Standardization andCertification requires companies to undergo certification toensure that their products meet with certain government stan-dards. Once certification is completed and approved by a certi-fication agency, the applicant receives a certificate and is enti-tled to use a special certification mark on his products.
Mandatory certification procedures are applied to both import-ed products and to products made locally. Certain categories offoreign goods, even if they have been certified in their owncountry, are subject to re-certification in Ukraine using localstandards, unless a separate certification recognition agreementexists with that country, which is rarely the case.
As part of its annual certification revisions, the Governmentmakes changes to certification procedures, including namingauthorized certification agencies and assigning them responsi-bility for designated products. For some goods however, certify-ing agencies are essentially granted monopoly powers overparts of a product, resulting in the involvement of multiple agen-cies, each with separate authority to grant certificates for variousparts of but not for the complete product. Products may also besubject to repeated certification.
Perceptions of Certification Procedures asa Barrier to GrowthIn 2001, 64 percent of survey respondents claimed that certifi-cation procedures were relevant for their business, a slightdecline from 70 percent in 2000. Of these respondents, 40.3percent felt that certification posed a major or significant obsta-cle to the growth of their business, a result that remains aboutthe same as last year (41.6 percent). This ranks certification asthe 4th most troubling regulatory barrier among 8 separate pro-cedures.
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Looking more closely at respondent perceptions towards certifi-cation procedures, significant regional disparities emerge (Table14). In Chernihiv, for example, just 17.9 percent of firms foundcertification to be a major or significant obstacle. In Poltava,Rivne and Ivano-Frankivsk, businesses felt similarly less critical ofthe process. Firms have much more difficulty in Lviv and
Cherkasy, in particular, with over 60% of firms citing certificationprocedures as a notable obstacle to business development.
Much has changed between 2000 and 2001 as well. As Table 14reveals, the certification process has become much easier in Rivne,Poltava and Mykolaiv, while Lviv and Kirovohrad have seen asharp rise in negative opinion of entrepreneurs toward the process.
Table 14
Certification as a Major or Significant Barrier to Business, Regional Variations, 2001 and 2000
(as a % of firms citing certification as relevant to their business activities)
Change2001 2000
Average Rank Average Rank
Chernihiv 17.9 1 36.0 6 -17.1
Poltava 23.4 2 39.6 13 -16.2
Rivne 25.4 3 48.0 22 -22.6
Ivano-Frankivsk 25.5 4 36.4 7 -10.9
Ternopil 25.6 5 22.9 1 2.7
Khmelnytsky 26.8 6 38.8 11 -12.0
Zhytomyr 28.3 7 40.0 15 -11.7
Lutsk 29.3 8 26.3 3 3.0
Mykolaiv 29.8 9 46.0 19 -16.2
Zaphorozhia 32.7 10 31.7 5 1.0
Sumy 35.1 11 47.8 21 -12.7
Kherson 37.7 12 23.4 2 14.3
Luhansk 40.8 13 44.0 16 -3.2
Vinnytsia 41.1 14 37.5 8 3.6
Simferopol 41.7 15 44.0 17 -2.3
Donetsk 42.9 16 44.0 18 -1.1
Odesa 43.3 17 50.0 24 -6.7
Uzhgorod 44.0 18 29.5 4 14.5
Kiev 44.8 19 48.9 23 -4.1
Kharkiv 50.7 20 46.1 20 4.6
Dnipropetrovsk 53.0 21 55.8 25 -2.8
Kirovohrad 56.9 22 38.1 9 18.8
Chernivtsi 57.1 23 39.6 14 17.5
Lviv 60.3 24 38.2 10 22.1
Cherkasy 67.3 25 39.4 12 27.9
National Average 40.3 41.6 -0.4
City
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2 This represents 22.2 percent of the entire survey sample. In the 'barriers' section above, the 40.3 percent of firms feeling that certification posed a major or significant barrier to their business included only those firms for whichcertification was an option (64 percent) - or about 25.8 percent of the entire sample. So, even though the questions were posed differently, the overall total citing problems with the process is approximately the same.
Problems Encountered During CertificationProceduresIn addition to being asked to report their perceptions of certifi-cation as a regulatory barrier to the growth of their business,respondents were asked whether or not they have had any spe-cific problems while completing procedures for certification ofproducts in 2001. Just over one fifth (22.2 percent) of all firmssurveyed said that they had encountered some kind of difficul-ties while completing these procedures (Figure 37).2
Survey data shows that the certification process poses arelatively equal amount of difficulty for small and medium firmsas for large enterprises. There is also little variation among firmsof different origins - yet privatized firms appear to have slightlymore difficulty compared to either state-run firms or privateenterprises. Not surprisingly, among various industry types,manufacturing firms are the most troubled by the process, withmanufacturing firms of all sizes reporting a similar level ofdifficulty.
Figure 37
Percentage of Firms Encountering Problems During Certification Procedures, by Sector
(as a % of all firms)
Average-2001
%
Manufacturing
Construction
Transport
Trade
Other Services
Financial Services
Public Catering
0 5 10 15 20 25 30 35 40
When asked which problems they face specifically, a majorityof enterprises singled out the lack of transparency and generalcomplicated nature of the certification process. This specificissue was noted by 53.8 percent of respondents stating that theyhad encountered problems during certification procedures. Thisissue of complexity and lack of transparency is not unique tocertification, however, and this concern remains a unitingtheme of many regulatory procedures in Ukraine. Among otherdifficulties with certification procedures noted by respondents,the cost of obtaining standards was cited by another relatively
large portion of enterprises (38.4 percent). Export-oriented firms,meanwhile, are particularly hampered by non-harmonization ofUkrainian and international standards, as well as the lack ofinternational recognition of Ukrainian certificates (Figure 38).
While survey results show that the issues of harmonization andrecognition of standards are particularly relevant for the trans-portation and manufacturing sectors (35% and 29% respective-ly), the most troubling issue of non-transparency and compli-cated procedures is shared among firms of all sizes and origins.
CERTIFICATION
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Figure 38
Specific Problems with Certification(as a % of firms encountering problems during certification procedures)
%
Certification procedure is non-transparent and too complicated
Cost of obtaining standards is too high
Ukrainian standards not harmonizedwith international standards
Ukrainian certificates not recognized abroad
0 10 20 30 40 50 60
Certification of Imported GoodsSurvey respondents were asked to comment on their experiencewith certain procedures related to import and export of goods.While this information is covered in detail in the 'Customs' sec-tion of this report, here we would like to highlight the procedurefor certification of imported goods, as it relates specifically tocertification processes.
Sixty-two percent of firms involved in import-export operationshad imported goods certified in 2001. Of these, nearly 37 per-cent reported difficulties during the process. This ranks certifi-cation of imported products the 7th most problematic issueamongst import-export procedures. Respondents were alsoasked whether they had identified violations of procedural ruleson the part of agency officials while clearing customs.Companies claimed that violations occurred just under 12 per-cent of the time when they had imported goods certified, plac-ing the procedure 5th for frequency of identified violations.(Please see 'Customs' section of this report for details.)
Certification in PracticeEnterprise restructuring and adoption of competitive businesspractices are important for firms wishing to remain active on theUkrainian market. The survey asked firms to report on a numberof changes in business practices that they have adoptedbetween 1999 and 2001. Two of these practices are related toimproving competitiveness - introduction of quality manage-ment systems, and voluntary certification of products.
According to survey results, just 7 percent of firms and about 10percent of manufacturing firms have adopted a quality manage-ment system which helps to ensure that the enterprise meetsquality standards of production. An additional 6 percent of firms(11 percent of manufacturers) plan to adopt such a system with-in the next three years.
Survey results also reveal that 11 percent of firms are engaged involuntary certification of products, with another 6 percent plan-ning to adopt such practices by 2004. Again, manufacturers arethe most active in this area, with nearly 18 percent havingalready begun voluntary certification and another 10 percentplanning to do so.
While manufacturing is the sector showing the greatest willing-ness to adopt competitive methods, interestingly, both methodshave been adopted by a greater share of small manufacturersthan by their larger counterparts. Small firms are also moreaggressive in planning to adopt both quality management sys-tems and voluntary certification of products.
ProposalsGiven survey findings, the following steps should be taken toimprove certification process and procedures:
6 Approve the technical product specifications required tobring into force the new laws: "On Standardization," "OnAccreditation" and "On Conformity Assessment";
6 Steer activities of NGOs and Government toward decreasingthe list of products liable for mandatory certification inUkraine, bringing the list into line with EU standards;
6 Together with the International Standards Organization,European Union, the World Trade Organization and otherinternational institutions, draft a joint program to bringUkraine in line with internationally accepted quality stan-dards.
PERMITS
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1 The term "permits" will be used in the rest of this section to refer to "permits and approvals."2 Examples of "domestic service firms" would be hairdressers, dry cleaners, shoe repair shops , etc.3 Cabinet of Ministers of Ukraine Resolution No. 150 of February 14, 2001 and Resolution No. 51 of April 23, 2001 of the Head Sanitary Physician of Ukraine, respectively.
PERMITS AND APPROVALS1
6 There has been no significant change in business per-ception of the permit process between 2000 and 2001,with the share of respondents citing it as a major orsignificant barrier dropping slightly, from 44% in 2000to 41% in 2001.
6 Despite this lack of change in general perceptions, sur-vey results show that, for firms obtaining permits in2001, the process has become increasingly difficult formost permit types.
6 Obtaining permits remains slightly more problematicfor small and medium sized companies.
6 Attitudes toward the permit process differ widely byregion, and this disparity has grown larger between2000 and 2001, underscoring the influence exerted onthe process at the local level. A number of cities showexceptional improvement in local perceptions of theprocess, while others have suffered marked declines.
6 The time required to receive permits is longest forland allocation (27 working days), construction (17),and renovation (14), with all other permits obtained inless than 10 working days.
General Aspects of the Permit ProcessA permit is a document which regulates commercial access to aspecific segment of the market, to works or to services connect-ed with a number of business activities. On the other hand, alicense gives its owner the right to carry out a specific type ofcommercial activity during a clearly defined period of time,assuming that conditions of the license are fulfilled. Thus, whilea license is required for carrying out certain types of entrepre-neurial activity, a permit must be obtained to start operations,obtain access to infrastructure, begin construction or recon-struction of premises, etc.
Many aspects of the process of obtaining permits are more com-plicated and non-transparent in practice than is described inregulatory documents. Unforeseen complications or obstaclesduring the process result in frequent delays in the startup ofoperations as well as interruption of ongoing business activity.Survey results show that the actual cost of obtaining a permit issignificantly higher than officially established, in part becausecomplications during the process may often result in some formof unofficial payment.
Legal Aspects of Permits and the Role ofLocal Authorities
Unlike the cases of registration and licensing, Ukraine does nothave a single, unified law that provides a legal definition of per-mits or describes the principles of the process of obtaining them.While permits are primarily allocated locally, rules and regula-tions for permitting procedures are established in a variety ofways, depending on the permit in question. Some permits areestablished and governed by national law, others by resolutionsof the Cabinet of Ministers, while administrative orders issued bygovernment bodies such as the State Labor Protection Committeegovern yet a different set of permits. In most cases, however, thepower to issue permits remains with local authorities.
As one example, the Law of Ukraine, "On Local Self-Government" (No. 280/97-VR of 21 May 1997) empowers localcouncils to issue a number of permits, including the following:
6 to purchase state-owned property;
6 to place outdoor advertising;
6 to use real estate for commercial purposes;
6 to alter the working hours of domestic service firms2 to makethem more convenient for the general public; and
6 to carry out design, construction and reconstruction ofbuildings and structures as well as land development work.
While there are significant potential benefits to decentralizedregulatory authority, currently the regulation of business bylocal councils is typically problematic and quite literally - tax-ing - to business. Many of the difficulties inherent in the permitprocess stem from an entire set of unwritten requirements thatlocal authorities create.
The laws and regulations that govern permit procedures areoften unknown to businesses, while information is not readilyavailable at one location, obliging business owners to spend asubstantial amount of time attempting to obtain informationabout the process. For example, by law, a fire inspection permitis issued free of charge. However, in order for a firm to receivethe permit, it must first pass a fire inspection which requires pay-ment to a licensed "fire expert", an official step and requirementthat is not stated in the law.
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PERMITS
4 Drafts of Presidential Decrees : "On Obtaining Permits and Approvals for Start-Up of Entrepreneurial Activity in the Unified Offices;" and "On Measures for Implementation of the Application Principle of Obtaining Permits Necessaryfor Start-Up Operations of Enterprises."
To add another layer of complexity, local authorities are oftenrequired to receive preliminary opinions on permit decisionsfrom a specific territorial division of national ministries. The lawdoes not stipulate, however, either the terms or the procedurefor such relationships. Thus, different legal bases for permits,under the jurisdiction of a variety of public bodies and governedby non-standardized, often ambiguous procedures, leave thepermit process vulnerable to mismanagement.
In 2001, however, procedures for granting some permitsbecame simpler and more transparent. For example, the proce-dure for obtaining the Fire Department permit has changed ashas the procedure for issuing expert opinions by the StateSanitary and Epidemiological Service.3 However, as describedlater in this section, despite these regulatory changes meant tosimplify the process, in the eyes of business, receiving permits isno less complicated than before.
At the beginning of September 2002, the drafts of two legislativeacts had been prepared, which, if properly implemented, canmake a significant difference in the process of obtaining per-mits4. They propose the establishment of regional 'one-stop-shops' for obtaining permits, similar to the pilots that have beenlaunched for the registration process. This will help entrepre-neurs to reduce both time and out of pocket costs involved inreceiving various required permits. Meanwhile, the implemen-tation of the application principle for obtaining permits, allow-ing firms to apply by filling out a simple form, will lead to thecreation of simpler procedures and a more transparent businessenvironment, similar to that which currently exists for licensing.
Number of Permits Required In order for a firm to start up operations, a certain number ofpermits must be obtained, depending on the firm's field of busi-ness activity. There is no special governmental advisory bodyproviding information about procedures for obtaining permits.An entrepreneur may find out which permits must be obtainedto engage in a certain activity and how to obtain them by con-sulting a lawyer, searching special publications which describeissues related to entrepreneurship activities, or obtaining infor-mation at the office of each separate authority that issues a spe-cific permit.
Of surveyed firms, 36.5 percent of respondents did not apply forany permits in 2001, up significantly from just 14 percent in2000. Among those who did apply, the average number of per-mits applied for by each firm (4.1 permits) declined slightly fromthe previous year (4.4 permits). This is the result of a sizabledrop in the share of firms requiring 5 or more permits and a cor-responding rise in the number of firms requiring just 1 or 2 per-mits to conduct business operations (Figure 39).
Comparable permit requirements are typically placed on allfirms regardless of size, origin or major industry group -veryminor differences are found when the sample is analyzed alongthese dimensions. When results are analyzed geographically,the average number of permits required per company is shownto be around 4.0 in all cities, though 3.6 was the average in Kievand Chernihiv, while firms in Lutsk typically required as manyas 4.7 permits.
Figure 39
Number of Permits Received per Firm, 2001 and 2000
(as a % of firms obtaining permits in 2001 and 2000)
10+ 7-9 6 5 4 3 2 1
In 2001
In 2000
0 10 20 30 40 50 60 70 80 90 100
%
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PERMITS
Perceptions of Permits as a Barrier toGrowthThe share of respondents citing obtaining permits as a major orsignificant barrier to the growth of their business declined from
43.8 percent in 2000 to 41.1 percent in 2001 (Figure 40).However, this dip has altered the relative position of the permitprocess significantly: permits dropped from third to sixth placeamong most problematic regulatory issues between 2000 and2001.
Regional Differences in PerceptionsAttitudes toward permits differ widely by region, and the dis-parity of opinion has grown larger between 2000 and 2001.Permit procedures appear least problematic in Zhytomyr andChernihiv where just 18.1 and 25.6 percent, respectively, ofrespondents found the process a significant or major barrier tobusiness growth. The opposite trend can be found in Lviv (61.3percent) and Kirovohrad (61.4 percent).
A number of cities show exceptional improvements between2000 and 2001. In Simferopol and Ivano-Frankivsk, for
example, the share of respondents claiming that the permitprocess is a notable barrier dropped by about 25 percentagepoints. Other large improvements were also seen in Chernihiv,Sumy and Zhytomyr. However, a number of cities experienceda sharp rise in business complaints about the process, mostnotably in Kirovohrad, Zaporizhia and Ternopil, where theshare of respondents not satisfied with the process grew by 22.1,16.1 and 15.9 percentage points, respectively. Table 15contains complete details on these regional dynamics for 2000and 2001.
Figure 40
Perceptions of Permits as a Barrier, 2001 and 2000
(as a % of firms citing permits as relevant to their business activities)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
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PERMITS
Table 15
The Permit Process as a Major or Significant Barrier, Regional Variations, 2001 and 2000
(as a % of firms citing permits as relevant to their business activities)
2001 2000
Average Rank Average Rank
Zhytomyr 18.1 1 35.4 5 -17.3
Chernihiv 25.6 2 46.2 18 -20.6
Lutsk 30.1 3 32.7 3 -2.6
Ivano-Frankivsk 31.2 4 55.7 24 -24.5
Sumy 31.4 5 50.8 22 -19.4
Uzhgorod 32.5 6 35.8 6 -3.3
Simferopol 32.7 7 58.2 25 -25.5
Donetsk 35.0 8 42.9 12 -7.9
Rivne 35.7 9 45.8 15 -10.1
Poltava 36.0 10 43.5 13 -7.5
Odesa 37.5 11 42.4 10 -4.9
Khmelnytsky 37.5 12 49.3 20 -11.8
Vinnytsia 39.0 13 33.3 4 5.7
Kharkiv 39.1 14 46.2 18 -7.1
Cherkasy 41.9 15 31.7 2 10.2
Chernivtsi 41.9 16 45.9 16 -4.0
Zaporizhia 43.0 17 26.9 1 16.1
Mykolaiv 44.6 18 38.2 7 6.4
Kherson 46.2 19 45.3 14 0.9
Kiev 49.4 20 42.6 11 6.8
Luhansk 51.6 21 53.0 23 -1.4
Dnipropetrovsk 53.5 22 50.0 21 3.5
Ternopil 54.5 23 38.6 8 15.9
Lviv 61.3 24 48.2 19 13.1
Kirovohrad 61.4 25 39.3 9 22.1
National Average 41.1 43.8 -2.7
ChangeCity
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PERMITS
Regional Perceptions by Firm SizeAttitudes toward the permit process differ greatly by firm size whenresults are analyzed both between regions of Ukraine and withinspecific localities. Overall, Zhytomyr is the city where it is the eas-iest to obtain a permit for those who run a small business - only15.6 percent said that it was a major or significant barrier. In everycity other than Poltava, this share is at least twice as large, and it isworst of all in Lviv, where nearly 7 out of 10 small firms findobtaining permits to be a problem. In Lviv, more than twice asmany small and medium sized firms find the permit process trou-bling when compared to large firms in the region. The same is truein Uzhgorod and Chernihiv, despite their overall strong showings.
For a medium-sized business, it is the easiest to obtain a permit inIvano-Frankivsk, followed closely by Sumy. Large firms have themost favorable climate in Chernihiv and Uzhgorod, while those inDnipropetrovsk have a particularly difficult time. Table 34 in Annex3 presents a complete breakdown by region and firm size.
Obtaining Permits in 2001Enterprises that obtained permits in 2001 report that the processhas become more difficult (Figure 41). This has taken place
despite little change in the general attitudes of all surveyed firmsregarding the overall permit process. However, it is important tonote that while questions of general perceptions of regulatorybarriers were posed to all survey respondents, only those firmsthat obtained permits in 2001 were asked to rate the difficulty ofobtaining each particular permit this year.
The most difficult permit to obtain remains the land allotmentpermit, with 6 in 10 firms claiming that acquiring it was a diffi-cult or very difficult process. This is not surprising given the his-toric political and social tensions around the issue of land useand reform in Ukraine. The land allotment permit is followed indifficultly by the construction permit (45.3 percent) and the per-mit to refurbish premises (41.9 percent).
Meanwhile, between 2000 and 2001, obtaining a permit torefurbish premises and obtaining approval from the Housingand Communal Property Department became significantly moredifficult. Also notable is that the three obligatory permits - Fire,Sanitation, and Labor Protection - are not viewed as particular-ly difficult to obtain. Table 35 in Annex 3 presents results for2001 by firm size.
