TAX MECHANISMS IN FREE ECONOMIC ZONES:OPPORTUNITIES AND CHALLENGES

Abstract

This article examines the theoretical essence and components of the tax mechanism for free economic zones as a tool for stimulating investment activity. It identifies the key components of the mechanism: participants, instruments, conditions and restrictions, and expected outcomes. The interrelationships between the components of the mechanism are analyzed. The main risks associated with the operation of free economic zones in Ukraine are identified, in particular the misuse of tax incentives. Directions for improving the tax mechanism to stimulate investment for post-war economic recovery are proposed. The purpose of the article is to analyze the key opportunities and systemic challenges of the tax mechanism, as well as to identify directions for its reform to enhance the effectiveness of attracting investment for the recovery of Ukraine’s economy. The article employs a range of general and specialized methods: analysis and synthesis – to identify the components of the tax mechanism; a systematic approach – to determine the relationships between these components; the comparative method – to analyze legislation; the formal-logical method – to formulate conclusions; and methods of generalization and abstraction. The results show that the FEZ tax mechanism is a modular system in which restrictions play a key role, acting as a kind of “filter” that prevents the misuse of incentives and distinguishes bona fide investors from participants in shadow schemes. It has been found that the main risks to the functioning of the FEZ tax mechanism in Ukraine are: the lack of an effective system for monitoring the effectiveness of the granted incentives, the historical tendency of businesses to use special regimes for short-term tax optimization without real investments, as well as the conflict between the state’s fiscal goals and the need to provide significant preferences. It has been demonstrated that the effectiveness of the FEZ tax mechanism directly depends on adherence to the “arm’s length” principle in transactions between zone residents and related parties in the mainland territory, as transfer pricing is the primary source of the largest fiscal losses. Based on the analysis, proposals have been formulated to improve the FEZ tax mechanism, including: the introduction of mandatory periodic assessments of the effectiveness of tax incentives, increased liability for violations of operating conditions within the zone, and the harmonization of Ukrainian legislation with European rules. Future research on this topic should focus on developing a quantitative model to assess the impact of specific tax instruments on the actual investment climate in Ukraine, taking into account sector-specific characteristics and European integration requirements.