Reducing corruption and tax avoidance with a modern public finance system

Project description

Title: Good Financial Governance
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ), UK Aid
Country: Ukraine
Lead executing agency: Ministry of Finance of Ukraine
Overall term: 2014 to 2019

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Context

In 2014, Ukraine signed an Association Agreement with the European Union (EU). As a result of this, the Government of Ukraine has to implement a programme of reforms. These will trigger comprehensive changes in the country. One example of this is the restructuring of the public finance system. The objective is to manage the Ukrainian national budget more effectively with the aid of European and international standards. It is planned that tax reform will mobilise domestic resources for sustainable development. Ukraine is also fighting corruption in the country and improving the effectiveness of its public administration.

Despite some considerable successes, the public finance system still faces major challenges: the State Fiscal Service, Ministry of Finance, Parliament and the Accounting Chamber of Ukraine all need to modernise their working procedures and make them more transparent. The State Fiscal Service does not operate in a manner that is responsive to citizens’ needs.

The Ministry of Finance has difficulties in coordinating the financial budgeting process with the State Fiscal Service and the sectoral ministries. Corruption is a problem at all levels. The level of motivation among public service employees is poor as they are not held in high regard within society, their earnings are low and they have limited career prospects.

Objective

The Ministry of Finance and the sectoral ministries have introduced and implemented European standards in their financial planning. As a result, the public finance system has become more transparent, more effective and more accountable.

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Approach

The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH is working on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) to support the Ukrainian Ministry of Finance in its efforts to initiate and implement reforms. The primary focus here is on providing training for the employees of relevant institutions. International experts share their experience with their Ukrainian partners in training courses on excise and VAT law, for example. Seminars and advisory services help to bring legislation more in line with EU directives.

The Ministry of Finance and the sectoral ministries are modernising the administration of their budgets by introducing and implementing European standards in their financial planning.

This project is strengthening the Accounting Chamber of Ukraine in its capacity to audit public revenues and expenditures independently and in accordance with international standards. For example, the body is providing the members of the parliamentary budgetary committee with the information they need to carry out their oversight duties.

The State Fiscal Service is also being reformed. A greater focus on service and better audit procedures are improving the tax compliance of citizens and companies, and also making tax avoidance more difficult. To improve transparency, the project is also involving actors from civil society and promoting innovative digital solutions. Communication of the implemented reforms by the partners is making successes visible and counteracting reform fatigue.

Results

With the support of GIZ, three internet platforms have been expanded since 2015: ProZorro, ProZorro.Sale and the E-Data web portal.

On ProZorro citizens can view public tenders. Since its introduction, tenders have been attracting 50 per cent more bids. Corruption and embezzlement have been made more difficult, allowing the Ukrainian Government to save more than 1.6 billion Euro in two years.

The Government of Ukraine uses ProZorro.Sale to make the sale of state assets transparent. Around 260,000 Euro was earned via the platform over an 18 month period.

The E-Data web portal allows all Ukrainians to see how funds from the national budget are being spent. 20,000 people use this service every day.

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In 2015, Ukraine only achieved a score of 46 out of 100 in the Open Budget Index, which compares the obligations of national budgets in terms of transparency and accountability; by 2017, this had already improved to 54 points.

The system for assigning public revenue has also become more efficient, and tax compliance has improved significantly. Ukraine has moved up from 164th place in 2014 to 43rd place in 2018 in the World Bank’s global ranking.