Figure 41
Share of Firms Citing Specific Permits as Difficult or Very Difficult to Obtain, 2001 and 2000
(as a % of firms obtaining permits in 2001 and 2000)
2001 2000
Land tract allotment permit
Construction permit
Permit to refurbish premises
Permit from Fire Department
Road Police approval
Permit to occupy premises
0 5 10 15 20 25 30 35 40 45 50 55 60
Approval from Housing andCommunal Property Department
Permit for trade and customer service outlets
Permit from State Sanitary and Epidemiological Service
Permit from Labor Protection Department
%
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PERMITS
5 There are two likely explanations for this. First, the questions asked - and therefore, the attitude being measured - were slightly different. The first question asked about firms' attitudes toward regulatory procedures as a barrierto firm growth and was presented in a comparative context. The second question asked specifically about the difficulty of receiving specific permits. An additional explanation, however, is that this difference reflects respondents'hesitancy to openly criticize particular, identifiable agencies.
Figure 42
Share of Firms Obtaining Specific Permits, 2001 and 2000
(as a % of firms obtaining permits in 2001 and 2000)
2001 2000
Permit from Fire Department
Permit from State Sanitary and Epidemiological Service
Permit from Labor Protection Department
Permit to occupy premises
Road Police approval
Permit to refurbish premises
Construction permit
Approval from Housing and Communal Property Department
Land tract allotment permit
0 10 20 30 40 50 60 70
Permit for trade and customer service outlets
Obligatory Permits Three types of permits are compulsory for all firms irrespectiveof their potential business activities. These include permits andapprovals of the State Fire Department, the State Sanitary and
Epidemiological Service, and the Labor Protection Department.Among survey respondents, between 35 and 45 percent of firmshad applied for these permits in 2001 (Figure 42). A significantdrop from the previous year can be seen in the share of firmswhich applied for each type of permit.
Obligatory Permits by Region
This section looks in detail at regional attitudes toward the threepermits that are obligatory for all companies before they canstart operations- Fire, Sanitation, and Labor Protection.
In 2001, Zhytomyr was a stand out case - local enterprisesreport having had far fewer problems in obtaining obligatorypermits than firms in any other region of Ukraine. In fact,Zhytomyr and Chernihiv display the two most positive assess-ments nation-wide of the permit process in general, while alsoranking amongst the top performers for all three mandatory per-
mits. Ternopil and Lviv also display strong showings for ease ofobtaining obligatory permits, ranking 2nd and 3rd in the nation.However, when the data below is compared to the informationgiven in Table 16, it is clear that in a majority of cities, enter-prise opinion of individual departments or agencies is less criti-cal than toward the process as a whole.5
Table 16 also displays significant shifts in opinion between2000 and 2001. In cities such as Khmelnytsky and Lviv, sub-stantial improvement in attitudes toward all three permittingagencies can be seen, while in others such as Lutsk andVinnytsia, attitudes have become more critical across the board.
%
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PERMITS
6 Cities are sorted by average difficulty of obtaining all three obligatory permits, from greatest to least.
Table 16
Share of Firms Citing Obligatory Permits as Difficult or Very Difficult to Obtain,
Regional Variations, 2001 and 2000
(as a % of firms obtaining permits in 2001 and 2000)
2001 2000
City6 Sanitation Fire Sanitation Fire
Sumy 36.7 35.7 40.0 23.3 40.0 34.8
Donetsk 32.8 40.3 32.1 24.6 22.4 25.0
Kiev 40.3 32.4 32.0 18.6 27.2 19.6
Vinnytsia 30.0 33.3 36.7 13.0 11.8 19.5
Kharkiv 29.6 35.4 34.7 23.5 43.7 20.9
Uzhgorod 34.3 43.6 21.4 15.2 19.1 8.8
Luhansk 35.6 36.0 25.5 16.7 39.3 35.0
Poltava 30.0 42.1 25.0 26.3 29.5 21.9
Ivano-Frankivsk 33.3 37.1 22.2 40.0 42.2 9.4
Dnipropetrovsk 21.9 32.8 37.7 39.5 35.6 32.8
Kherson 29.3 35.7 24.1 21.1 19.6 33.3
Simferopol 26.7 27.1 35.1 42.2 45.3 28.6
Chernivtsi 31.3 23.7 25.0 34.1 37.5 29.4
Kirovohrad 30.3 28.2 21.4 19.6 32.7 19.2
Rivne 31.4 26.7 21.6 29.2 37.0 16.7
Khmelnytsky 26.5 26.3 25.0 36.4 37.0 44.4
Lutsk 31.0 27.0 15.0 10.8 8.7 6.3
Mykolaiv 21.6 31.7 19.4 25.0 21.7 22.2
Odesa 16.7 25.0 28.9 36.7 35.6 30.2
Zaporizhia 18.2 24.4 18.8 14.6 11.3 14.0
Chernihiv 19.4 18.2 23.1 13.9 12.0 11.1
Cherkasy 14.7 25.6 17.9 16.7 39.1 28.6
Lviv 19.0 22.2 13.8 36.4 37.2 26.3
Ternopil 13.6 23.9 11.1 6.9 6.1 16.7
Zhytomyr 12.5 8.0 13.0 23.8 16.3 27.0
LaborProtection
LaborProtection
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PERMITS
Timeframes for Receiving PermitsThe time required to complete the permit process varies signifi-cantly, depending on the permit in question and the specificagencies involved in its allocation. The permit for land plotallotment (27 days) and the construction permit (17 days)require the longest wait, with respondents in extreme cases
reporting that the process of receiving these permits may last upto one year. The waiting period to obtain a permit to refurbishpremises is also rather lengthy (14 days). The remaining permitsdiscussed in this report are typically obtained in less than tenworking days. Figure 43 contains a complete breakdown of theaverage time required to receive each permit. Table 36 in Annex3 presents these results by firm size and origin.
Figure 43
Waiting Period to Receive Specific Permits
(as a % of firms obtaining permits in 2001, in number of working days)
Permit for land tract allotment
Construction permit
Permit to refurbish premises
Permit to occupy premises
Permit from Fire Department
Approval from Road Police for building site location
0 5 10 15 20 25 30
Approval from Housing andCommunal Property Department
Permit for trade and customer service outlets
Permit from State Epidemiological Service
Permit from Labor Protection Department
A regional breakdown of waiting periods for each permit dis-plays a wide variety of performance. Some cities, such asZaporizhia, Kherson and Khmelnytsky, consistently outperformthe national average for most or all permits. Other areas like
Cherkasy and Odesa have consistently underperformed theaverage. Most common, however, are varied waiting periodswithin a city, depending on the permit in question (Table 37 inAnnex 3).
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PERMITS
Permits and Unofficial PaymentsSurvey results show that 23.5 percent of firms who applied forpermits made unofficial payments during the process.Experience has shown that it is common for firms to claim thatthis information is "confidential." In fact, typically 30 - 40 per-cent of firms claim confidentiality, which was not offered as anoption for this particular question.
Of those who did make payments, half did so for just one per-mit, 18 percent did so to obtain two different permits, and 22percent did so for three or more permits. For which permits areunofficial payments most common? Figure 44 shows that typi-
cally, 10-15 percent of firms freely admit to having made unof-ficial payments for each of a number of different permits. Mostfrequently, payments are made for the mandatory FireDepartment permit, though a number of other permits display asimilar incidence of payment.
For many permits, small and medium enterprises tend to makeunofficial payments more frequently. The same is true for firmsoriginating as private enterprises, particularly for the three mostcommon permits, from the Fire Department, Sanitation Service,and Labor Protection Department. Table 38 in Annex 3 displaysresults by firm size and origin.
Figure 44
Share of Firms Making Unofficial Payments During the Permit Process, 2001
(as a % of firms obtaining permits in 2001)
Land tract allotment permit
Road Police approval
Permit to refurbish premises
Construction permit
Permit to occupy premises
0 2 4 6 8 10 12 14 16
Approval from Housing and Communal Property Department
Permit from Fire Department
Permit for trade and customer service outlets
Permit from State Sanitary and Epidemiological Service
Permit from Labor Protection Department %
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PERMITS
Proposals 6 Require that regulatory acts relating to permits be subject to
approval by the State Committee on Regulatory Policy andEntrepreneurship. General legal grounds for the issuance ofpermits should be stipulated by the Cabinet of Ministers ofUkraine.
6 Create regional 'one-stop-shops' for obtaining permits, sim-ilar to the pilots that have been launched for the registrationprocess. This will help reduce the time and out of pocketcosts to receive various required permits.
6 Establish clear procedures, authority and lines of responsi-bility for cases in which public officials violate terms forissuing permits, expert opinions and approvals;
6 Create a fair, transparent, viable appeals and review processthat designates an independent intermediary to arbitrateconflicts that arise between entrepreneurs and permit issuingauthorities.
6 Clearly stipulate the codes or standards that are relevant foreach type of permit and make this information publiclyavailable and easy for entrepreneurs to access. This willlimit those providing "expert opinion" on such matters to apre-defined set of standards and measurements applicableduring the permit review process.
6 Designate a permits procedure information service that hasresponsibility for creating and distributing information toenterprises on the list of permits required to engage in a cer-tain business activity and on the procedures for obtainingthem.
6 Make publicly and widely available a manual that containsa complete description of the legal grounds and require-ments for permits, and the steps that need to be undertakento obtain each permit, including citing all informationrequired for submission to issuing agencies, and the relevantfees involved.
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LICENSING
1 The Law "On Licensing", which passed through Parliament in June of 2000, came to force in November of the same year. Annex X presents a summary of changes that have been introduced with the new legislation. 2 Resolution No. 756 "On Approval of the Documents Necessary for Submitting an Application for Licenses for Specific Entrepreneurial Activities", adopted July 4, 2001.
6 With the enactment of the Law on Licensing in late2000, a number of important improvements have beenmade to the licensing process; this has resulted infewer firms considering it a significant or major barri-er to their business - 35% of firms participating in thesurvey cited licensing as a barrier in 2001, comparedto 43% in 2000.
6 However, continual changes in legislation - 14changes in 19 months since the Law on Licensingcame into force - confuse enterprises and undermineother progress made.
6 Twenty-one percent of respondents obtaining a licensein 2001 reported experiencing problems during theprocedures.
6 Licensing officials often exceed legally imposed dead-lines for completing the licensing process - more than41% of enterprises encountered excess delays in atleast one of the stages.
6 The need for unofficial payments during the licensingprocess decreased by nearly one-third compared to2000; most of the decline in such payments was expe-rienced among small enterprises.
Licensing, as one of the principle regulatory activities of gov-ernment, is conducted to help ensure and promote the publichealth and safety. Licensing is also intended as a means to helpprotect the interest of legitimate businesses from unfair practicesused by firms operating in violation of the law. When appliedproperly, licensing procedures can also help to ensure that busi-nesses adhere to minimal standards of professionalism.
Not all realms of business activities are subject to licensing;licensing typically is reserved for business activities that haveboth broad public reach and serious potential negative conse-quences if performed improperly, including spheres such asmedicine, education, and financial services.
In accordance with accepted international practices, a licensingsystem should comply with the following basic principles:
6 It should not allow business activities that are damaging tohuman health or the environment, or that threaten publicsafety;
6 It should be simple and transparent, with license require-ments having a single interpretation;
6 It should ensure that licensed businesses have appropriatequalifications to conduct the business activity in question,and;
6 It should not be used to restrict competition.
In the most general terms, Ukraine's licensing system meetsthese principles and over the years, Ukraine has made signifi-cant progress in improving its licensing activity. By the end ofthe year 2000, for example, the number of bodies with licens-ing powers had declined from 825 to 58 as a result of theenactment of new licensing legislation.1
Additional improvements to legislation have been made sincelast year. The full list of documents necessary for submissionwith an application for a license was adopted by Parliament inJuly of 2001.2 As of 2001, licenses to produce and trade in alco-hol and tobacco products may be issued in rayon (county) cen-ters, and no longer only in oblast centers. While these results areencouraging, survey results show that a number of areas withinlicensing remain problematic for enterprises.
Perceptions of Licensing as a Barrier toGrowth Overall, fewer firms are subject to licensing procedures -- 67percent of firms participating in the survey in 2001, comparedto 72 percent in 2000. Those who are, find the licensing processslightly less troubling than last year; businesses ranked licensing7th out of 8 potential regulatory barriers, in order of difficulty.Despite this position, however, licensing was cited as a signifi-cant or major barrier by 35 percent of survey respondents.While this represents an improvement from 2000, when 42 per-cent of businesses named licensing a barrier to development, itremains a large share in absolute terms.
LICENSING
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LICENSING
Figure 45
Perception of Licensing as a Barrier, 2001 and 2000
(as a % of firms citing licencing as relevant to their business activities)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
Firm Size and Regional CharacteristicsWhen national averages are analyzed, the size of a firm does notappear to affect its perceptions of the licensing experience - small,medium and large firms report a similar level of difficulty.However, this convergence at the national level masks acute dif-ferences that emerge when the figures are analyzed separately byregion (Table 39 in Annex 3 presents results for firms of varioussizes). The discrepancies in perceptions across regions emphasizethe amount of influence exerted on the licensing process at thesub-national level, and highlight inconsistencies in local treat-ment of firms of various sizes. In Cherkasy, for example, more
than half of firms whose activities are subject to licensing foundthe process to be a major or significant barrier to their business.This 50 percent threshold remains in place regardless of whetherthe firm is a small, medium or large enterprise. In Ivano-Frankivsk,however, where just over one in five firms claim licensing as anotable obstacle, small firms are affected disproportionately.
When making comparisons to 2000, substantial levels of year-on-year change at the regional level emerge. Attitudes towardslicensing improved significantly in Poltava, Sumy, Ivano-Frankivsk and Mykolaiv, while in Cherkasy, Zaporizhia andUzhhorod licensing was viewed as much more of a barrier.
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LICENSING
Cherkasy
Lviv
Kirovohrad
Chernivtsi
Kharkiv
Zaporizhia
Dnipropetrovsk
Ternopil
Uzhgorod
Simferopol
Kiev
Luhansk
Odesa
Donetsk
Khmelnytsky
Vinnytsia
Kherson
Rivne
Chernihiv
Poltava
Sumy
Lutsk
Ivano-Frankivsk
Zhytomyr
Mykolaiv
0 10 20 30 40 50 60
National Average
Figure 46
Perceptions of Licensing as a Major or Significant Barrier, Regional Variations
(as a % of firms citing licencing as relevant to their business activities)
%
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LICENSING
3 Serhiy Tretiakov, Economic Reforms Today , N38, 2001, p.3, CIPE4 An exhaustive list of additional documents is determined by Resolution # 756 of the Cabinet Minister of Ukraine, of July 4th, 2001 "On approval of the list of additional documents submitted with application form for obtaining
licenses for certain types of business activities" 5 Examples are licenses for TV and radio broadcasting.6 Cabinet of Minister�s Resolution of November 14, 2000 #1698 �On the Approval of the List of Licensing Bodies.�
The Licensing ProcessTo conduct certain types of activities, a business must apply toa licensing body, subordinated to either the local or nationalexecutive authorities, for a license. A license is an official doc-ument certifying the right of the licensee to conduct a specifiedbusiness activity during a specified term. In practice, nearly 80percent of all licenses are issued by local authorities,3 whichaccounts for much of the regional variation in regard to licens-ing witnessed in this report.
In Ukraine, the standard license term is three years. A longerterm of validity is stipulated only for licenses to provide radiocommunication services (10 years), telephone communicationservices (15 years), technical maintenance of broadcasting net-works used for industrial purposes (5 years) and the license toissue and hold lotteries (12 years). Terms shorter than one yearare applicable to licenses to sell alcoholic spirits, alcoholic bev-erages and tobacco products.
License fees are standard for most types of business activities.Major exceptions which require payment of special fees includethe activities requiring longer terms of license validity, listedabove. License fees, however, do vary depending on the bodywhich issues the license. The standard license fee is 20 non-tax-able minimum incomes (340 UAH or US $63) if the license isissued by a national executive authority, and 15 non-taxableminimum incomes (255 UAH or US $48) if the license is issuedby a local executive authority.
Depending on the type of business activity concerned, the lawproscribes three basic procedures for obtaining licenses:
6 on the basis of an application;
6 on the basis of a permit;
6 through tenders.
In accordance with the application principle, which applies tolicensing of activities that do not pose a potential public dangernor require special skills, entrepreneurs must submit only theapplication, a copy of their state registration certificate, and acopy of a statement confirming the enterprise is included in theUnified State Register of Enterprises and Organizations ofUkraine (EDRPOU).
The permit principle applies to the majority of businessactivities, and requires that entrepreneurs submit, together withthe application and the state registration certificate, additionaldocuments confirming their ability to conduct the businessactivity in question pursuant to the terms and conditions of thelicense.4 Examples of licenses given out on the basis of permitsare those for construction, issuing insurance, and conductingmedical practice.
Tenders are used to issue licenses for business activities whichinvolve the use of limited resources and for which the registra-tion authority receives several competing applications.5 A sum-mary of the various administrative bodies that have authorityover the licensing process in Ukraine can be found in Annex 2.
Legal and Regulatory BasisUkraine has made substantial progress in establishing the legalbasis and framework for licensing. The Law "On LicensingCertain Types of Business Activities," which sets forth 61 licens-able business activities in Article 9, went into effect in Octoberof 2000. However, in the short time since implementation of thelaw, 14 separate changes have been introduced to Article 9 -twice during 2000, eight times during 2001 and four times thusfar in 2002.
These changes have served to complicate the process and con-fuse business owners, and are consequently a revealing exam-ple of the kind of obstacles entrepreneurs claim frustrate theirbusiness. Frequent changes to regulations covering businessactivities were identified as the most serious regulatory obstacleto growth by surveyed enterprises. The Law on Licensing i sonesuch example, with 14 changes in 19 months made to one arti-cle of the law. Such conditions are indicative of the reasons forwhich a unified procedure for licensing business activities inUkraine is yet to be established.
Article 2 of the Law on Licensing sets forth certain businessactivities which are licensed in accordance with specific lawsregulating business transactions in their respective fields. Theseinclude:
6 banking;
6 financial services;
6 foreign economic activity;
6 broadcasting;
6 electric and nuclear power;
6 education;
6 intellectual property; and
6 production of and trade in alcoholic beverages, spirits andtobacco products.
The Law also identifies 58 distinct licensing bodies including 31national executive authorities, 24 regional administrations, theKiev and Sevastopol city administrations, and the Council ofMinisters of the Autonomous Republic of Crimea.6
All but four normative acts which stipulate licensing terms andprocedures have been brought into compliance with the Law,after having been approved by the State Committee of Ukraineon Regulatory Policy and Entrepreneurship.
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LICENSING
Problems Encountered with Licensing
While the business activities of a full 67 percent of surveyedcompanies are subject to licensing, in 2001 licenses wereobtained by 36 percent of all surveyed enterprises. Most of these(64 percent) were single licensees while 29 percent obtainedtwo licenses and 7 percent obtained three or more licenses.Table 17 displays a breakdown of licensing activity by type of
license received and the share of firms reporting problemsreceiving it.
The most commonly received licenses were those to trade inalcoholic beverages, (43 percent of all licensed firms), trade intobacco products (27 percent), and undertake constructionactivity (21 percent). Of firms receiving these licenses in 2001,every fifth respondent reported encountering problems duringthe process. Table 40 in Annex 3 presents detailed results.
Table 17
Licensing Activity by Type of License
(as a % of firms receiving licenses in 2001)
Trade in Alcoholic Beverages 43 25
Trade in Tobacco Products 27 21
Construction 21 22
Passenger Transportation Services 16 11
Import-Export Operations 11 20
Banking 4 14
Tourism 3 19
Manufacture of Medicines 3 32
Selling and Issuing Insurance 3 5
Other* 16 21
Average** 21
% Experiencing Problems
% of All Licensed Firms
Procedure
* 'Other' combines responses for procedures applicable to less than 2% of licensed firms
** Average is a weighted average of all companies experiencing problems during the licensing process in 2001.
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LICENSING
Licensing Violations
Ukrainian law stipulates three distinct timing requirements forconsidering and issuing licenses. First, once a complete applica-tion is submitted, it can be considered for no more than ten days.Second, once a decision is rendered, the licensing body has up tothree days to notify the applicant. Third, once the first two steps
have been completed and the applicant gives the go-ahead toprocess the license, it must be processed within three days. Thesurvey reveals that 27.1 percent of license applicants experienceddelays in at least one of these stages in 2001, in violation of thelaw. The most problematic stage is consideration of the applica-tion itself, the deadline for which was violated for more than 40percent of firms (Figure 47).
