The roots of tax evil
However, the most negative effect of the existence of SEZ’s and the subsequent experiment with companies in the MMC was the influence it had on the tax system in general.
Almost immediately, the public finances of the newly independent Ukraine faced a problem with a very distorted tax legislation. On one hand, the general regime of taxation in the country was punitive for businesses, which is why a big number of companies moved into the shadow economy.  On the other hand, the tax laws were stitched through with a significant number of tax incentives, which became very costly to the state. For example, the VAT exemption in the middle of 1990’s brought about material losses exceeding 2% of GDP.
Під тиском МВФ у середині 1990-х Україна дещо "залатала" дірки в податковому законодавстві й за рахунок цього змогла знизити ставки податків. Наприклад, податок на доходи підприємств був замінений податком на прибуток (стягувався тільки з прибутку підприємства, а не з прибутку і заробітної плати, як раніше), ставка ПДВ була знижена з 28% до 20%, а граничну ставку ПДФО з рекордних 90% знизили спочатку до 60% , а згодом - до 40%.
According to IMF estimates (Report №03 / 173 of July 2003)
, during 2001, the metallurgists "earned" $1 billion USD by underpaying taxes on profits. SEZ and TPD cost the state budget 600,000,000 to 800,000,000 UAH in uncollected taxes. All together, it was about 1% of GDP per year.
But that’s not all. Taking into account other tax benefits, total budget losses for VAT and income tax in 2001 alone amounted to 3.4% of GDP. For comparison, the total budget revenues from these taxes accounted for 9.2% of GDP (IMF, 2003).
This means that for every three hryvnias of tax income into the budget, one hryvnia stayed in the enterprises as a benefit. Furthermore, the introduction of tax incentives significantly leveled the efforts that the government directed at reducing distortions in the field of VAT. From 1998 to 2000, the total amount of benefits of VAT has been reduced from 3.7% GDP to 2.1% GDP. At the same time, the payments of income tax doubled (from 0.8% of GDP to 1.6% of GDP).  Vicious circle
The key negative consequence of this policy was, and partially still is, that the decrease in budgetary income is compensated for by taxpayers. “Ukraine’s tax system has become more bent than those of other transition economies. High tax rates have become inevitable because of a narrow base,” stated a study composed by the IMF in 2003.
An example of this was Ukraine’s failure to implement an agreement with the IMF in 1997 to reduce the marginal rate of personal income tax from 40% to 30%. Six years after it was signed, the reduction had still not been achieved. In turn, high tax rates led to a general deterioration of the investment climate in Ukraine. For this reason, even during the mass creation of SEZ’s in 2000, the IMF strongly opposed such practices.
“IMF believes that we have failed because after the creation of SEZ the budget revenues have significantly decreased,” this was
how Kuchma’s economic advisor Anatoliy Galchinsky had described the Fund’s claims in 2000. SEZs are closing
It took Ukraine 5 years to “come to an agreement” with international creditors. In March 2005, Yulia Tymoshenko’s government received
support from parliament for the draft law “On making amendments to Ukraine’s law on the state budget of Ukraine for 2005 and several other policy documents of Ukraine.” The draft law canceled all favorable customs and tax regimes of entrepreneurial activity on the territories of SEZ. With this decision the parliament hadn’t liquidated SEZ’s, but it had changed their purpose and they were deprived of any special legal regime.
This cancellation was a prerequisite for obtaining a loan from the World Bank
, the terms of which committed Ukraine to reducing the volume of industrial benefits by at least 55% in comparison to January 1, 2002. As for the experiment with MMC, the government themselves cancelled it during President Kuchma’s time. Still, for quite some time, the government and the Ukrainian parliament would go back to the practice of tax benefits for particular industries who had powerful lobbies in parliament.
In 2011, the state budget failed to receive 58.8 billion UAH
, or 4.5% GDP, in revenue due to tax benefits. At that moment, more than 15 industries were receiving tax benefits.
A decisive step in the elimination of sectoral exemptions was finally taken in December 2014. By the beginning of 2017, Ukraine will need to get rid of the last sectoral exemption which is the special regime of taxation in the agricultural sector. The volume of indirect support to this sector amounted to 18 billion UAH in 2015, according to the statistics provided by the Ministry of finances.