How Ukrainian businesses can avoid being hurt after EU accession and how transition periods can help
A recent Business and Government Forum, held this time under the slogan "Think small first", featured a presentation of an analytical study examining the experience of new EU member states in obtaining temporary exemptions from certain EU legal requirements when they joined the bloc.
This issue is of utmost importance for Ukraine.
In terms of living standards and institutional development, Ukraine is falling behind not only the EU average but even countries with the lowest levels of development.
This makes transition periods for aligning with certain EU rules critically important.
Read more about what risks Ukrainian businesses could face after EU accession and how former new EU member states addressed them through transition periods in the article by Volodymyr Dubrovskiy, CASE Ukraine senior economist: EU rules as a challenge: what transition periods Ukrainian businesses need to survive after accession.
A significant share of the rules that EU member states are required to implement are considered justified and well designed, for example, those relating to competition protection.
At the same time, many other rules could be problematic to apply in Ukraine: excessive regulatory and administrative burdens on businesses; identical costs for equipment, certification, reporting and inspections regardless of the size of the enterprise; and ambiguity in EU regulations.
In Ukraine's case, all of this is compounded by poverty, which has been deepened by the war.
Transition periods can help address these challenges. The study shows that all the countries examined received transition periods of up to eight years for implementing the most problematic EU requirements.
As a rule, these periods were linked to the modernization of production facilities and infrastructure and included the provision of necessary assistance from the EU.
There are also examples of transition periods for income taxation ( eight years for Bulgaria) and even excise duties, in the cases of Bulgaria and Lithuania. Other areas covered by transitional arrangements included assistance to businesses, particularly small businesses (for 7.5 years in Poland) adaptation of production to EU standards in Hungary, and numerous infrastructure upgrades, especially in waste management.
A particular challenge for Ukraine is that the state does not provide significant support to micro, small and medium-sized enterprises (MSMEs) through mechanisms that are incompatible with EU law.
Ukraine needs to preserve its simplified tax system. At the same time, it would make sense to establish a transition period for introducing the threshold above which an entrepreneur must register as a VAT payer. It is important to bear in mind that Ukraine has a uniquely burdensome VAT administration system.
Support for small and micro businesses through preferential (subsidised) loans under the "5-7-9" programme appears compatible with EU rules, provided the programme is limited specifically to MSMEs, which was, in fact, its original purpose.
For large businesses, however, Ukraine will probably have to abandon "investment nannies" involving tax breaks, subsidies and incentives for industrial parks, "localisation" requirements in public procurement and a number of other programmes that were recognised from the outset as harmful, including because of their corrupt and lobbying-driven nature. In particular, these programmes explicitly favour large businesses.
The same applies even more strongly to "cashback" schemes for domestically produced goods.
Therefore, in this area, Ukraine should introduce EU rules without exemptions or transition periods.
Overall, an analysis of the experience of post-communist countries that have recently joined the EU or are currently negotiating accession shows that national negotiators have a good chance of defending the interests of domestic MSMEs during the negotiations. What matters is that their position be based on a professional understanding of the national interest, supported by facts and evidence, rather than pressure from lobbyists, which is often driven by personal preferences – not to mention corrupt interests.
At the same time, Ukraine should accelerate the implementation of those elements of EU law that benefit small and medium-sized businesses, starting with the foundational Small Business Act, including provisions that promote competition by ensuring a level playing field for MSMEs.