Figure 47
Share of Firms Experiencing Violations of the Term Required to Receive a License
(as a % of firms receiving licenses in 2001)
Yes No Hard to tell
The application is considered for more than 10 daysafter submission of all required documents
It took more than 3 working days to send the notice ofthe decision taken
It took more than 3 working days to formalize the license
0 10 20 30 40 50 60 70 80 90 100
%
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LICENSING
7 The responses of firms answering 'yes' and that such information is 'confidential' have been combined in order to estimate the share of firms making unofficial payments during the licensing process.
Unofficial Payments
In 2001, nearly 22 percent of all licensees were most likelyrequired to make unofficial payments during the licensingprocess.7 This represents a decrease of nearly one third com-
pared to 2000, when 32 percent of respondents reported suchactivity. The fact that this decline in unofficial payments wasexperienced mainly among small enterprises (Figure 48) is par-ticularly encouraging, and strengthens the results of otherprogress that has been seen in the sphere of licensing.
Figure 48
Unofficial Payments During the Licensing Process by Firm Size, 2001 and 2000
(as a % of firms receiving at least one license)
Large Medium Small
2001 Yes
2000 Yes
2001 Yes + Confidential
2000 Yes + Confidential
0 5 10 15 20 25 30 35 40
Respondents were also asked to indicate the amount by whichtheir payment exceeded the official license fee (See Figure 49).Almost half (48 percent) of those who made additional pay-ments said that these exceeded the official fee by no more than
10 percent. However, every fifth respondent paid from 10 to 25percent over the official rate and every tenth respondent paid atleast twice the official fee.
Figure 49
Unofficial License Payments: Percent Above Official Cost
(as a % of firms claiming to have made unofficial payments)
1-10% 11-25% 26-50% 51-100% >100%
0 10 20 30 40 50 60 70 80 90 100
48 25 14 7 7
%
%
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LICENSING
ConclusionsThe process of applying for and receiving a license is relativelystraight-forward, particularly when compared to many otherregulatory procedures. Additionally, progress has been made inUkraine over the years in reducing both the number of licens-able activities and the number of authorities empowered togrant a license. This has resulted in a slight decline in the shareof firms citing licensing as a significant or major obstacle to theirdevelopment. In part, the results are somewhat surprising giventhat the number of business activities requiring a license hasincreased from 58 in 2000 to 68 in 2001. With an increasednumber of business activities falling under the scope of licens-ing bodies, a slight increase in the share of firms subjected to theprocess would have been expected. This suggests both an over-all decline in the role that government plays in this aspect ofbusiness life, and that positive changes have been made overthe past year.
While these are significant achievements, survey results showthat a great deal of improvement still should be made. Morethan one third of Ukrainian enterprises continue to find thelicensing process a significant or major barrier to the growth oftheir business. Twenty-seven percent of firms reported that offi-cials failed to meet legally mandated timing requirements dur-ing at least one of the three stages of application processing.One in five firms state that they faced specific problems whentrying to obtain their license and about the same share is forcedto make some type of unofficial payment to complete theprocess.
Once again, significant regional variation exists among enter-prises, suggesting that local authorities exert substantial controlover the licensing experience of each enterprise.
Proposals After the passage and implementation of the Law of Ukraine"On Licensing Certain Types of Business Activities" in 2000,many problems pertaining to licensing procedures wereresolved or at least improved. However, a number of problemsand complications remain. Many of these issues could beresolved through amendments to existing licensing legislation,
including the introduction of restrictions on increasing the num-ber of licensable business activities and making additionallicensing requirements. Further steps in the improvement oflicensing procedures concern the following:
6 Devolve licensing responsibilities to local authorities butmaintain national guidelines and standards to which sub-national agents must adhere. This would allow more timely,less costly, and more representational decision-making.
6 Establish formal recourse mechanisms and clear lines ofresponsibility to enforce legal time requirements to issuelicenses and to lessen the incidence unofficial payments.
6 Specify, standardize and make publicly available compre-hensive license terms and conditions. Currently, somelicense terms contain additional requirements above andbeyond those required by law.
6 Bring into compliance with the Licensing Law four norma-tive acts regulating license terms and conditions that are stillnot compatible with the new legislation. This is the respon-sibility of the State Committee of Ukraine on RegulatoryPolicy and Entrepreneurship.
6 Provide all relevant regulatory bodies with electronic accessto documents in the Unified State License Register, to elim-inate the need for making numerous notarized copies of offi-cial forms.
6 Establish local branches of the Chamber of Experts andAppeals in the most populous regions of Ukraine.
6 Make license terms, conditions and rules publicly availablein both paper copy and electronic format.
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REGISTRATION
1 This section covers firms going through registration and re-registration procedures both in 2000 and 2001, unless otherwise indicated.2 This excludes 19% of respondents, who cited registration procedures as not applicable.
6 The registration and re-registration processes rank asthe lowest overall regulatory barrier to enterprisedevelopment. In 2001, only 21% of respondentsclaimed that the process was either a significant ormajor barrier to business, down from 25% in 2000.
6 In 2000-2001, nearly 40% of respondent firms wentthrough registration procedures - either registering orre-registering their business, or changing their compa-ny's constituent documents.
6 Registration remains a lengthy, opaque, multi-stepprocess requiring formal engagement with at least 7different agencies.
6 To complete the full process of registering their com-pany, entrepreneurs require about 40 working days ifthey attempt to do it alone or just over 15 workingdays if they hire an intermediary that provides full,"turnkey registration."
6 Deadlines for receipt of the registration certificate arenot typically adhered to: 61% of companies experi-enced delays during the process.
6 Extreme variations in registration duration and costsexist among both regions and government bodies, sug-gesting strong, independent influence and control ofthe process by regional and local authorities.
6 By law, the cost of obtaining a registration certificateis UAH 119 (US $22). Survey results show, however,that businesses pay an average of UAH 369 (US $66)to obtain this certificate. Meanwhile, the entire regis-tration process, including pre-registration, registration,and post-registration formalities, costs entrepreneurs anaverage of UAH 1,408 (US $262) before they canlaunch their company.
The process of enterprise registration is often an entrepreneur'sfirst formal experience with the administrative apparatus andregulatory procedures that govern commercial activity. This sec-tion describes the general process of registration as well as itslegal basis, reports on business owners' experience with theprocess, and highlights differences between official require-ments and daily practice. Aspects of the process that are neitherclearly defined nor adequately addressed by law are also dis-cussed, as these areas of vagueness often result in a registrationprocess subject to confusion and, at worst, open to misuse byofficials.
Perceptions of Registration as a Barrier toGrowthIn 2001, entrepreneurs found the registration process the lowestoverall regulatory barrier to the development of their business(Figure 50). Just 21 percent of surveyed enterprises claimed thatthe registration process was either a major or significant barrierto growth, down from 25 percent in 2000. Only 7 percent offirms found the registration process to be a major obstacle.While this figure is quite low, it represents a slight increase overthe previous year (4 percent) and is the same result as that wasobtained in 1999 (7 percent).
It should be noted that substantial improvements have beenmade to the process of registering a business in Ukraine.However, survey results also show that there is still potential forsignificant enhancement of the process.
REGISTRATION1
Figure 50
Perceptions of Registration as a Barrier, 2001 and 2000
(as a % of all firms2)
Major Obstacle Significant Obstacle Small Obstacle No Obstacle
In 2001
In 2000
-100% -75% -50% -25% 0% 25% 50% 75% 100%
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3 This Law provides for the possibiliy of separate (future) legislative acts to regulate state registration procedures for banks and companies providing financial services.
The Registration ProcessIn Ukraine, 'registration' is a multi-step process involvingdozens of discrete actions that an entrepreneur must take andformal encounters with at least 8 different agencies. The processis effectively divided into three stages of activity: pre-registrationrequirements, the registration process, and post-registration pro-cedures.
Pre-registration includes completing the company's foundingdocuments and having them properly notarized; learning of allof the requirements of the multi-step registration process;obtaining a notarized letter from the landlord identifying thelegal address of the business; and obtaining the appropriate reg-istration application from local authorities.
Registration itself includes establishing a temporary bankaccount to contribute the paid-in capital for start-up; obtainingand notarizing rental or ownership documents to prove that thebusiness location has been properly established and paid for;and completing and submitting full registration documents.
After receiving a state registration certificate, the business ownermust then complete post-registration procedures: that is, registerseparately at seven additional offices including the StateStatistics Department, Pension Fund, Unemployment InsuranceFund, Accident Insurance Fund, Temporary Disability Fund,State Tax Administration, and the local office of the Ministry ofInternal Affairs. Each new enterprise is also required to open upa registered bank account for ongoing operations and obtain itscompany stamp and seal. Often, multiple visits to each gov-ernment organ or auxiliary body are required during the regis-tration process.
Legal Basis for RegistrationThe registration process is principally governed by the Law ofUkraine "On Entrepreneurship",3 passed by Parliament inFebruary of 1991, as well as by the Cabinet of Ministers'Resolution "Regulation on State Registration of BusinessSubjects," adopted in May of 1998. The government has alsoestablished standards for maintaining the Unified State Registerof Enterprises and Organizations of Ukraine, the amount of thestate registration fee and the time requirements for completingthe registration process.
The legal procedure established for business registration wasintended to ensure three basic principles favorable for businessstart-ups: 1) directness - registration by direct application only;2) timeliness - an acceptable registration waiting period; and 3)affordability - reasonably priced registration fees. However,results of the survey show that these principles are not alwaysadhered to.
Business registration is conducted in the jurisdiction of theowner's place of residence. This localization of the registrationprocess is the source of the considerable regional variation inboth the perceptions and the reality of the process shown by sur-vey results.
Problems Encountered During Registration Enterprises registering in 2001 were asked to evaluate the levelof difficulty that each separate portion of the registration processcreates, as divided into its three constituent stages: pre-registra-tion formalities, registration itself, and post-registration proce-dures.
None of the individual procedures was found to be particularlytroubling to companies. In fact, even the most problematicaspect of the registration process was rated as a major or signif-icant obstacle by just 28 percent of respondents. Major com-plaints were found to be the long lines and limited number ofwork days at both the Registration Office and the State TaxAdministration.
While firm size generally had no bearing on attitudes toward theprocess, when data is analyzed by the origin of the firm, signif-icant differences emerge. Firms which began as purely privateenterprises tended to view nearly all procedures as a greaterobstacle. This is a somewhat predictable result, as start-up pri-vate firms must go through the entire registration procedure atsome point in their existence, while state-owned companies andprivatized firms would only need to re-register with state author-ities. Figures 51-53 display the results in attitudes toward eachstep in the process, while Table 41 in Annex 3 provides a fullbreakdown of results, by firm size and origin.
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Figure 51
Obstacles in the Registration Process - Pre-Registration
(as a % of firms registering)
Notarizing required documents
Drafting required documents
Lack of information on consultants providing paid registration services
Lack of complete information about registration stages and
the departments involved
Obtaining a landlord's letter confirming the firm's
legal address
0 5 10 15 20 25 30
The rental agreement or transfer of thepremises into the entrepreneur's ownership
Long lines of people/ limited number ofworking days at the registration section
Payment of charter capital
Figure 52
Obstacles in the Registration Process - Registration
(as a % of firms registering)
%
%
0 5 10 15 20 25 30
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Long lines of people/ limited number of work-ing days at the Statistics Department
Long lines of people/ limited number of work-ing days at the State Tax Administration
Tax police background checks
Long lines of people/ limited number of work-ing days at the Pension Fund
Obtaining permission for the company seal and stamp
0 5 10 15 20 25 30
Figure 53
Obstacles in the Registration Process - Post-Registration
(as a % of firms registering)
Registration ActivityNearly four in ten enterprises were engaged in registration-relat-ed procedures in 2001. Almost 11 percent of all respondentsregistered their business for the first time, with the remaindereither having re-registered (14 percent) or having made officialchanges to their constituent documents (14 percent).
Re-registration and/or altering documents is typically requiredwhen one of a number of changes occurs within the company.This includes changes in things as simple as the company nameor official address to more complicated matters such as changesin ownership structure, legal form, statutory fund, or the firm'sprimary business activity.
Choice of Legal FormSole-proprietorships are the legal form of choice for start-upfirms, with over half (54 percent) of all surveyed new enterpris-es registered in this form. Limited liability companies are thesecond most popular legal form, with 20 percent of new com-panies registering in this manner. These are followed distantlyby open- and closed-joint stock companies and workers' col-lectives, with 7 percent of respondents choosing each of thesethe legal forms for their new companies (Figure 54).
Figure 54
Registration Activity by Choice of Legal Form
(as a % of firms registering)
Sole-proprietorships
Limited Liability Company
Open Joint Stock company
Collective Enterprise
Closed Joint Stock Company
Other
0 10 20 30 40 50 60 70 80 90 100
54 20 7 7 7 5
%
%
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4 Days refers to 'working days' in this section, unless calendar days are specifically noted.5 "Turnkey registration", discussed later in this section, allows entrepreneurs to hire consultants to register their business for them, and therefore should not be confused with the use of intermediaries to help complete particular
stages of the process.6 This result is similar to results of a study by the United States Agency for International Development-funded project, BIZPRO, in 2001 (81 percent for large, 94 for medium and 77 for small businesses) .7 Cabinet of Ministers' Resolution "Regulation on State Registration of Business Subjects."
Use of Registration IntermediariesWith the growth and development of the consulting and businessservices industry in Ukraine over the past few years, enterpriseshave increasingly turned to outside assistance to help them pre-pare registration documents. In 2001, nearly one quarter (23 per-cent) of registering enterprises utilized intermediaries or outsideconsultants for this purpose, up from 18 percent in 2000.
Survey results suggest some benefit in utilizing such outsideassistance, specifically for time saved preparing documentation(14 working days4 vs. 20 days without outside help) and waitingto receive the registration certificate once all documents aresubmitted (8 days vs. 12 days without help). Usage trends sug-gest that these benefits are not sufficient to convince enterprisesto pay for them - at least at their current price.
It is important to note that there should be no significant differ-ence in waiting time to receive the registration certificate,whether or not a company decides to use outside consultingservices. The fact that a significant differences do exist, howev-er, highlights the lack of transparency inherent in the processand suggests that buying consulting help for registration actual-ly means "buying special access" of some kind or "buying unof-ficial fast track approval."
When responses are analyzed at the regional level, significantvariability can be witnessed in the use of outside serviceproviders for registration preparation. In Luhansk, Rivne andKharkiv, for example, over one-half of respondents indicatedthat they used such services. However, in Lutsk, Ternopil andChernihiv not a single respondent had recourse to the servicesof intermediaries to draft registration documents. Lutsk presentsa compelling example as local enterprises spent among the low-est amounts of time both for preparing documents for registra-tion and for the registration process itself. This suggests that anefficient registration process can be established without creatingan artificial need to pay for outside assistance to complete it.
Time Required to Complete theRegistration Process The time required to register an enterprise includes the time abusiness owner must spend completing each of the three dis-tinct phases of the registration process. Survey respondents wereasked to estimate the total time required for each of the threestages. This duration may be subject to many factors, including
whether one uses the assistance of outside consultants, choiceof the regular or fast-track procedure for obtaining the registra-tion certificate, the level of efficiency of local registration offi-cials, and the varied number of work days during which partic-ular state authorities may be open for business.
To complete the full process, survey results show that enterpris-es require anywhere from 15 to 42 working days, on average,depending on whether a firm hires a special intermediary to pro-vide full, "turnkey registration"5 or chooses to complete theprocess fully on its own.
Pre-registration FormalitiesPre-registration consists of time spent gathering relevant infor-mation about the process, completing all required documents,and notarizing documents prior to submission. The timerequired to complete these documents averages about 18 workdays, but depends highly on the procedure used - self-comple-tion or the assistance of an intermediary.
The majority of firm registrations are conducted by firm employ-ees themselves (77 percent).6 In these cases, firms averagedabout 20 working days to prepare all proper documents, thoughhere again a great deal of regional variance is found. InVinnytsia and Ivano-Frankivsk, for example, this process tookabout half as much time as the national average, while inDnipropetrovsk and Kharkiv pre-registration required more than33 days (Figure 55).
As has been discussed, enterprise managers also have the optionof hiring consultants or other intermediaries to help or advise oncompleting the necessary documentation. Use of such outsideassistance can save, on average, more than one work week forpre-registration, with the total registration process consequentlyaveraging about 14 working days.
Time Required to Obtain a RegistrationCertificateIn Ukraine, there are two types of methods for companies to obtaintheir registration certificate: regular and fast-track. By law, com-panies choosing the regular registration procedure should obtaintheir registration certification within five working days after allrequired documents are delivered. The fast-track method, imple-mented in 1998,7 streamlines this process to just one day.
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8 As will be discussed below, the official cost of the regular procedure is UAH 119 (US $23), while fast-track method costs UAH 357 (US $66).
In 2000 and 2001, enterprise owners overwhelmingly preferredthe regular procedure, with only a small percentage (9 percent)electing the fast-track option. This represents a slight increaseover 1999 and 1998 when 7 and 6 percent, respectively, ofentrepreneurs chose the fast-track procedure. The reasons forsuch a small response rate are most likely the additional costsrequired for fast-track registration, which costs 3 times as muchas the regular method,8 combined with a corresponding lack ofperceived benefit from paying extra to quicken the process. Inaddition, not all firms may have access to readily-availableinformation on the fast-track procedure.
Survey results confirm significant regional differences in uptakeof the fast-track method. For example, in ten different oblasts, nosurveyed firms used the fast-track procedure. In Rivne and Kiev,however, over one in five firms chose the fast-track option toobtain registration certificates. While these differences amongcities are not statistically significant given the relatively smallnumber of firms responding, the sizable variation is likely to bea basic indicator that reflects overall levels of local adoption.
The time required to receive a registration certificate averaged12 days nationally in 2001. This exceeds the maximum timerequired by law by more than 7 working days and is also anincrease of one full day over the previous year. Survey resultsreveal that nearly 61 percent of surveyed enterprises electing thestandard 5-day process in 2001 received their certificates afterthe 5-day deadline had expired. Moreover, not one city coveredin the survey had an average that met or bettered the legallymandated duration for registration. The cities with the best per-formance include Ivano-Frankivsk, which averaged 6 working
days, as well as Lutsk and Ternopil, both averaging 7 days.Dnipropetrovsk, on the other hand, had an average time of 27days, exceeding the legal maximum by more than 22 workingdays.
While the frequency of delays and the disparity in results sug-gest continuing deficiencies in the process, it is important tohighlight that these "wait periods" are delays as reported by sur-veyed companies and do not therefore all represent violations ofcurrent legislation. In practice, entrepreneurs may create the"delay" themselves by not arriving to pick up their certificatesimmediately upon preparation.
As was the case with pre-registration formalities, survey resultsshow that the time required to receive a registration certificate isalso heavily dependent on whether or not an intermediary ofsome sort is used. For example, an enterprise can save nearlyone full work week (8 vs. 12 days), on average, if it uses theservices of an intermediary firm to complete this stage of theprocess. Despite this significant time difference, over three-quarters of respondents still preferred to directly obtain registra-tion certificates themselves.
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0 10 20 30 40 50 60 70
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Figure 55
Average Duration for Self-Completed Registration Activities, Regional Variations
(as a % of firms registering, in number of working days)
Ivano-Frankivsk
Kirovohrad
Luhansk
Poltava
Chernivtsi
Ternopil
Lviv
Mykolaiv
Donetsk
Vinnytsia
Zaporozhia
Chernihiv
Zhytomyr
Rivne
Khmelnytsky
Kiev
Kherson
Simferopol
Odesa
Uzhgorod
Cherkasy
Sumy
Kharkiv
Dnipropetrovsk
Pre-Registration Registration Post Registration
days
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9 The average of 9.6 working days was calculated by dividing the sum of the averages for each department by 2. This accounts for two factors. First, procedures lasting less than one day were reported at one full day and a sig-nificant share of respondents (about 60 percent) report that individual steps took 1 day or less. Second, some, though not all procedures, can be done nearly simultaneously, so this calculation allows us to reduce double-count-ing in these cases.
Duration of Post-Registration ProceduresUpon receiving the state registration certificate, enterprises arerequired to register with an additional seven administrative bod-ies, in addition to opening a mandatory bank account. Surveyresults show that registration with these various bodies adds anaverage of almost 10 days to the full registration process before
an enterprise can begin operations.9 Figure 56 displays theresults for the time required to complete registration with eachadministrative body. Table 42 in Annex 3 provides details foreach stage of the post-registration process in all cities coveredby the survey.
Figure 56
Duration of Post-Registration, by Agency
1 day 2 days 3 days > 3 days
Tax administration (3.7*)
Internal Affairs Office (3.3)
Statistics office (2.5)
Pension Fund (2.1)
Bank (2.0)
Accident Insurance Fund (2.0)
Unemployment Fund (1.9)
TemporaryDisability Insurance Fund (1.8)
0 10 20 30 40 50 60 70 80 90 100%
Large variability in performance is to be found both betweenregions and among various government bodies. Some regionsdemonstrate relative consistency across all steps of the process,suggesting a highly coordinated effort by local officials either toimprove the process for enterprises or to maintain strong controlover it. However the same cross-regional consistency does notexist among individual government agencies. Therefore anenterprise's total registration time is highly dependent upon reg-istration location. As most entrepreneurs register where theylive, they have little effective choice in this regard.
Inclusion in State Register and Assignment ofthe Classification CodeAll businesses must be included in the Unified State Register ofEnterprises and Organizations of Ukraine (USREOU). After sub-mitting relevant documents to a regional division of the StateStatistics Committee, start-up firms are issued confirmation of
their inclusion in the USREOU and are assigned an identifica-tion or classification code in accordance with the Classificationof Types of Economic Activities (CTEA). In 2001, this processtook, on average, almost 3 working days, and ranges from oneday in Ivano-Frankivsk, Kirovohrad, and Lutsk to 5 days inDnipropetrovsk. It should be noted that nearly half of all entre-preneurs reported that this process took one day or less.
State Pension FundHaving received a state registration certificate, an enterprisemust register within ten days with the local division of thePension Fund. According to survey results, entrepreneurs spentan average of 2 working days registering with the local divisionof the Pension Fund. While most entrepreneurs (61 percent)spent no more than 1 day to complete this procedure, in somecities -- Vinnytsia, Odessa and Rivne -- this process averaged 4days.
* Average
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Registration with Insurance FundsAll firms must register with the following three separate insur-ance funds:
6 Unemployment Insurance Fund of Ukraine;
6 Employment Injury and Occupational Disease InsuranceFund of Ukraine; and
6 Temporary Disability Insurance Fund.
Generally, these are fairly efficient processes, each taking 2 orfewer days to complete, with nearly two-thirds of enterprisescompleting the process in one day or less. In the case of a fewcities, however, average times for these procedures exceeded 3days, although this is exceptional.
State Tax AdministrationIn accordance with current legislation, entrepreneurs must reportto the local division of the State Tax Administration within 20days of receiving their state registration certificate. According tosurvey results, this procedure is the most time consuming of allpost-registration activities, requiring on average of up to 4 work-ing days to complete. In two cities, Rivne and Poltava, averagetimes exceed 6 business days, while only one city (Luhansk)reported an average time of just one day. It is notable that aboutone-third of all firms were registered with the State TaxAdministration within just one working day.
Ministry of Internal Affairs: Seal and StampPermitEvery firm must apply to the Ministry of Internal Affairs toreceive an official permit in order to produce its corporate sealand stamp. These corporate stamps are required for firms toundertake formal procedures such as issuing contracts and com-pleting bank transactions. On average, a Ukrainian enterprisemust wait 3 working days to obtain this permit, while 37 percentof respondents received it in one working day or less. Cities withthe longest waiting times include Vinnytsia (up to 8 days) andDnipropetrovsk (nearly 5 days). Again, Luhansk was the onlycity with an average time of 1 day.
Opening a Mandatory Bank AccountA business is allowed to open a bank account only as the laststep in the registration process. Upon request of the bank offi-cer, the company is required to provide separate documentationfrom each of the government agencies described above, in addi-tion to the registration certificate itself. This step is also quiteefficient, averaging about 2 working days to complete, whilemore than half of all firms complete it in just one day. Regionalvariation is much less prevalent, with no city averaging morethan 4 days.
Bureaucratic Barriers in ActionFor a small medical goods seller in southwestern Ukraine, theregistration process had been going smoothly, until it cametime to register his new enterprise with the Tax Inspectorate. Itso happened that this entrepreneur owned another company intown. Upon learning this, local tax officials announced that hewould have no need to open another firm if the existing firmwas not engaged in anything illegal. In the eyes of the local taxpolice, the fact that the owner was opening an additional busi-ness would mean that the manager and chief accountant weretrying to evade taxes.
When the manager and chief accountant tried to explain thelegitimacy of their situation, tax officials began a formal taxinspection of the existing company, even though the latestinspection had ended two weeks prior. This was a clear viola-tion of the law which states that an enterprise can be inspect-ed by tax officials no more than once per year. As a result oftheir suspicions, the Tax Inspectorate refused to register thenew firm with the tax authorities, even though the new firmalready had a registration certificate. This made it impossiblefor the owner to open a bank account and to begin normaloperations. In the meantime, the existing firm was inspected,resulting in disrupted business operations.
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10 One-window registration pilots have been launched in the cities of Ivano-Frankivsk, Kherson, Khmelnytsky and Mykoliav. Mykoliav has also launched a one-stop process of obtaining permits.
Total Registration TimeAccounting for partial days and parallel activities available forsome post-registration procedures, Table 18 displays a summa-
ry of the total approximate time required for the registrationprocess, with a breakdown of each separate phase.
Table 18
Registration Time
(number of working days)
Stage Days
Pre-registration 20
Registration 12
Post-registration: 10
Statistics Department 1
Pension Fund 1
Unemployment fund 1
Accident Insurance Fund 1
Disability Fund 1
Tax Administration 2
Interior Department 2
Bank 1
Total 42
"Turnkey" RegistrationEnterprises have the option to contract with a business servicesintermediary to complete the entire registration process fromstart to finish - a "turnkey" operation. While this process resultsin significantly higher out-of-pocket costs to the enterprise (seeanalysis below), it also provides for faster registration, requiring15 working days on average. The advantages of the method areclear when this figure is compared to an average duration ofmore than 40 working days for a firm completing registrationwithout outside assistance, and when the time saved by entre-preneurs not having to manage the entire process themselves istaken into account. Ukrainian SMEs are highly price sensitive,however, and this is highlighted by the fact that only 18 percentof firms that registered in the past year, did so using the turnkeymethod.
One-Window RegistrationA pilot program of one-window registration, a process designedto allow entrepreneurs to register their companies by goingthrough a simplified procedure at a single location, was intro-duced in four regions10 of Ukraine between late 2001 and earlyautumn of 2002.
The process works in the following manner: the entrepreneursubmits all required documents at a single office, where repre-sentatives of all necessary organizations are located. In thismanner, all registration and post-registration formalities are con-cluded at one location, with the entire procedure lasting a max-imum of ten days. The entrepreneur needs to come to the regis-tration office a total of three times - once to gather informationon the documents required for registration, once to submit all
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11 The median amounts to UAH 977 (US $182)12 Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, 2000, "The Regulation of Entry," Working Paper, John F. Kennedy School of Government, Harvard University, 6
necessary documents at one window, and finally to receive thedocuments on his or her newly fully-registered company.Besides saving entrepreneurs the time and hassle associatedwith registering at 9 different locations with 9 different govern-ment agencies, the process of one-window registration is muchmore transparent - clear information on the full procedure isprovided on-site, legal and consulting services are readily avail-able, while representatives of business associations and otherNGOs are allowed to monitor the process from start to finish.
Pilot one-window registration offices were launched in early tolate 2002, and as a consequence their results are not covered inthis survey. However, one-window registration is gatheringmomentum, and a draft law allowing the process to launch ona national scale is currently before Parliament.
Costs to Register The results of the survey show that the average cost for the entireregistration procedure, including unofficial payments, amountsto UAH 1408 (US$ 262),11 which is quite close to other inde-pendent estimates.12 The lowest cost reported by any respondentwas UAH 511 (US $95), while the highest overall cost was UAH2,348 (US $437). The following sections take a closer look at thecosts of each stage of registration, and of both official and unof-ficial payments.
Figure 57
Average Registration Costs
(UAH and USD)
Pre-registration 675 UAH 125 USD
Registration 369 UAH 69 USD
Post-registration 365 UAH 68 USD
Total in USD
$262
Total in UAH
14080 10 20 30 40 50 60 70 80 90 100 %
Cost of Pre-RegistrationPre-registration costs include money spent by entrepreneurs todraft the charter and the constituent agreement (for certain legalforms of businesses), pay for services of a notary public andopen a bank account to deposit the required charter capital ofthe company. In 2001, Ukrainian enterprises paid an average ofUAH 365 (US $68) to complete these tasks, though half of allfirms paid less than 250 UAH (US $47).
Actual Registration CostsThe average cost for the standard state registration procedurewas UAH 369 (US $69) with a range from the official UAH 119
(US $23) to as high as UAH 1,000 (US $189). This average costis 3 times higher than the official registration fee. However, forfast-track registration, entrepreneurs can in fact expect to paythe official price of UAH 357 (US $66), or about triple the offi-cial price of the standard 5 day procedure.
Cost of Post-Registration ProceduresAfter receiving their state registration certificate, entrepreneursmust complete additional required steps before opening theirbusinesses. While individually, the costs involved are not large,the cumulative amount can be significant, averaging aboutUAH 675 (US $125) with half of respondents paying a total ofUAH 427 (US $79). The most significant single expense is to
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produce the company seal and stamp, which costs about UAH172 (US $33). Figure 58 displays the average amount managers
of start-up enterprises usually spend on each of these additionalstages.
Figure 58
Costs of Post-Registration Procedures
(UAH)
172
Manufacturingthe seal and
stamps
Internal AffairsOffice
Tax Administration
Statistics Office
Pension Fund
Unemployment Fund
Accident InsuranceFund
Temporary Loss of CapabilityInsurance Fund
Bank
Total 675 UAH
43
69
60
60
54
66
66
84
Cost for "Turnkey" Registration
Entrepreneurs who hired an intermediary to provide "turnkey"registration paid an average of UAH 919 (US $171) to completeall pre-registration, registration and most post-registration activ-
ities, excepting manufacturing the corporate seal and stamp.When these costs are added in, turnkey registration averagesUAH 1091 (US $203). Most surprising is that turnkey registra-tion turns out to be less expensive than standard registration,where an entrepreneur completes the procedure him or herself.
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13 Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, 2000, "The Regulation of Entry," Working Paper, John F. Kennedy School of Government, Harvard University, 6 14 Global Competitiveness Report15 Transparency International
Figure 59
Registration Costs: Self-administered vs. Turnkey
Self-administered registration
Turnkey registration
0 200 400 600 800 1000 1200 1400 1600 UAH
0 50 100 150 200 250 300 USD
Unofficial PaymentsWhile it is well known that unofficial payments are customary inUkraine, very few firms are willing to acknowledge in concreteterms that they engage in such practices. Survey results reflectthis: only 18 percent of respondents who registered their businessin 2001 acknowledged having made unofficial payments duringthe registration procedure. Of these, 64 percent specified theamount of their unofficial payment. The average payment madewas UAH 555 (US $104) or nearly 40 percent of the total cost ofthe complete registration procedure. While some entrepreneursquoted payments as high as UAH 4,500 (US $838), half of allfirms responding paid less than 275 UAH (US $51).
Registration in Ukraine and WorldwideA number of studies have recently been published relating tobusiness start-up in general, with some discussion and evalua-tion of the registration process specifically. One study analyzedthe level of complexity involved in opening a business in 75countries, including Ukraine and 10 other countries fromCentral and Eastern Europe.13 The authors measured the time,cost and procedural requirements (including registration) to setup a bakery business in each country.
They found that in Ukraine, one must complete 11 separate pro-cedures that require 21 working days at an average cost of $197.Based on these results, Ukraine ranked 37th on number of pro-cedures, 11th on time required, and 39th in cost - rather com-petitive overall. However, the authors take into account only theofficially stated number of days required for each process, ratherthan measuring the actual time businesses spend completingthese procedures, and do not, of course, estimate unofficial pay-ments.
When considering such issues, one must assess whether or notUkraine is worse than other countries with its bureaucratic redtape and additional distortive administrative conditions. A num-ber of sources have confirmed this to be the case. Out of 75countries, Ukraine ranks 67th both on the extent of bureaucrat-ic red tape and the burden of regulation on business, 69th inirregular payments to government officials, 70th in the businesscosts of corruption, and 73rd on administrative burden for start-ups.14 A separate study found that Ukraine ranked 83rd out of91 countries when measured on corruption issues.15 Such resultsstrongly suggest that Ukraine would fare far worse comparative-ly if the true costs and time to start a business were measured.These independent findings support the results of this survey,showing the true costs and time required to register a businessin Ukraine to be much higher than officially reported.
Íàçâà ðîçä³ëó
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REGISTRATION
Conclusions According to survey results, entrepreneurs typically pay asmuch as five or six times the official amount for business regis-tration, 40 percent of which is for unofficial payments to gov-ernment officials. Firms can lower their overall costs of registra-tion both in terms of direct out of pocket costs as well as in theamount of time saved by utilizing the services of an intermedi-ary who manages the process.
Despite this complexity, results of the survey suggest that entre-preneurs generally do not consider any of the steps in theprocess as a serious obstacle either to founding or developingtheir businesses. This is true when results are measured directlyas well as relative to other difficulties entrepreneurs face whenattempting to establish and grow their enterprises. Moreover, wefind that since 1998, enterprise experience with the registrationprocess has generally improved with much shorter processingtimes and lower costs.
Ukraine is to be commended for its progress in this area.However, the most recent results raise important concerns. First,some prior progress has been lost with average registration timesand costs rising from last year. Second, ample room exists forcontinued improvement, particularly with regard to streamliningthe process and eliminating opportunities for government work-ers to exact additional payments. And third, in an absolutesense, the process is still far from friendly to business.
Proposals6 Adopt the draft law on One-window Registration currently
before Parliament, allowing the process to roll out on a nation-al scale. A one-stop procedure, similar to the pilots nowlaunched in Mykolaiv, Ivano-Frankivsk, Kherson andKhmelnytskyi, would greatly simplify and enhance the overallprocess of business registration in Ukraine.
6 Clear, reader-friendly registration guides explaining each nec-essary step, including related costs and required time, should beprinted and made available at one central location to all regis-tering enterprises.
6 A standard list of documents required for registration should beestablished, with relevant authorities required to implement itas soon as possible; this list should be provided as a referenceto entrepreneurs upon receipt of the registration application.
6 Procedures for completion of the registration card should besimplified by clearly specifying the fields that need to be filledin by the applicant individually.
6 Registration officials should be trained regularly on the prac-tices and principles of professional, efficient and effective regis-tration procedures.
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ANNEX 1
1 Examples of domestic service firms are hairdressers, dry cleaners, shoe repair shops, etc..
The fieldwork for this survey was carried out in April of 2002 byUkraine Marketing Group, an independent Ukrainian market-research firm. Questioning was conducted on the basis of threeseparate questionnaires, covering a number of aspects of thecommercial activities of each enterprise. Two portions of the ques-tionnaire were based on personal interviews, while respondentswere asked to one section was complete one section individually.
Selection of interviewed firms was random and based on a spec-ified number of firms per sector per city, without regard to sizeor origin of enterprise. Manufacturing firms were selected pro-portionally by region, while selection of all other firms was basedon fixed quotas established for each sector of business activity.
Sectors of Business ActivityThe sectors covered by this survey are:
6 Manufacturing: heavy and light industry, food processingand industry, energy, construction materials.
6 Construction: construction service companies. Producers ofconstruction materials are covered under manufacturing.
6 Trade: Wholesale and retail.
6 Public Catering: restaurants, canteens and cafes.
6 Transport: Freight services, passenger transportation, publictransportation.
6 Financial Services: commercial banks, insurance companies.
6 Other Services: this includes hotels, travel agencies, anddomestic service firms.1
The sectors noted above were selected in order to encompass abroad selection of business in Ukraine, while following the sec-toral breakdown used by the State Statistics Committee ofUkraine when compiling national statistics. Firms were selectedbased on their self-stated primary line of activities.
Agricultural enterprises were specifically excluded from the sur-vey given the specifics of the sector. Enterprises which are fullystate-financed (so-called budget organizations) were also notcovered by this survey.
Sample SelectionManufacturing firms constitute the largest share of surveyrespondents, with 1,171 participating enterprises. These respon-dents are distributed amongst the cities of Ukraine based oneach city's proportionate share of manufacturing firms. In nocase are there fewer than 25 manufacturing firms per city.
For firms active in all other sectors, companies were selectedbased on quotas established per city. The survey was structuredso as to ensure that the final number of firms interviewed fromeach sector accurately reflects the participation of the sector inthe national economy. This method allows for statistical com-parisons across cities, but is not necessarily representative of theoverall economic structure within each city.
The quotas for each city were established as follows:
6 Construction: 6 firms;
6 Trade: 16 firms, including 4 wholesale and 12 retail;
6 Public Catering: 6 firms, including 2 cafes, 2 canteens and 2restaurants;
6 Transport:1 freight and 4 passenger transport firms;
6 Financial Services: 3 firms;
6 Other Services: 10 firms including hotels, travel agencies,insurance companies, and domestic service firms.
Due to the reluctance of some enterprises to participate in thesurvey, final respondent firms display some variance from thesectoral quotas noted above.
METHODOLOGY AND SAMPLE SELECTION
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ANNEX 1
Table 19
Sample Structure by Firm Size, Origin and Sector of Business Activity
TOTA
L
Firm Size Firm Origin
Small Medium Large State-Owned Privatized Private
Manufacturing 644 285 242 268 482 421 1171
Construction 164 56 39 44 109 106 259
Transport 72 34 22 43 47 38 128
Trade 287 93 62 57 108 277 442
Public Catering 77 41 31 36 51 62 149
Financial Services 49 13 15 27 16 34 77
Other Services 152 58 44 89 75 90 254
TOTAL 1445 580 455
Firm Size
Small 321 505 619 1445
Medium 130 204 246 580
Large 113 179 163 455
TOTAL 564 888 1028 2480
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ANNEX 1
Table 20
Sample Structure by City and Sector
ManufacturingCity
Construction Transport Trade PublicCatering
FinancialServices
OtherServices TOTAL
Vinnytsia 36 9 5 17 7 3 8 85
Dnipropetrovsk 84 10 5 17 6 3 11 136
Donetsk 81 10 6 17 5 3 16 138
Zhytomyr 36 11 5 15 6 3 11 87
Zaporizhzhia 39 14 8 21 6 3 8 99
Ivano-Frankivsk 34 14 5 17 5 3 10 88
Kiev 113 15 6 21 4 3 10 172
Kirovohrad 35 10 5 16 6 4 10 86
Luhansk 44 12 5 16 6 3 10 96
Lutsk 33 12 4 17 6 3 10 85
Lviv 45 11 6 27 6 1 9 105
Mykolaiv 43 7 5 16 7 3 8 89
Odesa 51 16 5 17 5 3 7 104
Poltava 38 9 5 17 5 3 10 87
Rivne 42 7 5 16 5 5 7 87
Simferopol 61 6 5 16 7 4 7 106
Sumy 33 10 5 16 8 2 14 88
Ternopil 36 9 5 17 6 3 11 87
Uzhgorod 29 11 4 20 11 4 10 89
Kharkiv 77 10 4 17 6 3 11 128
Kherson 40 11 5 14 6 3 11 90
Khmelnytsky 36 7 5 20 6 4 9 87
Cherkasy 27 10 4 26 3 2 15 87
Chernihiv 40 6 6 15 6 3 11 87
Chernivtsi 38 12 5 14 5 3 10 87
TOTAL 1171 259 128 442 149 77 254 2480
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ANNEX 1
Table 21
Detailed Information on Legal Form
Legal Form of Companies Surveyed %
Private enterprise (founded with individual's property) 26.1
Collective enterprise (founded with the property of enterprise workers' collective) 9.5
Open joint-stock company 21.4
Closed joint-stock company 9.8
Limited liability company 21.2
Additional liability company 0.3
Full partnership 0.1
Limited partnership 0.1
Company founded with the property of a citizens' association 0.8
Communal company (founded with the property of a territorial community) 3.0
State enterprise 6.5
Consumers' cooperative 0.6
Leased company 0.6
TOTAL 100
Table 22
Respondents by Management Level
Position %
General Manager/ Director 46
Deputy Director 28
Chief Economist 10
Chief Accountant 9
Other 7
TOTAL 100
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ANNEX 2
LEGAL FRAMEWORK
The following is a list of taxes for which enterprises and citizens in Ukraine may be liable. Not all companies are liable for all ofthe following taxes.
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1. TAXATION
LOCAL TAXES AND DUTIES
Tax on Placing Commercial Advertisements
Communal Tax
Hotel Fee
Vehicle Parking Fee
Fee for Using Local Markets to Sell GoodsFee on the Issue of Authorization for an Apartment(applied to those receiving government-financedapartments)
Resort Fee
Hippodrome Use Fee
Horse Racing Winnings Fee
Gambling Fee
Fee on Use of Local Symbols for Commercial Purposes
Fee on Television or Movie Filming
Fee on Conducting Local Auctions, Competitive
Sales and Lotteries
Vehicle Border Crossing Duty (applicable to vehiclesheading out of Ukraine and passing through regionsalong the national border)
Duty on Obtaining a Permit for Trade and CustomerService Outlets
Dog Owning Fee
NATIONAL TAXES AND DUTIES
Value Added Tax
Excise Tax
Corporate Profit Tax
Personal Income Tax
Customs Duty
Government Fee (applied when obtaining official docu-ments � passports, etc.)
Property Tax
Rental Fee for Transportation of Natural Resources
Tax on Owning Transportation Vehicles
Arts and Crafts Tax (allows an individual craftsman upto 4 business transactions per year)
Geological Exploration Fee
Fee on Extraction and Processing of Natural Resources
Fee for Environmental Contamination
Chernobyl Fund Fee
National Insurance Tax
Social Security (State Pension Fund) MandatoryCollection
Fee for Obtaining Patents
Tax on the Cultivation of Vines, Fruits and Hops
Unified Duty on Contamination Caused by CommercialTransportation Vehicles (payable by transportationcompanies when transporting goods through Ukraine)
Note: Payments to the fund for the social protection of the disabled is not mandatory, and is payable only by enterprises which do not comply with the requirements of the Law "On Basics of the Social Security of Invalids/DisabledPersons."
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ANNEX 2
DESCRIPTION OF LEGAL BASE IMPLEMENTATION AND PROBLEMS
CORPORATE PROFIT TAX
VALUE-ADDED TAX
The procedure for the payment of company income tax is reg-ulated by the Law of Ukraine "On the Taxation of CompanyProfits", dating from 22 May 1997, #283/97-VR.
Pursuant to the Law, the taxable base is profit defined as areduction of total adjusted gross revenues by the taxpayer'stotal gross expenditures and depreciation charges. The tax-payer's income is taxed at a rate of 30 percent of the taxablebase.
6 the Law lacks clarity in defining certain amounts withrespect to gross expenditures, thus giving tax authorities alarge scope for interpreting them freely, and determiningthe basis for taxation at their own discretion (e.g. difficul-ty in classifying some amounts as business expendi-tures);
6 the Law does not clearly address the issue of treating someamounts as gross revenues (e.g. the tax administration'srequirement to include borrowed amounts with grossrevenues);
6 tax authorities often provide conflicting explanationsregarding the application of certain provisions of the law,thus creating confusion;
6 the legal framework (especially, the Law "On IncomeTax" and the Law "On the Procedure for RedeemingDebts of Taxpayers to Budgets and State Target Funds")sets different time limits for tax payment;
6 the Law fails to clearly define certain terms (e.g. "nonma-terial assets", "royalties", etc.), thus creating a vast scopefor misinterpretation.
The objects, basis and rates of the value-added tax, list ofuntaxed and tax-exempt transactions, unique characteristicsof the taxation of export and import transactions, proceduresfor accounting, reporting and adding the tax to the budget aredefined by the Law of Ukraine "On Value-Added Tax" of 3April 1997, #168/97-VR 9.
Pursuant to the Law, VAT is applicable to transactions on salesof goods (works, services) carried out by taxpayers in the cus-toms territory of Ukraine, including transactions on the pay-ment of services under leasing contracts and transactions onthe transfer of ownership of collateral to the creditor to acquitdebts on loans of the borrower, import (shipment) of goods tothe customs territory of Ukraine and acceptance of works(services) provided by nonresidents for further use or con-sumption in the customs territory of Ukraine, including trans-actions on the import (shipment) of property under contractsof lease, collateral and mortgage and the export (shipment) ofgoods outside the customs territory of Ukraine and the provi-sion of services (performance of works) for consumption out-side the customs territory of Ukraine.
The tax is determined as 20 percent of the taxable base estab-lished by applicable articles of the Law and is added to theprice for goods (works, services). The Law provides a list oftransactions on which tax is calculated at a zero rate.
6 at some point, the system of VAT rebates for exportedgoods and services created a favorable climate for settingup illegitimate companies, which obtained funds from thebudget by illegal means.Because of this, tax authorities aregenerally prejudiced against companies applying for arebate, as they must audit them. This creates problems forlaw-abiding entrepreneurs. However, even if an amountdue for rebate is not itself the subject of dispute, it is stillalmost impossible to receive a rebate from the budget.Additional unofficial payments of 20-30% of the rebateamount are standard procedure;
6 no defined need for taxing certain transactions with VAT(e.g. transactions on sales of shares in limited liabilitycompanies, contribution of shares to the charter capital ofa joint stock company, etc.);
6 the difficult-to-apply and often confusing provisions of thelaw result in a multitude of violations and errors in deter-mining the basis for taxation;
6 the legal framework (in particular, the Law "On VAT" andthe Law "On the Procedure for Acquitting Debts ofTaxpayers to Budgets and State Target Funds") sets dif-ferent time limits for filing the tax form.
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ANNEX 2
Pursuant to the Presidential Decree �On the SimplifiedSystem of Taxation, Accounting and Reporting for Smalland Medium Sized Enterprises� of 3 July 1998, #727/98, eli-gible small and medium business entities are allowed to usethe simplified system of taxation, accounting and reporting.
Eligible entities include:
6 entrepreneurs-legal entities of any corporate form andownership, whose average annual number of employeesis under 50, and whose annual proceeds from sales ofproducts (goods, works, services) do not exceed UAH 1million (USD 186,000).
The Decree also sets forth a list of business entities to which itdoes not apply (insurance companies, banks, etc.)
An entrepreneur-legal entity switching to the simplified sys-tem of taxation, accounting and reporting is free to chooseany of the following single tax rates:
6 percent of total revenue from sales of products (goods,works, services); excise duty not included and VAT paid sep-arately in accordance with the Law "On VAT"; or;
10 percent of total revenues from sales of products (goods,works, services), less excise duty if VAT is included into thesingle tax.
Taxes Replaced by the Unified TaxThe Unified Tax (flat tax) allows eligible companies to payone tax in lieu of the following:
6 VAT (if 10% Unified Òax rate selected)·
6 Corporate Profit Tax
6 Property Tax
6 Fee on Extracting and Processing Natural Resources
6 Chornobyl Fund Tax
6 Communal Tax
6 National Insurance Tax
6 Social Security (Pension Fund) Mandatory Collection
6 Employment Fund Mandatory Collection (However, eventhough the overall payroll fund may be exempted from anumber of taxes, each employee is still liable for personalincome tax, state pension fund mandatory collection andemployment mandatory collection).
6 Duty on Obtaining a Permit for Trade and CustomerService Outlets
6 Fee for Obtaining Patents, etc.
6 To this day, the issue of the simplified taxation systemhas not been finalized at the legislative level; the legali-ty of the system's application is not secured by theConstitution of Ukraine or the Law of Ukraine "On theTaxation System"; procedures for setting and cancelingtaxes and duties, rates, and tax administration mecha-nisms are determined solely by various applicable lawsof Ukraine.
6 there are numerous unclear issues related to VAT rebatesfor which enterprises become eligible if switching over tothe single tax system.
The new version of the Decree (as of June 1999) removed anumber of the flaws inherent in the original version, and as ofthe year 2000, businesses have increasingly adopted the sim-plified system.
It is important to note that the Presidential Decrees concern-ing simplified taxation are not fully compatible with tax lawscurrently in force. For example, the Law "On the TaxationSystem", the highest law regulating taxation, does not refer tosimplified taxation, which renders 'unified' taxes illegitimatein a formal sense. After the introduction of simplified taxation,no correspondent amendments have been made to the Laws"On the Taxation of Company Profits", "On VAT" and oth-ers, creating a lack of coherence and significant confusion.
THE SIMPLIFIED TAXATION SYSTEM
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ANNEX 2
Some progress towards systematizing guidelines for theadministration of taxes was made once the Law of Ukraine"On the Procedure for Redeeming Debts of Taxpayers toBudgets and State Target Funds" of 21 December 2000,#2181 (hereinafter referred to as "Law #2181").
The main stages of tax administration defined by Law #2181may be described as follows:
Stage 1 - a taxpayer makes a commitment to pay taxes.Pursuant to Law #2181, the filing by the taxpayer of a taxreturn is construed as proof of his/her commitment. Theundertaking of the commitment is an important part of the taxadministration process, since the countdown to the com-mencement of events with potentially serious consequences,such as tax debt, tax collateral, etc., begins on the day the taxreturn is filed.
Stage 2 - tax authorities supervise the taxpayer
The legal framework for tax administration is composed ofseveral hundreds of legal acts on taxation and as many otherregulatory documents. There is no single legal act that coversall components of the tax administration process by definingrights and liabilities of taxpayers, taxation regulations, powersof agencies of the state taxation services and other controllingauthorities in Ukraine.
Law #2181 is a special law on taxation which establishes aprocedure for meeting tax and duty commitments. The scopeof the law covers only reporting procedures that apply totaxes, duties and mandatory payments listed in Articles 14 and15 of the Law of Ukraine "On the Taxation System". It is nec-essary to take into account the fact that, in addition to taxes,many enterprises also make a variety of other payments to thebudget or specific funds. For instance, provisions of Law#2181 do not apply to the unified tax, mandatory social pay-ments to the unemployment and industrial injury fund, andpayments to the fund for the social protection of the disabled.Time limits for making the payments and filing the appropri-ate reporting documentation are set in applicable regulatoryacts.
In addition, the legislation provides for a list of free econom-ic zones which enjoy a privileged taxation regime.
At this stage, a taxpayer is allowed to correct a mistake andreport it to tax authorities. If the budget incurs losses as aresult of the taxpayer's actions, a penalty will be imposed, butit will be greater if the mistake is not corrected voluntarily.Also, at this stage, it is still possible to agree with tax authori-ties to pay taxes in installments or to delay payment.
At this stage, a taxpayer may come into conflict with tax
authorities due to:
- mistakes in the tax form;
- document inspections;
- adding more taxes and penalties, etc.
Pursuant to Article 4.4.1 of Law #2181, whenever a provisionof a law (a regulatory act issued on the basis of a law) or pro-visions of several laws (regulatory acts) allow for an ambigu-ous interpretation of rights and liabilities of taxpayers or con-trolling authorities, the decision on a tax appeal is made infavor of the taxpayer.
ADMINISTRATION OF TAXES
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During inspections, inspectors may require the delivery of alldocuments necessary to conduct the inspection directly totheir office, without visiting the firm. While this is a violationof established procedures it is often is better for the firm thanif they follow the procedure.
Quite often, representatives of the inspection body do not pro-vide the firm with a copy of the report summarizing inspectionresults. Without this document, the firm cannot avail itself ofits right to submit comments on the report within 10 days afterit has been drawn up. If a firm receives a decision on theapplication of penalties based on results of the inspection, thefirm is entitled to challenge the lawfulness of such a decisionin court.
There have been cases where inspectors purposefully omitdocuments provided by the firm from the inspection report,and the lack of required documents then becomes grounds forapplication of penalties.
It is impossible to determine the precise list of bodies and offi-cials authorized to conduct inspections of business entitiesbecause these bodies are so diverse, sometimes causing theirfunctions to overlap.
ANNEX 2
The taxpayer may be offered an out-of-court settlement toprove that he/she is right. As a result of the tax appeal, the tax-payer may not have to pay the taxes charged by tax authori-ties. The choice is up to the taxpayer, yet once agreement hasbeen reached, the taxpayer may no longer appeal against theagreed tax amount.
Having lost a lawsuit against tax authorities or having failed touse the chances available to him/her at the previous stages,the taxpayer and its officials bears responsibility ranging inseverity from a minimum fine to imprisonment. Failure to paythe tax or the tax debt may result in the imposition of a penal-ty, surcharge, administrative sanctions and criminal charges.The law defines under what conditions specific charges maybe brought.
Tax debt is collected in accordance with a procedure whichconsists of reaching an agreement on tax liability and servingthe taxpayer with an appropriate notice. The taxpayer's assetsmay be repossessed to cover the tax debt strictly by decisionof the court.
Stage 3 - tax appeal. In accordance with established proce-dure, the taxpayer and tax authority communicate through taxnotices, requirements, claims and decisions.
Stage 4 - liability of the taxpayer
Stage 5 - sanctions are taken against the taxpayer to ensurethat tax debt is either redeemed or collected.
2. INSPECTIONS
INSPECTION BODIES IMPLEMENTATION AND PROBLEMS
Section 5 of Decree No. 817/98 of 23 July 1998 stipulates thatthe bodies authorized to conduct planned and unplannedfield inspections of business entities' financial and businessactivities include:
6 State Tax Administration (STA) bodies concerning pay-ment of taxes and duties (obligatory payments) to budgetsand state target funds as well as non-tax payments;
6 Customs bodies concerning payment of the import duty,excise duty and VAT that are levied in the event of import-ing goods into the customs territory of Ukraine uponcrossing the customs border;
6 State Treasury bodies;
6 State Control and Audit Service bodies and State TaxAdministration bodies, within their scope of authority,concerning budget loans, budget-guaranteed loans andcredit, target use of subventions and subsidies, otherbudget allocations and extra-budgetary funds as well asproper performance of governmental contracts prepaid atthe expense of the budget.
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ANNEX 2
Consumer rights protection bodies are also recognized asinspection bodies entitled to conduct unplanned inspectionsof firms' activities based on consumers' complaints aboutsuch firms' having violated legal requirements concerningprotection of consumers' rights.
A number of other laws of Ukraine have provisions regardingthe process of inspections.
Article 15 of the Law of Ukraine No. 265/95-VR of 6 July 1995"On Using Cash Registers in Trade, Public Catering andServices" stipulates that the National Bank of Ukraine andState Tax Administration bodies control business entities'observance of the procedure for buying and selling foreigncurrency by conducting operative inspections.
This list of inspection bodies is not exhaustive because,besides the laws that authorize said agencies to conductinspections, there is the General Regulation on Ministries andOther Central Executive Authorities approved by Decree No179 of 12 March 1996 of the President of Ukraine, whoseSection 6 stipulates the right of central executive authorities toissue their own orders and control their execution.
Inspection bodies often act as if they are interested in identi-fying the largest number of violations, providing no supportfor or suggestions to eliminate violations or defects. The "puni-tive" nature of inspections is a characteristic feature ofplanned-administrative relationships that should be replacedwith market economy partner relationships.
However, even if there are violations, in some cases no penal-ties are applied due to officials and inspectors finding rent-seeking opportunities at the firm in question. To prevent con-stant inspections, some firms periodically subsidize relevantinspection bodies.
There are two ways of solving problems arising in the courseof inspections:
- challenging decisions of state authorities in court;
- making unofficial payments.
Presently, no methodology exists for assessing the amount oflost profits. The actual amount of losses has to be establishedin court in civil litigation as legal culpability of inspectionbody officers and a causal connection between their actionsand the losses inflicted. Recently (in particular, with respect tostate registration and licensing procedures) there has been atrend towards laying responsibility on particular officers of rel-evant state authorities. Usually, they are not responsible withtheir property and bear only administrative or disciplinaryresponsibility "in the cases and scope stipulated by law,"while no relevant law exists.
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ANNEX 2
Section 5 of Decree No. 817/98 of 23 July 1998 stipulates thatthe bodies authorized to conduct field inspections of businessentities' financial and business activities include.
STATE TAX ADMINISTRATION BODIES
1) concerning payment of taxes and duties (obligatory pay-ments) to budgets and state target funds as well as non-taxpayments;
2) within their scope of authority, concerning budget loans,budget-guaranteed loans and credit, target use of subventionsand subsidies, other budget allocations and extra-budgetaryfunds as well as proper performance of governmental con-tracts prepaid at the expense of the budget (bodies of the StateControl and Audit Service).
Most problems arise with tax inspections when STA bodiesconducting inspections are vested with very broad authoritythat is not always used to benefit business development.
Tax inspectors may conduct unauthorized inspections, relyingon firm employees not knowing the law, or by citing eventsthat cannot be the ground for an inspection. Such inspectorstry to get information or documents they need or to examinethe premises. As a rule, mandates to conduct such inspectionsare executed with violations of the established requirementsor are simply missing.
When conducting inspections, STA representatives sometimescheck documents to confirm payment of the obligatory statepension insurance duty and the obligatory social insuranceduty. In doing so, they overstep their authority as checking thepayment of said duties is a part of the exclusive powers of thePension Fund and the Social Insurance Fund.
Given the broad inspection powers of the STA, constantlychanging regulations, and confusion that arises with the appli-cation of ambiguous regulations, rent seeking opportunitiesoften arise. When they do, firms almost always agree to pay aminimal penalty for a non-existing violation, rather than cre-ate tension between themselves and the state authorities.
Law of Ukraine No. 2181-III of 12 December 2000 "On theProcedure for Repaying Taxpayers' Liabilities to Budgetsand State Target Funds" is one of the few legislative acts reg-ulating questions of applying for review of tax authorities'decisions regarding the amount of tax liability in accordancewith the appellate procedure.
INSPECTIONS BY STATE TAX ADMINISTRATION (STA) BODIES
INSPECTIONS BY STATE FIRE DEPARTMENT (SFD) BODIES
Article 7 of the Law of Ukraine No. 3745-XII of 17 December1993 "On Fire Safety" stipulates that state fire inspectors areentitled, at any time in the presence of the owner or their rep-resentative, to conduct fire examinations and inspections offirms, institutions, organizations, buildings, structures, newconstruction and other facilities under their control as well asreceive required explanations, materials and information fromthe owner.
Since the law allows the possibility of conducting inspectionsnot according to schedule, an inspection by State FireDepartment bodies may be expected at any time.
Current legislation does not establish a clear procedure for theconduct of inspections by SFD bodies. Many functioning firmscannot observe all fire safety rules in practice, as these can beincompatible with real business practice, technical and otherconditions of the functioning of some firms. Observing all firesafety rules would cause a severe interruption in firm opera-tions, and this situation is often used by SFD bodies whenapplying penalties based on inspection results.
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Article 39 of Law of Ukraine No. 4004-XII of 24 February 1994"On Ensuring Sanitary and Epidemiological Well-being ofthe Population" stipulates that state sanitary and epidemiolog-ical supervision is carried out in accordance with theRegulation on State Sanitary and Epidemiological Supervisionin Ukraine through selective inspections for compliance withsanitary legislation pursuant to plans of bodies, institutions andorganizations of the State Sanitary and EpidemiologicalService. Unplanned inspections are conducted depending onthe sanitary and epidemiological situation and also based oncitizens' applications.
The procedure for the conduct of inspections by bodies andinstitutions of the State Sanitary and Epidemiological Service isstipulated by CMU Resolution No. 1109 of 22 June 1999 "OnApproving the Regulation on State Sanitary andEpidemiological Supervision in Ukraine." In accordance withthis Resolution, inspections are conducted pursuant to plans ofSES bodies and institutions, and unplanned inspections areconducted depending on the sanitary and epidemiological sit-uation and also based on citizens' applications. The Regulationstipulates the list of cases where inspections are mandatory.Besides this, the Regulation stipulates that, in other cases, thestate sanitary and epidemiological control is carried outthrough selective inspections of facilities under state sanitaryand epidemiological supervision depending on the sanitary,hygienic and epidemiological situation.
SES bodies may inspect firms at any time. As can be expect-ed, the SES most often inspects food stores and public cater-ing companies (bars, cafes and restaurants).
INSPECTIONS BY STATE SANITARY AND EPIDEMIOLOGICAL SERVICE (SES) BODIES
INSPECTIONS BY OTHER STATE AUTHORITIES
Article 1 of Law of Ukraine No. 700-XIV of 21 May 1999 "OnExercising Control Over Payment of the Obligatory StatePension Insurance Duty and the Obligatory State SocialInsurance Duty" stipulates that agencies of the Pension Fundof Ukraine (concerning payment and targeted use of the oblig-atory state pension insurance duty), and agencies of SocialInsurance Fund (concerning payment and targeted use of theobligatory state social insurance duty, except for the unem-ployment insurance duty), are entitled to conduct plannedand unplanned field inspections of business entities' financialand business activities.
Law of Ukraine No. 26-94-ÕII of 14 October 1992 "On LaborProtection" stipulates the right of State Labor ProtectionDepartment officials to freely conduct inspections of firmsunder their control at any time.
No major issues arise in connection with the conduct ofinspections by Pension Fund of Ukraine and Social InsuranceFund bodies. The only problems that may arise are those relat-ed to incorrect application or interpretation of the rules stipu-lated by current legislation on the part of inspection body rep-resentatives. If, following an inspection, a fined company feelsthat it has been unlawfully subject to penalties or additionalpenalty amounts have accrued, the firm may challenge suchthe decision in court.
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Customs regulation of import-export operations is performedin accordance with the following normative acts:
The Customs Code of Ukraine, which defines principles of theorganization of: the Ukrainian customs system (procedures formoving goods and other items across the customs border ofUkraine, determining customs duties and charges, customsinspection, and other methods of carrying out the customspolicy), and the network of customs regulating agencies;
Laws of Ukraine which regulate the process of declaringgoods, paying customs duties and customs charges, grantingcustoms privileges and going through customs. The generalcustoms tariff of Ukraine and customs regulations of Ukrainemust be published no later than 45 days before coming intoeffect;
Normative acts of the Cabinet of Ministers of Ukraine, whichdefine the principles of charging customs duties, forms andprocedures for submitting, preparing and issuing cargo decla-rations, procedures for customs clearance of imported goodssubject to mandatory certification in Ukraine, guidelines forimporting certain types of products into the customs territoryof Ukraine, specific issues related to the activity of licensingwarehouses, principles of creating a consolidated statisticaldatabase on foreign trade operations.
Unless the owner of the goods obtains a product inspectioncertificate or a certificate of validation of a foreign certificate,the goods will be accepted for storage at a customs licensingwarehouse or removed from the customs territory of Ukraine.
3. CUSTOMS
GENERAL PROVISIONS IMPLEMENTATION AND PROBLEMS
REGISTRATION OF A COMPANY AS A FOREIGN TRADE OPERATOR
Companies are required to obtain the accreditation of a cus-toms agency. To obtain accreditation, it is necessary to pre-pare and submit documents prescribed by the relevant regu-latory acts to the statistical division of the customs authority inthe area of the company's registration.
Accreditation is a relatively simple procedure and is per-formed free of charge.
Delivery of products
To take a group of products across the border, the companyshould go to the customs agency in the area of accreditationand:
6 in case of an export operation - fill out an export declara-tion, present the cargo for a customs inspection, submitdocuments for customs clearance (contract, cargo decla-ration, certificate of the declaration of cash and securitiesheld abroad, and other documents as required by the cus-toms agency);
6 in case of an import operation - ensure unhinderedcrossover of the border by the expected cargo.
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Should the company fail to provide or prepare customs docu-ments in accordance with established procedure, it may berefused customs clearance and issued a refusal card, whichshould specifically state the reason for refusal.
The following taxes and duties are calculated and charged forcustoms clearance:
1) VAT (for import only);
2) customs duty (mostly for import);
3) excise duty (for imported goods subject to excise duty);
4) customs charges.
The general VAT rate is 20%; excise duty rates are linked tothe product code, and all types of customs duties aredescribed in the Addendum to the CMU Resolution #65 of 27January 1997.
Under Ukrainian law, special import (export) conditions applyto certain groups of products, namely: mandatory certifica-tion, veterinary/ environmental/ sanitary/other inspection,import (export) license.
Relevant information may be obtained through customs agen-cies at the location of accreditation) or a broker, but only if theproduct code is available. Some products may be importedinto Ukraine only upon the presentation by the shipper of thepermit documentation. For example, agricultural products(groups 1-24) and pharmaceuticals may be imported only ifan inspection certificate or a certificate of the validation of aforeign certificate issued by an agency of the Standards andMeasurements Committee are presented at the border. Otherproducts that are subject to mandatory certification may becertified upon arrival at the destination customs point.
Refusal to give customs clearance
Taxation
Permits, certificates, licenses, quotas, etc.
4. CERTIFICATION
Products that manufactured in Ukraine and subject to manda-tory certification may only be sold if properly certified.Customs will only give clearance to bring goods that are sub-ject to mandatory certification into the customs territory ifprovided with an appropriate certificate or document issuedby a relevant Ukrainian authority, which certifies that the cer-tificate issued by a foreign authority is valid in Ukraine.
The procedure for giving customs clearance for importedgoods subject to mandatory certification in Ukraine andimported into the customs territory of Ukraine by businessentities for subsequent sale or exchange is defined in theResolution of the Cabinet of Ministers of Ukraine "OnApproving the Procedure for Customs Clearance of ImportedGoods (Products) Subject to Mandatory Certification in
GENERAL PROVISIONS IMPLEMENTATION AND PROBLEMS
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A foreign conformity certificate will be validated if:
1) the State Committee for Standards and Measurements anda national certification agency of the country of origin of theproduct imported into Ukraine have a bilateral agreement onthe mutual recognition of certification procedures;
2) the foreign certificate is issued directly within the state cer-tification system of the country the imported product origi-nates from and is made in;
3) the product imported into Ukraine may be identified by theshipping documentation (markings, labels, etc.) as manufac-tured in conformity with international or other regulatory actsvalid in Ukraine;
4) the nomenclature of the mandatory standards and require-ments stated in the foreign conformity certificate correspondswith the nomenclature of mandatory standards and require-ments valid in Ukraine.
The procedure for validating a foreign conformity certificate isnot transparent enough. To validate such a certificate, cus-toms often ask for original conformity certificates or docu-ments authorizing the issuance of the certificates (test proto-cols). Given that the original conformity certificate is issued inonly one copy for the entire bulk of products manufactured,manufacturers are reluctant to give up the only copy of theoriginal conformity certificate or test protocol if importingonly one lot of products.
Ukraine", #1211 of 4 November 1997.
Customs clearance of goods intended for unlimited use in thecustoms territory of Ukraine is given on the grounds of:
6 a conformity certificate or a copy thereof, issued by theState Committee for Standards and Measurements or anauthorized certification agency;
6 a certificate of the validation of a foreign certificate or acopy thereof, issued by the State Committee for Standardsand Measurements or an authorized certification agency;
6 the goods being listed in the General Register of ProductsCertified in Ukraine.
Unless the owner of the goods obtains a conformity certificateor a certificate of the validation of a foreign certificate, thegoods will be accepted for storage at a customs licensingwarehouse or taken outside the customs territory of Ukraine.
VALIDATION OF A FOREIGN CONFORMITY CERTIFICATE
CERTIFICATION OF ALIMENTARY PRODUCTS IMPORTED INTO UKRAINE
Pursuant to Part 2 Paragraph 3 of Article 12 of the Law ofUkraine "On the Protection of Consumer Rights", goodsimported into Ukraine must be accompanied by a documentcertifying that the quality of the goods has been inspected inaccordance with established procedure.
Pursuant to Part 2 of Article 5 of the Law of Ukraine "On theQuality and Safety of Alimentary Products and Food Stocks"#771/97-VR of 23 December 1997, for alimentary products,food stocks and related materials, such documents are:
1) a conformity certificate;
2) a letter from the State Register or approval of the state san-itary service;
3) veterinary certificate for alimentary products and foodstocks of the animal origin;
4) quarantine clearance for vegetable products.
The certification procedure is often overloaded with red tapeand inconsistent.
Cargo brought into Ukraine must be stored under customssupervision in the customs area or at a licensing warehouseuntil final clearance. The cost of the storage of the cargo trans-port or the cargo itself is calculated on a daily basis. Thelonger it takes to collect all documents to obtain customsclearance, the higher the costs.
One delivery may be measured in hundreds of tons. Eventhough the delivery originates with the same manufacturerand only one group of products is imported, it is necessary toobtain a veterinary certificate for every vehicle (railway car).Thus, the importer's costs increase in proportion to the num-ber of transport vehicles used.
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An inspection certificate will normally be issued within 30days from the date of the application and provision of all doc-uments required.
A laboratory analysis should be conducted before any of theabove documents may be issued.
Under the law, all laboratories must be accredited to performcertain types of tests.
Unless some material incentive is provided to speed up theprocess of obtaining the document, it will be issued in exact-ly 30 days. Government officials are rarely concerned aboutthe fact that the products may spoil or that the cost of usingthe customs storage area is high.
A minimum of 8 kg of a product sample must be provided toobtain a laboratory report. Thus, to obtain three reports, threesamples 8 kg each should be provided. If the product is frozenand transported in packages of 10-30 kg, three whole pack-ages must be provided for laboratory analysis. The price forlaboratory services also increases three-fold.
Laboratories usually have one, or rarely, two licenses. A labo-ratory with a double license is allowed to perform testsrequired for the issuance of a veterinary certificate and a san-itary report, or a conformity certificate. Triple licensing (whichis currently unavailable in Ukraine) would simplify the certifi-cation process and cut certification time and costs. The needfor improvement of relevant regulatory documents is signifi-cant.
THE IMPORT AND EXPORT OF ANIMALS AND FEEDSTOCK OF ANIMAL ORIGIN
The import, export or transit through Ukraine of animals, ani-mal products and stocks, and other cargo, and the entry oftransport subject to a mandatory veterinary inspection are per-mitted upon the presentation of documents prescribed byinternational agreements (veterinary certificates/reports) andthe fulfillment of veterinary requirements established withregard to the epizootic situation in the exporting country.
Customs clearance for cargo liable for inspection by the stateveterinary service is given only to exporters from countrieswith a stable epizootic situation upon the presentation of anoriginal veterinary certificate issued by the country of origin,clearly indicating the receiver of the cargo and the fulfillmentof veterinary requirements for the import of cargo liable toinspection by the state veterinary service upon the completionof a veterinary inspection.
A veterinary inspection agency is authorized to suspend ortemporarily prohibit the transport (displacement) of cargoliable to inspection by the state veterinary service in the eventof an unstable epizootic situation in the exporting country,evidence of incompliance with veterinary requirements, non-conformity of veterinary documentation to an establishedstandard, discrepancies in or failure to present documenta-tion. A relevant report in respect thereof should be preparedin three copies to be submitted to officers-in-command of bor-der patrol and customs units.
Should a veterinary inspection reveal any discrepanciesbetween the name of the cargo stated in the foreign veterinarycertificate and the sanitary certificate and the actual name ofthe cargo, or inconformity of quality characteristics of theproduct to those listed in the relevant documentation, the cus-toms agency draws up an act authorizing the return of thecargo to the sender. Discrepancies in the name of the cargo orquality characteristics of the products are often due to a tech-nical error on the part of the issuing authority. Correcting themistakes takes some time, which results in a delay in obtain-ing customs clearance.
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The export of cargo liable for inspection from countries withwhich there are no agreed forms of veterinary certificatesshould take place in accordance with veterinary requirementsthat apply to the import into Ukraine of cargo liable to inspec-tion by the state veterinary service. Obtaining customs clear-ance for cargo liable to inspection by the state veterinary serv-ice at the state border is possible only upon the presentationof an original veterinary certificate, sanitary certificate of themanufacturing country and upon the fulfillment of veterinaryrequirements that apply to the import into Ukraine of cargoliable to inspection by the state veterinary service.
CONFORMITY CERTIFICATES FOR CONSTRUCTION MATERIALS
Pursuant to the Order of the State Committee for Standardsand Measurements #537 of 8 September 2000 "On Changesto Guidelines for Mandatory Certification of ConstructionMaterials, Products and Structures, Approved by the Orderof the State Committee for Standards and Measurements"#192 of 11 April 1997, the procedure for the certification ofconstruction materials, products and structures has beenaltered. A comprehensive analysis of available informationabout materials that are liable for certification is now manda-tory. A product identification act is drawn up based on indi-cators verified during tests. Technical inspection of the prod-ucts certified is performed at every new stage of certification.
Certification of products is no longer performed during thecertification of one lot of products.
To obtain a conformity certificate which will be valid for
6 1 year, for serial products, a process inspection is notrequired,
6 2 years, a process inspection is required,
6 3 years, certification of products, instead of quality certifi-cation, is performed;
6 5 years, quality certification, certification tests and a tech-nical inspection are performed.
5. PERMITS
GENERAL PROVISIONS IMPLEMENTATION AND PROBLEMS
The State Fire Department issues permits for firms to start upoperations, to put into operation newly constructed and reno-vated production facilities, housing and other projects, toimplement new technologies, to start production of machines,equipment and products that pose certain fire risks, and alsoto rent premises. The procedure for granting such permits byState Fire Department bodies is approved by CMU ResolutionNo. 150 of 14 February 2001.
Said permits are issued free of charge by central, territorialand local divisions of the SFD within their scope of authority.To obtain the permit, the owner (lessee) must apply to theSFD. The application must be lodged together with the opin-ion of a fire inspection expert concerning the fire safety of thefirm, facility or premises. In the case of a permit to rent prem-ises, a copy of the rental agreement must also be attached.
A fire inspection is a paid service. This means that, althoughthe permit is issued free of charge, firms nevertheless incurexpenses to secure the expert opinion necessary to obtain thepermit.
1. PERMITS OF THE STATE FIRE DEPARTMENT (SFD)
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The grounds for the issuance of the permit is an expert opin-ion formulated based on a fire inspection of the firm, facilityor premises. The inspection is conducted by a SFD body orother legal entity (individual) licensed to conduct such inspec-tions.
A decision is made within five working days after applicanthas submitted all required documents. If violations of fire safe-ty rules have been identified, the SFD may decide not to issuethe permit.
If no violations of fire safety rules have been identified in thecourse of the inspection, an open-ended permit is issued. TheSFD permit is one of the grounds for granting the State LaborProtection permit.
In practice, the SFD does not limit itself to requiring the doc-uments stipulated by law. Often, to obtain a permit, firms areasked to give financial assistance to the relevant SFD body ordirectly to the official at such agency.
2. PERMITS OF THE STATE LABOR PROTECTION COMMITTEE (SLP)
Pursuant to the Regulation on the Procedure for GrantingPermits by the State Labor Protection Committee of Ukraineapproved by SLP Order No. 103 of 4 June 1999, the SLP issuespermits for the following:
a) putting into operation newly constructed and renovatedproduction and social assets;
b) starting up operations of firms, institutions and organiza-tions of all forms of ownership engaged in all lines of business;
c) developing new technologies, manufacturing and usingnew machines, equipment, vehicles and other capital goods,including those purchased abroad in accordance with therequirements of normative acts;
d) manufacturing, testing, assembling, repairing, remodeling,fixing and using boilers and vessels that operate under pres-sure, steam and hot water pipes, lifting and gas works equip-ment;
e) training labor protection staff, specialists and officials ateducational institutions;
f) obtaining land allotment and use of subsoil rights (except forthe extraction of minerals of local import);
g) purchasing and manufacturing explosives by firms andorganizations, conducting blasting work.
The arrangements and procedure for granting permits to startup operations (Section b) are detailed in the Regulation "Onthe Issuance by the SLP of Permits to Start Up Operationsto Owners of Firms, Institutions and Organizations"No. 831 of 6 October 1993.
Pursuant to this Regulation, the permit to start up operations isan official document that allows the operation of a business.The permit is granted based on a favorable expert opinion ofFire Department and Sanitary and Epidemiological Serviceagencies and, if applicable, nuclear and radiation safetysupervision bodies, stating that the firm is ready to operate.
The State Labor Protection Committee agencies are entitled torequire the performance of control measurements and theconduct of inspections of construction projects, equipment,workshops and the natural environment. SLP officials do notalways exercise this right in the interest of firms' observanceof the law. It often allows them to delay the issuance of per-mits and encourage firms to solve the problem through unof-ficial payments.
The Regulation stipulates that SLP bodies make the decisionon granting the permit to start up operations within 10 daysafter submitting the application. In practice, this term is rarelyobserved. The Regulation does not provide any responsibilityon the part of SLP agencies for violating the term for grantingthe permit.
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To obtain a permit to start up operations, the owner of the firmmust file an application in the established form with a relevantagency of the SLP. The permit is issued to state-owned firmsbased on a duly drawn up acceptance act of a special com-mission.
Permits to any non-state-owned firms are issued based on thefollowing documents:
6 the state registration certificate and a permit (license) tocarry out the activities listed in the foundation documents,if the law requires obtaining such permit (license);
6 a statement of a SLP control inspection;
6 a statement to the effect that the professional skills of com-pany management and staff are appropriate for the firm'sline of business and that they are knowledgeable aboutlabor protection issues;· a permit of a relevant body todispose of (bury) industrial waste (in some cases).
Article 15 of the Law of Ukraine "On Ensuring the Sanitaryand Epidemiological Well-being of the Population" stipu-lates the necessity to obtain expert opinion regarding compli-ance with sanitary requirements of projects and buildingsbeing put into operation, while firms must obtain expert opin-ions to the effect that they are ready to carry out businessactivities. In order to be in compliance with the procedure forSES issuing such opinions, approved by Resolution No. 51 of23 April 2001 of the Head Sanitary Physician of Ukraine,firms, institutions and organizations must submit the followingdocuments:
6 an application of the firm's owner or their authorized rep-resentative;
6 the state registration certificate;
6 the firm charter;
6 documents certifying the right to use premises;
6 a favorable expert opinion regarding design documents;
6 a hygiene department's opinion regarding raw materials,finished products and equipment used by the technology;·
6 results of prior medical examinations of staff in accor-dance with requirements of current sanitary legislation.
To secure an expert opinion for a completed constructionproject, a statement of the state technical commission must beprovided to the effect that the newly constructed building isready for use in accordance with relevant rules of the law.
The SES may request additional materials containing informa-tion necessary for a sanitary and hygienic inspection of thefirm. In this event, the waiting period begins on the day of pro-viding the additional materials. This does not add to the trans-parency of the procedure for obtaining the expert opinion andmay create unforeseen barriers, as well as additional opportu-nities for rent-seeking officials.
A refusal to issue a permit by any of the above state authori-ties may be challenged before a higher authority to which it issubordinated or in a court of law. If the refusal to issue thepermit was not justified, the firm may avail itself of its right tochallenge such decision, but this would cause a significantdelay in starting up its operations. In addition, this will com-plicate future relations with the relevant authority. In practice,refusals by the above mentioned state authorities to issue per-mits are almost never challenged.
3. PERMITS OF THE STATE SANITARY AND EPIDEMIOLOGICAL SERVICE (SES)
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Expert opinions are approved by the Head Sanitary Physicianin the region and are issued to the applicant within 10 daysafter the submission of the application and all required mate-rials. Before issuing its opinion, the SES inspects the firm forcompliance of working conditions, production and naturalenvironment with sanitary rules and requirements.
4. PERMITS OF OTHER STATE AUTHORITIES
Permits that are not compulsory but are only needed toengage in a certain line of business include:
6 the permit to place outdoor advertising;
6 the permit to place a retail outlet;
6 the permit to construct and operate domestic services andtrade facilities;
6 the permit to place a small architectural form (kiosk), etc.
Obtaining all permits causes typical problems. A direct rela-tionship is often observed between the list of documentsrequired to obtain a permit and the number of additional dif-ficulties facing the entrepreneur.
Permits often necessitate additional approvals from relevantstate agencies, which makes the procedure even more diffi-cult.
It is much more convenient for entrepreneurs to make a one-time payment for all required permits and start up operationsas soon as possible instead of solving problems of obtainingpermits and approvals as they occur. Official payments are taxdeductible expenses.
6. LICENSING
NEW LEGISLATIVE RULES IMPLEMENTATION AND PROBLEMS
GENERAL PRINCIPLES
The Law stipulates types of licensable business activities; legalgrounds for issuing, re-issuing and canceling licenses; powersof the special authorized licensing body (State Committee onRegulatory Policy and Entrepreneurship) and of licensingauthorities; terms for the approval of decisions regarding doc-uments filed for the issuance of a license and terms for formal-izing licenses; the territorial jurisdiction covered by a licenseand the term of its validity, etc. A unified license form has beenintroduced throughout Ukraine, and the Unified LicenseRegister has been created. Sub-licensing has been prohibited.
The Cabinet of Ministers of Ukraine
The Cabinet of Ministers issues normative acts stipulating thefollowing:
6 a list of executive authorities responsible for licensing;
6 an exhaustive list of documents that must be submittedtogether with the application for a license;
6 validity periods for different types of licenses; and
6 the amount of and payment procedure for the license fee.
State Committee of Ukraine on Regulatory Policy andEntrepreneurship
This body has the following main functions:
6 to determine the main fields for licensing development;
The Law "On Licensing" stipulates that officials at licensingauthorities and at the specially authorized licensing body areheld responsible for violations of licensing legislation.However, the law does not stipulate responsible parties forenforcement mechanisms or the consequences or penaltiesassociated with violations.
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6 to draft normative acts in the field of licensing and summa-rize the practice of applying current normative acts;
6 to issue explanations regarding the application of law inthe field of licensing;
6 to determine the required forms for documents and therules for completing them;
6 to maintain the public Unified License Register;
6 to ensure that licensing authorities and licensees complywith the law;
6 to approve, jointly with licensing authorities, license termsand the procedure for control over their observance; and
6 to issue orders to eliminate violations of license terms andlicensing legislation.
The Chamber of Experts and Appeals (CEA)
The Chamber, or CEA, exists under the framework of StateCommittee of Ukraine on Regulatory Policy and Entrepreneurship.The principle objective of the CEA is to maintain a dialoguebetween executive authorities, the public and entrepreneurs. TheCEA includes government officials, scholars, representatives ofNGOs and other experts, and carries out its activities pursuant toregulations approved by the Cabinet of Ministers.
The main functions of the CEA include :
6 expert review of and recommendations on draft normativeacts;
6 provision of preliminary opinions on proposals to instituteor abolish licenses for certain activities; and
6 consideration of applications, claims and complaints ofenterprises concerning the decisions of licensing authori-ties.
If upon review of proposed or current legislation governinglicensing, the CEA comes to the conclusion that a particularprovision violates existing laws or reasonable practice, theprovision can be subject to suspension or cancellation bythe State Committee of Ukraine on Regulatory Policy andEntrepreneurship.
LIST OF DOCUMENTS
An exhaustive list of documents that must be filed togetherwith the application for a license to conduct particular busi-ness activities is laid down in Decree No. 756 of 04 July 2001of the Cabinet of Ministers of Ukraine "On Approving the Listof Documents Filed Together With the Application for aLicense to Engage in Particular Business Activities."
The provisions of the Decree stipulate a list of documents for57 types of business activities. In accordance with Article 10of the Law, licensing authorities are not allowed to requireadditional documents from business subjects, other than theapplication, the statement on inclusion in EDRPOU and thedocuments specified in the Decree.
However, in practice, the specially authorized licensing bodytypically requires applicants to file additional documents.These requirements are not standardized and are appliedinconsistently, creating confusion and opportunity for officialabuses.
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LICENSING AUTHORITIES
The Cabinet of Ministers of Ukraine in its Resolution of 14November 2000 approved a list of bodies responsible forlicensing different types of business activities (presently, thelist includes 31 central authorities, the Council of Ministers ofthe Autonomous Republic of Crimea, 24 regional authorities,and the Kyiv and Sevastopol city administrations).
The overwhelming majority of licensing bodies are centralexecutive authorities that do not have their own territorialdivisions. A significant portion of licenses is issued at the headoffice of the licensing authority in Kiev, which results inlengthy waiting periods, significant costs to the applicants andother inconveniences. Under such conditions, due oversightof the observance of license terms and conditions and analy-sis of practical implementation of current laws, etc. seemsproblematic.
LICENSE TERMS AND CONDITIONS
License terms and conditions, that is, qualification, organiza-tion, technological and other requirements to conduct thebusiness activity in question, along with the procedure forcontrol over observance of license terms and conditions, areapproved by joint order of the State Committee on RegulatoryPolicy and Entrepreneurship (as the specially authorizedlicensing body) and the authority that directly issues licensesto engage in a certain business activity.
Not all license terms and conditions are registered with theMinistry of Justice of Ukraine.
LICENSE FEE
The law stipulates a flat fee for the issuance of a license.Formost licenses, the license fee is the same and amounts to 20non-taxable minimum incomes if the licensing body is thecentral executive authority, and to 15 non-taxable minimumincomes if the licensing body is a local executive authority.
Exceptions to this rule include: fees for the licenses to engagein the provision of radio communication services (with the useof radio spectrum); provision of telephone communicationservices (except for departmental facilities); and technicalmaintenance of television, radio and wire broadcasting net-works used for industrial purposes, which all require paymentof special fees.
Current legislation prohibits requiring additional payments forlicenses. However, it is characteristic of licensing authoritiesto suggest that entrepreneurs transfer certain amounts intotheir bank accounts as "financial assistance" when the docu-ments are under consideration.
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ANNEX 2
There is no single normative act that stipulates requirementsto constituent documents of firms.
Before preparing the documents, information should berequested as to whether or not another firm has been regis-tered under the same name with the Register of business sub-jects.
The format of the registration card for legal entities is quitecomplicated and, objectively, cannot be completed by theapplicant individually - one must indicate the identificationcode and the name of the registration authority, the identifi-cation code of the start-up entity, the number of the registra-tion file, etc.
It is not clearly stipulated which of the following documentsmust be submitted to confirm payment of the registration fee:a money transfer order endorsed by the bank to indicate thatthe transfer has been completed, or a statement of the relevanttreasury to the effect that the money has been received.
6 the home address of one of the founders based on thepropiska [the registration of residence] in their passportor the title deed for their apartment or house.Registration authorities often require a notarized state-ment of all adult family members having propiska in thefounder's dwelling confirming their consent to provide alegal address to the start-up firm;
6 the address of the rented premises;
6 the address of the premises bought by one of thefounders to accommodate the firm. A copy of the deedof real estate or the title deed for the premises isrequired;
6 the address of the premises provided to the firm as acontribution to its the charter capital, which fact mustbe mentioned in the constituent agreement of the firm.
This issue is not regulated by law and its practical resolutionvaries from case to case.
A copy of the rental agreement is often required, which is notstipulated by law.
Housing laws impose some restrictions on the use of privatedwellings as offices.
Constituent documents are signed by the founders or theirrepresentatives.
An authorized representative acting on the basis of the char-ter or a power of attorney signs the constituent documents onbehalf of a legal entity. A seal is affixed to the signature of therepresentative of the legal entity. If one of the founders is anindividual, the constituent documents are notarized.
This procedure does not involve any particular difficulties. Itis thoroughly regulated by law and routinely used in practice.
7. REGISTRATION
ACTIVITY OR PROCEDURE IMPLEMENTATION AND PROBLEMS
1. DRAFTING CONSTITUENT DOCUMENTS
WHAT LOCATIONS OF THE FIRM MAY BE INDICATED DURING REGISTRATION:
2. SIGNING AND NOTARIZING CONSTITUENT DOCUMENTS
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ANNEX 2
Setting up charter capital is obligatory for legal entities only.It must be:
6 no less than 100 minimum wages for limited liabilityand additional liability companies; and
6 1,250 minimum wages for joint-stock companies.
The charter capital may be set up both with cash and withproperty or property rights. A list of items has been stipulatedwhich may not be a charter capital contribution (promissorynotes, budget, loan and borrowed funds, etc.).
An authorized person or body submits, personally or by mail,a set of documents stipulated by law to the registration author-ity. After the submission of all the documents and payment ofthe registration fee (UAH 119), the registration authority isobliged, within 5 working days of submission of the docu-ments, to register the firm and issue the constituent documentsand the state registration certificate to the applicant. If a trebleregistration fee is paid, the registration procedure takes oneday.
Problems may arise when setting up charter capital with prop-erty or property rights. These problems concern the nature ofsupporting documents to be provided to the state registrationauthority. The law regulates only cases where the charter cap-ital is set up with cash. In this case, a bank statement must beprovided.
Procedural issues:
- documents may only be submitted twice a week during spe-cific working hours, which creates long lines;
- there is no requirement to register the fact of document sub-mission. It is therefore impossible to support the fact of viola-tion of the state registration term stipulated by law.
6 inclusion of the firm in the Unified State Register ofEnterprises and Organizations of Ukraine (EDRPOU);
6 registration with the Pension Fund of Ukraine;
6 registration with the Unemployment Insurance Fund ofUkraine;
6 registration with the Employment Injury andOccupational Disease Insurance Fund;
6 registration with the Temporary Loss of CapabilityInsurance Fund.
A firm is included in the Unified State Register of Enterprisesand Organizations of Ukraine based on a special statementcontaining all essential information about the firm, in particu-lar, the codes for the activities (no more than six) that the firmintends to carry out. The statistics bodies provide paid servic-es. Depending on the amount paid, the statement may beissued immediately after submitting all required documents orwithin five days after the document submission. The proce-dures for the registration with compulsory state funds arerather simple. The firm must register with said state fundswithin ten days from the day it was issued the state registra-tion certificate.
3. STATE REGISTRATION OF THE FIRM. OBTAINING THE STATE REGISTRATION CERTIFICATE
4. REGISTERING WITH COMPULSORY STATE FUNDS
5. REPORTING TO THE STATE TAX ADMINISTRATION AS A TAXPAYER
Within 20 days of receiving the state registration certificate, alegal entity must report as a taxpayer to the STA at its location.The procedure for the registration of a firm as a taxpayer isregulated by Instructions on the procedure for accounting fortaxpayers approved by Order No. 552 of 17 November 1998of the STA.
In accordance with law, it may take up to seven or more cal-endar days to register a firm that already has its state registra-tion certificate with the State Tax Administration. That is, dur-ing this period, a registered legal entity cannot perform banktransactions: for its tax registration, a copy of its registrationcard is required, which may only be provided by the state reg-istration authority.
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ANNEX 2
Additional documents, not stipulated by law, are oftenrequired: a copy of the document confirming the firm's loca-tion; copies of founders' passports and statements on theassignment of tax identification codes to them (if the foundersare individuals); a copy of the founder's state registration cer-tificate (if the founder is a legal entity); minutes of the con-stituent assembly (if it was held); executive orders on theappointment the firm manager and chief accountant.
Tax authorities require proof of founders' registration (if theyare legal entities), which is provided by specially formattedstatements. These statements are issued only upon priorrequest, only on public days and are valid for registration pur-poses during 30 days.
The largest problem is the required preliminary examinationby the tax police of documents that will be filed for registra-tion. All founders, the firm manager and chief accountant, ifthey have been appointed, must personally appear before thetax police authority (sometimes, agents are not allowed to rep-resent the founders).
The permit to manufacture the company seal and stamps isissued by an internal affairs office.
Typical problems at this stage are unsatisfactory work of inter-nal affairs offices and demands to make unofficial payments(to speed up the procedure).
6. OBTAINING THE PERMIT TO MANUFACTURE THE COMPANY SEAL AND STAMPS
OTHER EXISTING PROBLEMS
Articles 4 and 34 of the Law "On Enterprises in Ukraine" and Articles 4 and 19 of the Law "On Business Companies" stipu-late that companies must be established in accordance with the requirements of antimonopoly law. This means that, togetherwith a mandatory set of registration documents stipulated by Article 8 of the Law "On Entrepreneurship," a document confirm-ing the approval of the Antimonopoly Committee of Ukraine or its territorial division must be submitted to allow the establish-ment of a firm. Section 21 of Explanations No. 02-5/334 of 12 September 1996 of the Supreme Commercial Court of Ukrainestipulates that the act of state registration of a legal entity is not valid, if it has not been approved by the Antimonopoly Committeeor its territorial division.
There is also a traditional discrepancy between the governmental regulation requiring the notarization of individuals' signatureson constituent documents and the provision of the Law "On Business Companies" stipulating that constituent documents ofbusiness companies must be approved by the constituent assembly or by the owner (without any founders' signatures).
There is also an inappropriate requirement of the Law of Ukraine "On Entrepreneurship" stipulating that documents must besubmitted confirming payment of a contribution to the charter capital, while cash contributions to the charter capital are oblig-atory only for banking and other financial institutions.
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ANNEX 3
53.8 54.1 52.7 54.4 52.2 53.3 55.1
45.6 46.7 43.7 44.8 41.9 44.9 48.3
45.4 45.5 46.4 43.5 46.4 44.9 45.2
41.1 41.4 42.1 38.7 33.6 38.4 47.3
40.3 42.0 35.6 40.9 38.2 39.1 42.6
39.8 40.6 40.3 36.7 33.8 36.8 45.2
35.3 36.0 32.1 37.6 30.8 32.9 40.2
21.4 21.4 20.1 23.1 18.5 20.0 23.8
Frequently Changing Regulatations
Customs Procedures
Inspections, not including taxinspections
Obtaining Permits/Approvals
Certification
Requirements to make �voluntary�contributions
Licensing
Registration/ Re-registration
Small Medium Large
Firm Size Firm OriginAve
rage
State-Owned
Privatized Private
Table 23
Perceptions of Regulatory Procedures as Major or Significant Obstacles
(as a % of all firms citing each procedure as applicable to their business activities)
SUPPLEMENTARY TABLES
Issue
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ANNEX 3
Score % Score % Score % Score % Score % Score %
2.6 90 2.6 88 2.6 90 2.6 91 2.6 90 2.6 91 2.6 89
2.4 95 2.5 95 2.4 96 2.4 94 2.4 95 2.4 95 2.4 96
2.4 41 2.3 36 2.4 47 2.5 39 2.5 41 2.4 41 2.4 41
2.3 64 2.2 60 2.3 69 2.4 61 2.4 65 2.2 63 2.3 60
2.3 79 2.2 71 2.2 80 2.4 82 2.4 80 2.3 80 2.2 76
2.3 90 2.1 88 2.2 90 2.4 92 2.4 91 2.3 91 2.2 88
2.2 67 2.1 68 2.1 69 2.3 66 2.3 67 2.1 69 2.2 66
1.8 81 1.7 75 1.8 79 1.9 85 1.9 81 1.8 81 1.8 78
Issue
Frequently Changing Regulations
Inspections, not including taxinspections
Customs Procedures
Certification Procedrues
Requirements to make �voluntary�
contributions
Obaining Permits / Approvals
Licensing Procedures
Registration/Re-registration proce-dures
Small Medium Large
Firm OriginFirm SizeAverage
Score*
%**
State-Owned Privatized Private
Table 24
Rating of Regulatory Barriers by Firm Size, Origin, and Sector of Activity
(ranked by average score)
* Average score**Percent of respondents, as a share of total sample.
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ANNEX 3
Table 25
"Time Tax" Estimates, by Firm Size, Origin, and Sector of Business Activity
(the share of time that managers spend dealing with regulatory issues, %)
Small Medium Large State-Owned Privatized Private
Manufacturing 15.7 16.0 15.6 19.9 15.1 13.8 15.7
Construction 15.5 14.6 17.2 16.4 16.6 14.1 15.6
Transport 20.5 18.1 18.7 21.1 19.1 18.4 19.5
Financial Services 10.5 13.8 13.9 13.4 8.7 11.8 11.7
Trade 14.6 15.4 16.3 13.7 15.1 15.2 15.0
Public Catering 16.4 14.6 12.0 12.2 14.1 17.4 15.0
Other Services 15.0 16.6 19.2 21.0 15.9 11.3 16.0
Average 15.5 15.8 16.0
Firm Size
Small 17.2 15.8 14.3 15.5
Medium 20.3 16.0 13.3 15.8
Large 19.6 13.7 16.1 16.0
Average 18.4 15.4 14.3 15.7
Ave
rage
Firm OriginFirm Size
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ANNEX 3
Table 26
Average Number of Taxes by Firm Size, Origin, and Industry, 2001 and 2000
Firm Size Firm Origin Average
Small Medium Large State-Owned Privatized Private
Manufacturing 8.3 11.4 12.6 10.0 9.7 10.1 9.9 12.1
Construction 8.0 11.6 11.8 10.6 8.7 9.3 9.3 11.2
Transport 7.1 11.5 13.3 8.6 8.6 11.0 9.3 11.8
Trade 8.4 12.4 12.8 10.6 10.4 9.5 9.8 10.0
Public Catering 8.4 11.7 13.3 11.5 9.8 10.5 10.5 9.0
Financial Services 7.6 12.8 10.8 8.9 9.8 9.0 9.1 n.a.
Other Services 8.0 11.3 13.7 10.1 8.8 10.1 9.7 9.5
Average 8.2 11.7 12.7
Firm Size
Small 8.4 7.8 8.4 8.2 9.4
Medium 11.7 11.4 11.8 11.7 12.4
Large 12.6 12.6 12.7 12.7 14.2
2001 Average 10.1 9.5 9.9 9.8
2000 Average 11.8 12.2 9.7 11.1
2000
2001
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ANNEX 3
AverageFirm Size Firm Origin
2001
2000
Table 27
Average Tax Burden as a Share of Sales in 2001 and 2000
Small Medium Large State-Owned Privatized Private
Manufacturing 28.0 35.8 31.0 22.7 37.0 29.3 31.8 23.6
Construction 34.9 26.7 19.2 17.9 22.5 25.2 22.4 27.6
Transport 26.1 26.6 31.0 28.7 17.3 43.7 30.2 23.6
Trade 34.0 32.4 26.3 33.7 29.4 27.0 28.3 18.8
Public Catering 27.4 34.7 25.5 24.8 25.2 29.0 26.0 24.6
Financial Services 29.3 25.8 14.6 15.8 23.7 22.8 18.4 n.a.
Other Services 21.9 27.3 27.9 31.2 18.7 28.0 27.5 26.7
Average 29.0 33.4 27.7
Firm Size
Small 28.8 29.7 28.8 29.0 24.9
Medium 30.7 33.3 34.5 33.4 26.9
Large 24.4 30.7 27.5 27.7 22.7
2001 Average 25.2 31.2 29.0 28.8
2000 Average 26.5 22.2 24.0 23.6
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ANNEX 3
Table 28
Average Tax Burden as a Share of Value Added, 2001 and 2000
AverageFirm Size Firm Origin
2001
2000Small Medium Large State-Owned Privatized Private
Manufacturing 43.7 94.9 66.1 46.0 88.8 55.4 70.9 56.0
Construction 48.9 47.4 57.1 15.9 50.0 58.5 54.0 50.1
Transport 34.6 39.2 26.4 44.8 22.7 46.3 28.3 54.7
Trade 37.1 43.8 65.9 42.3 76.2 51.0 56.6 29.5
Public Catering 67.3 67.8 50.5 79.1 49.9 39.4 51.5 41.3
Financial Services 20.1 51.4 31.5 32.6 35.7 23.4 28.8 �
Other Services 40.2 55.4 45.2 41.5 46.4 59.2 46.0 60.3
Average 42.1 74.6 52.2
Firm Size
Small 32.8 61.1 37.6 42.1 44.0
Medium 75.3 88.6 57.7 74.6 47.4
Large 50.1 57.2 48.7 52.2 56.1
2001 Average 50.8 63.7 49.2 55.1
2000 Average 51.6 57.0 41.6 52.8
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ANNEX 3
AverageFirm Size Firm Origin
2001
2000
Table 29
Percentage of Respondents Reporting Similar Enterprise Share of Sales Concealed from
Taxation, by Firm Size, Origin and Industry, 2001 and 2000
(as a % of sales)
Small Medium Large State-Owned Privatized Private
Manufacturing 22.6 20.3 27.9 31.2 21.4 28.0 25.7 15.1
Construction 27.9 22.1 38.1 28.1 27.3 38.0 34.0 20.2
Transport 24.0 22.6 20.3 7.2 35.0 10.3 20.7 16.9
Trade 25.8 26.5 22.9 25.5 16.1 26.7 23.8 21.4
Public Catering 15.4 28.9 19.6 9.5 35.9 19.0 20.1 21.7
Financial Services 27.3 18.8 15.1 26.6 13.7 24.8 23.2 �
Other Services 12.1 20.1 37.4 34.8 36.7 28.0 33.0 15.2
Average 22.4 21.8 27.1
Firm Size
Small 21.8 23.5 22.2 22.4 18.9
Medium 24.4 15.6 28.4 21.8 19.8
Large 23.8 28.4 28.6 27.1 14.4
2001 Average 23.8 25.4 27.6 25.8
2000 Average 10.3 16.3 23.1 15.8
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ANNEX 3
Table 30
Percentage of Respondents Reporting Similar Enterprise Share of Sales Concealed
from Taxation, Regional Variations, 2001 and 2000
(as a % of sales)
Concealed Sales Average
0% 1-10% 11-20% 21-30% 31-40% 41-50% 51-60% >60% 2001 2000
Odesa 12.9 3.7 15.5 12.3 2.9 1.6 7.5 43.6 37.6 18.4
Chernigiv 7.6 2.3 0.7 9.9 58.0 4.2 4.4 13.0 35.1 20.9
Kirovograd 5.8 3.3 14.2 5.6 51.0 0.1 0.1 19.8 33.6 29.6
Uzhgorod 15.1 2.1 4.5 21.8 27.5 2.6 0.1 26.3 32.9 9.8
Rivne 15.0 4.1 25.8 6.3 3.5 11.5 12.1 21.6 31.7 16.7
Lviv 6.8 1.6 12.7 44.9 7.8 1.9 24.0 0.4 30.2 18.7
Poltava 18.9 2.4 10.8 7.3 19.2 37.1 1.8 2.5 29.5 16.9
Kiev 17.2 4.5 6.1 27.8 8.2 19.0 15.6 1.5 29.0 12.3
Kharkiv 17.4 15.7 2.8 12.1 2.7 39.1 3.9 6.3 28.7 22.6
Zaporizhzhya 16.3 2.9 3.1 34.0 25.3 13.9 3.0 1.6 26.8 9.2
Mykolayiv 27.6 1.1 30.6 4.3 2.6 0.6 0.1 33.2 26.8 23.0
Dnipropetrovsk 40.8 5.1 1.5 11.4 3.0 5.0 0.3 32.9 26.5 20.5
Chernivtsi 10.9 30.3 1.7 19.3 8.5 4.9 3.7 20.7 26.3 8.8
Kherson 28.6 2.6 21.3 8.8 0.4 8.7 25.5 4.2 26.1 8.8
Ivano-Frankivsk 7.9 4.9 1.7 56.2 22.7 2.1 2.5 1.8 25.9 23.1
Zhytomyr 3.4 12.1 27.9 28.5 10.5 9.3 4.6 3.7 24.6 20.7
Khmelnytsky 23.5 4.8 8.2 42.5 8.3 6.1 3.7 2.9 21.5 18.6
Sumy 19.6 33.0 5.3 2.5 5.1 31.9 0.7 1.8 20.7 24.3
Vinnytsia 58.5 1.0 2.2 1.4 0.9 6.1 29.3 0.6 20.3 11.2
Lugansk 39.8 18.6 6.4 3.0 0.4 17.5 1.2 13.0 19.2 9.9
Ternopil 40.4 3.2 4.2 35.2 3.5 0.8 0.6 12.2 18.8 13.2
Simferopol 21.6 6.4 43.8 7.2 6.6 6.6 2.7 5.1 18.6 10.9
Lutsk 22.2 35.5 1.1 17.8 13.3 0.4 1.6 8.1 17.0 17.9
Cherkasy 33.0 23.1 5.5 10.1 24.3 0.4 1.4 2.2 15.3 7.9
Donetsk 62.5 3.0 10.5 4.0 9.8 0.7 2.2 7.3 12.1 11.5
National Average 21.0 10.1 13.7 17.8 11.7 11.9 6.0 7.7 25.8 15.8
City
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ANNEX 3
Table 31
Payment of Which Taxes/Duties is Most Problematic for Your Business?
(as a % of all firms)
Ave
rage
Firm Size Firm Origin
Small Medium Large State-Owned Privatized Private
VAT 23.2 28.4 32.5 27.6 25.9 26.1 26.4
Corporate income tax 21.9 26.5 27.5 24.4 24.9 23.3 24.1
None 20.8 12.6 11.3 17.2 17.1 16.4 16.8
Payroll tax 14.1 15.2 14.3 13.4 14.4 15.0 14.4
Undecided 10.3 5.8 4.8 8.3 6.9 9.0 8.1
Local taxes, duties 5.6 7.1 6.2 5.4 6.3 6.3 6.1
Other 2.3 2.1 2.0 1.8 2.3 2.3 2.2
Excise duty 1.8 2.3 1.5 1.8 2.1 1.7 1.9
Total 100% 100% 100% 100% 100% 100% 100%
Tax
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ANNEX 3
Table 33
Firm Identification of Violations by Customs Officials, Detailed Information
(as a % of firms engaged in import-export operations)
Formalizing customs documents 21.5 60.4 18.1
Customs control 20.4 60.4 19.2
Crossing the state border 17.5 56.9 25.5
Sanitary control 13.9 59.1 27.0
Certification of imported goods 11.7 55.1 33.2
Obtaining a certificate of product origin 9.1 64.2 26.6
Exceed 15 days deadline to process import license 8.8 56.4 34.9
Exceed 15 days deadline to process export license 6.8 56.0 37.2
Obtaining quotas 6.0 50.5 43.4
Veterinary control 4.2 50.0 45.8
Table 32
Calculating Which Taxes/Duties is Most Problematic for
Planning Your Business Activities?
(as a % of all firms)
Ave
rage
Firm Size Firm Origin
Small Medium Large State-Owned Privatized Private
Corporate income tax 32.1 40.7 41.4 34.9 36.1 36.1 35.8
VAT 26.1 35.5 41.0 31.0 30.7 31.5 31.1
None 27.7 19.7 15.6 24.6 24.0 22.7 23.6
Undecided 17.1 13.1 12.8 14.6 15.6 15.6 15.4
Payroll tax 10.2 12.4 10.8 6.9 10.3 13.4 10.8
Local taxes, duties 5.6 6.9 6.4 5.5 6.1 6.3 6.1
Other 1.4 1.2 1.8 1.1 1.2 1.8 1.4
Excise duty 1.4 1.6 1.1 1.2 1.8 1.1 1.4
Total 100% 100% 100% 100% 100% 100% 100%
Yes, a violationoccurred
No Difficult toanswer
Tax
Procedure
ANNEX 3
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Table 34
Regional Differences in Perceptions of the Permit Process, by Firm Size
(as a % of firms citing the permit process as a major or significant barrier)
City Small Medium Large Average
Kirovohrad 64.6 55.0 60.0 61.4
Lviv 68.4 68.4 29.4 61.3
Ternopil 56.4 33.3 66.7 54.5
Dnipropetrovsk 44.6 62.1 70.8 53.5
Luhansk 50.8 52.4 53.8 51.6
Kiev 47.7 57.1 41.7 49.4
Kherson 50.0 38.1 45.5 46.2
Mykolayiv 48.3 37.5 33.3 44.6
Zaporizhia 36.4 66.7 35.3 43.0
Cherkasy 41.5 57.9 21.4 41.9
Chernivtsi 37.5 47.6 46.2 41.9
Kharkiv 43.3 33.3 34.6 39.1
Vinnytsia 46.8 33.3 21.4 39.0
Khmelnytsky 32.3 32.0 50.0 37.5
Odesa 32.8 52.6 37.5 37.5
Poltava 22.2 42.1 55.0 36.0
Rivne 33.3 38.5 38.5 35.7
Donetsk 40.3 27.3 26.9 35.0
Simferopol 33.3 33.3 30.0 32.7
Uzhgorod 34.6 36.8 11.1 32.5
Sumy 34.9 20.0 29.4 31.4
Ivano-Frankivsk 41.3 16.7 15.4 31.2
Lutsk 30.0 28.6 33.3 30.1
Chernihiv 30.0 25.9 9.1 25.6
Zhytomyr 15.6 22.7 20.0 18.1
Average 41.4 42.1 38.7 41.1
ANNEX 3
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AverageFirm Size
Table 35
Share of Firms Citing Specific Permits as Difficult or Very Difficult to Obtain
by Firm Size, 2001
(as a % of firms obtaining each permit in 2001)
Small Medium Large
Land tract allotment permit 61.6 59.7 57.9 60.4
Construction permit 43.5 44.8 50.7 45.3
Permit to refurbish premises 42.8 41.0 40.8 41.9
Approval from Housing and Communal Property Department 38.7 32.5 35.3 36.6
Permit from Fire Department 31.3 29.0 29.5 30.4
Permit for trade and customer service outlets 26.9 24.8 36.2 28.1
Approval from Road Police 28.3 31.3 18.8 27.5
Permit from State Sanitary and Epidemiological Service 26.6 27.3 27.0 26.9
Permit from Labor Protection Department 26.3 24.7 26.8 26.0
Permit to occupy premises 24.8 24.8 20.8 24.2
Permits
ANNEX 3
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Table 36
Waiting Period to Receive Specific Permits by Firm Size and Origin
(number of working days)
26.9 26.8 28.0 25.5 30.5 30.6 21.8
16.8 13.7 25.8 13.0 16.6 16.9 16.9
13.5 15.7 11.2 10.3 19.4 12.1 12.3
8.8 8.1 9.2 10.9 5.8 9.9 9.3
8.1 6.6 10.2 9.9 7.3 7.1 9.3
7.6 7.3 7.7 8.4 8.3 6.1 8.5
7.4 6.4 8.2 9.5 8.7 7.2 7.0
7.0 6.2 7.6 9.1 5.8 6.4 8.1
7.0 6.7 6.9 8.3 7.5 7.4 6.4
4.3 4.2 4.7 4.2 4.5 4.0 4.5
Permit for land tract allotment
Construction permit
Permit to refurbish premises
Permit to occupy premises
Permit for trade and customer service outlets
Approval from Housing andCommunal Property Department
Permit from Labor ProtectionDepartment
Permit from Fire Department
Permit from State Epidemiological Service
Road Police permit to use vehiclefor business purposes
Small Medium Large
Firm Size Firm OriginAve
rage
State-Owned
Privatized PrivatePermits
ANNEX 3
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Table 37
Waiting Period to Receive Specific Permits, Regional Variations
(in number of working days)
Vinnytsia 20.6 20.2 29.2 5.8 9.4 8.8 6.1 5.1 6.7 5.5 5.2
Dnipropetrovsk 22.4 10.1 8.9 4.6 5.0 4.5 5.5 4.2 3.4 3.0 3.1
Donetsk 56.3 23.5 25.1 18.5 6.5 5.0 8.9 7.5 10.2 4.1 6.0
Zhytomyr 23.9 11.2 14.7 9.8 6.7 9.5 15.8 5.6 5.9 4.1 3.3
Zaporizhia 13.9 8.5 6.2 4.9 3.8 4.5 3.0 6.0 4.4 4.0 4.4
Ivano-Frankivsk 7.0 9.0 1.3 4.0 4.6 2.2 5.0 4.7 4.8 3.0 3.2
Kiev 12.2 29.8 9.5 6.7 8.9 11.0 6.0 8.9 8.2 5.2 4.8
Kirovohrad 10.2 16.5 7.2 11.6 4.9 6.5 7.2 6.2 6.7 2.8 4.5
Luhansk 18.1 9.3 5.0 3.7 5.3 5.6 3.9 4.8 12.9 3.3 2.9
Lutsk 79.7 36.1 2.2 5.4 4.6 2.5 14.6 7.3 4.4 2.2 3.2
Lviv 60.8 20.5 13.4 5.3 6.1 5.3 2.7 4.0 4.7 4.8 4.6
Mykolaiv 22.5 11.2 20.0 8.1 7.7 7.2 8.1 5.1 5.7 5.7 4.7
Odesa 23.2 6.0 15.4 24.6 20.3 7.7 15.6 15.2 12.5 4.2 4.5
Poltava 19.0 29.3 16.7 6.9 9.6 9.1 4.5 4.8 5.3 3.2 4.4
Rivne 17.0 15.1 7.0 6.1 6.0 10.8 6.2 4.3 5.0 5.4 4.0
Simferopol 25.9 7.5 23.4 5.3 9.3 13.8 12.1 5.7 8.6 4.5 3.4
Sumy 18.5 53.0 15.0 17.2 7.8 6.4 11.1 10.0 10.3 6.1 2.5
Ternopil 40.0 17.5 9.9 3.8 5.8 7.3 11.8 4.7 4.8 5.4 5.3
Uzhgorod 13.9 15.7 37.6 8.2 4.0 7.5 8.6 6.0 4.9 6.4 4.3
Kharkiv 30.1 8.5 5.6 10.8 11.0 8.3 8.0 13.0 7.9 5.3 5.4
Kherson 5.0 9.4 5.8 4.0 4.7 1.9 4.2 7.3 4.1 3.9 3.4
Khmelnytsky 5.5 11.9 2.8 4.2 5.4 2.5 3.7 4.0 4.4 2.8 3.2
Cherkasy 65.3 26.7 21.8 28.5 8.5 15.7 4.8 7.7 5.6 5.0 3.3
Chernivtsi 30.0 15.4 12.9 4.7 41.1 12.8 7.8 12.2 12.0 6.2 6.7
Chernihiv 2.3 12.4 13.9 3.9 4.5 3.0 4.1 7.0 7.3 3.3 6.1
National Average 26.9 16.8 13.5 8.8 8.1 7.6 7.4 7.0 7.0 4.5 4.3
Land
Con
struction
Ren
ovation
Occ
upan
cy
Trad
e/Se
rvice
Outlets
Hou
sing
/Com
mun
alProp
erty
Hea
lth
and
Safety
Fire D
epartm
ent
Sanitation
Roa
d Po
lice
Roa
d Po
lice
-
Business Veh
icle
City
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14.5 16.0 13.0 11.4 13.0 11.2 18.0
13.9 15.1 12.5 12.3 10.7 14.0 15.3
13.4 11.9 14.8 15.9 11.1 9.1 17.6
13.1 15.1 8.6 12.6 11.2 11.0 15.6
12.0 15.5 6.0 9.9 7.6 10.7 15.0
11.5 12.0 11.5 10.1 7.9 9.6 14.5
9.7 10.1 5.5 14.7 10.3 8.3 10.7
9.0 11.6 5.2 5.9 6.3 7.1 12.0
7.4 9.6 6.2 1.3 3.6 4.9 11.5
7.3 8.0 8.2 3.9 6.6 6.1 8.7
State Fire Department permit
Land tract allotment permit
Road Police approval
Sanitary and EpidemiologicalService permit
Permit to refurbish premises
Construction permit
Permit to place trade and serviceoutlets
Building Maintenance Officeapproval
Permit to occupy premises
Permit from Labor Protection
Department
Small Medium Large
Firm Size Firm Origin
Ave
rage
State-Owned Privatized Private
Table 38
Share of Firms Making Unofficial Payments During the Permit Process,
by Firm Size and Origin
(as a % of firms obtaining permits in 2001)
Permit
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Table 39
Perceptions of Licensing as a Major or Significant Barrier, Regional Variations by Firm Size
(as a % of firms citing licensing as relevant to their business activities)
City Small Medium Large Average
Cherkasy 53.1 57.1 50.0 53.8
Lviv 53.7 50.0 38.5 50.0
Kirovograd 50.0 46.2 46.2 48.3
Chernivtsi 46.9 40.0 66.7 48.2
Kharkiv 46.2 35.7 50.0 44.9
Zaporizhia 48.6 38.9 33.3 42.6
Dnipropetrovsk 40.4 33.3 60.0 41.3
Ternopil 37.0 36.4 50.0 40.4
Uzhgorod 43.9 35.7 0.0 39.0
Simferopol 37.5 50.0 30.0 38.2
Kiev 33.9 40.0 46.2 37.3
Lugansk 37.2 40.0 33.3 37.3
Odesa 31.8 44.4 42.9 36.8
Donetsk 40.4 21.4 28.6 34.1
Vinnytsia 40.0 31.3 9.1 32.3
Khmelnytsky 26.1 15.0 54.5 32.3
Kherson 36.7 22.2 25.0 30.0
Rivne 35.3 19.0 22.2 28.1
Chernigiv 34.4 16.7 20.0 27.3
Poltava 13.0 45.5 33.3 26.5
Sumy 18.9 33.3 29.4 24.2
Lutsk 22.0 16.7 42.9 23.3
Ivano-Frankivsk 29.3 7.7 11.1 22.2
Zhytomyr 15.0 25.0 42.9 20.9
Mykolayiv 22.2 0.0 33.3 19.6
National Average 36.0 32.1 37.6 35.3
Íàçâà ðîçä³ëó
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ANNEX 3
Table 40
Licensing Activity by Type of License
Licens
Number ofLicensesReceived
% of AllLicenses Received
% of LicensedFirms
%ExperiencingProblems
Trade in alcoholic beverages 324 28.8 42.5 25.3
Trade in tobacco products 207 18.4 27.2 21.3
Construction activity 156 13.9 20.5 21.8
Passenger transportation services 122 10.8 16.0 10.7
Foreign economic activity 81 7.2 10.6 19.8
Banking activity 28 2.5 3.7 14.3
Operation of domestic and foreign tours 26 2.3 3.4 19.2
Manufacture of medicines 22 2.0 2.9 31.8
Insurance activity 22 2.0 2.9 4.5
Manufacture of pesticides and agricultural chemicals 14 1.2 1.8 42.9
Electric and nuclear power 14 1.2 1.8 14.3
Manufacture of tobacco products 14 1.2 1.8 35.7
Medical practice 13 1.2 1.7 30.8
Manufacture of ethyl, cognac and alcoholic beverages 13 1.2 1.7 23.1
Professional activity in the securities market 11 1.0 1.4 27.3
Customs broker's activity 9 0.8 1.2 11.1
Education services 8 0.7 1.0 37.5
Financial services 7 0.6 0.9 14.3
Physical culture, recreation and sports activity 5 0.4 0.7 n.a.
Intellectual property 4 0.4 0.5 n.a.
Manufacture of veterinary medicines 3 0.3 0.4 n.a.
Radio and television broadcasting 3 0.3 0.4 n.a.
Other 20 1.8 2.5 n.a.
Total 1126 100% 148 21.4%
ANNEX 3
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Table 41
Registration Procedures as Major or Significant Obstacles
(as a % of firms registering)
20.9 21.6 19.1 20.8 15.8 15.4 28.5
14.8 14.1 12.9 19.6 12.6 11.8 18.7
8.7 9.3 6.3 10.1 5.7 7.9 11.0
6.9 6.9 5.7 8.6 3.9 6.9 8.5
5.5 5.5 6.0 4.9 3.7 6.0 5.9
26.8 26.8 25.5 28.6 21.0 19.7 36.0
10.2 11.5 7.7 9.3 9.1 7.7 12.9
8.5 9.5 7.1 7.1 5.6 8.9 9.6
28.3 28.4 28.4 28.2 23.0 22.6 36.0
20.3 21.0 19.2 19.2 14.9 17.2 25.6
18.5 20.0 15.8 17.0 16.4 17 20.9
16.5 17.2 14.2 16.9 14.5 14.2 19.5
9.4 11.6 4.8 7.7 6.9 8.9 11.0
Pre-Registration Procedures
Drafting all documents required forregistration
Lack of complete information about registra-tion stages and departments that participatein the registration/ re-registration
Lack of information about consult-ants providing paid registration serv-ices
Notarization of requireddocuments
Obtaining a landlord's letter concerningthe firm�s legal address
Registration Procedures
Long lines of people/ limited num-ber of public days at the registrationsection
The rental agreement or transfer ofthe premises into the business sub-ject's ownership
Payment of the charter capital
Post-Registration Procedures
Long lines of people/ limited num-ber of public days at the State TaxAdministration
Long lines of people/ limited numberof public days at the Pension Fund
Tax police checks on the foundersof start-up firms
Long lines of people/ limited num-ber of public days at the StatisticsDepartment
Obtaining the permit to manufacturethe seal and stamps
Small Medium Large
Firm Size Firm Origin
Ave
rage
State-Owned
Privatized Private
ANNEX 3
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Table 42
Number of Days Necessary to Complete Post-registration Procedures, by Agency,
Regional Variations
StatisticsOfficeCity
PensionFund
UnemploymentFund
AccidentInsurance
Fund
TemporaryDisabilityInsurance
Fund
TaxAdministration
InternalAffairsOffice
Bank Total
Vinnytsia 3 4 4 3 3 5 8 3 33
Dnipropetrovsk 5 3 1 1 3 4 5 3 25
Donetsk 2 1 1 1 2 2 4 2 15
Zhytomyr 3 3 2 5 1 5 4 3 26
Zaporizhya 3 2 2 1 1 2 3 2 16
Ivano-Frankivsk 1 1 1 1 1 2 3 2 12
Kiev 3 3 2 2 3 5 4 2 24
Kirovograd 1 2 1 2 2 3 3 2 16
Lugansk 3 1 1 1 1 1 1 1 10
Lutsk 1 2 1 1 1 3 2 2 13
Lviv 2 2 2 1 2 4 3 2 18
Mykolayiv 3 2 2 2 2 4 4 3 22
Odesa 3 4 4 4 3 5 2 3 28
Poltava 2 2 2 2 1 6 4 1 20
Rivne 4 4 3 3 4 6 4 1 29
Simferopol 3 1 2 3 2 4 3 3 21
Sumy 3 1 1 1 1 3 3 2 15
Ternopil 2 1 1 1 1 3 4 1 14
Uzhgorod 4 3 3 2 3 3 3 2 23
Kharkiv 3 3 3 3 3 5 3 3 26
Kherson 2 1 1 2 1 4 3 1 15
Khmelnytsky 2 2 2 2 1 3 2 1 15
Cherkasy 3 3 2 2 1 5 4 3 23
Chernigiv 2 2 2 2 1 2 2 1 14
Chernivtsi 3 2 2 1 1 3 2 1 15
National Average 2 2 2 2 2 4 3 2 19
