Ukraine approves first edition of tax changes, collateral collection ban

Макроэкономика 26.12.2014 Ukraine’s parliament approved in the first reading on Dec. 25 most of the Cabinet tax initiatives that are critical for the 2015 spending plan. In particular, parliament approved a law on transfer pricing, which targets closing tax evasion schemes; reduced to 9 from 22 primary taxes; and imposed a tax on non-critical imports (10% on food and 5% on other imports). Parliament also approved a schedule of payroll tax reduction, while simultaneously increasing responsibility for tax evasion, and a tax compromise bill that provides for legalizing shadow earnings by reducing taxes on those incomes (thereby providing incentive to legalize them). Parliament also introduced on Dec. 25 changes to a law on tax code amendments (refer to our news of Dec. 24), eliminating an item that denies grain export VAT it planned to extend the measure from end-2014 to end-2017. The Rada is going to vote to approve the 2015 state budget on Dec. 30, by which time, all legislative initiatives must be approved in the second reading. Other legislative initiatives in relation to the budget might be introduced during this time. Among other important initiatives, the Rada approved in the first reading a moratorium on the confiscation of apartments pledged as collateral for mortgages in foreign currency. Alexander Paraschiy: We have a mixed impression of the authorities’ legislative initiatives. Fighting against tax optimization via transfer pricing, reducing the number of taxes (which is actually the reclassification of taxes), as well as a law on tax compromise, are important steps that can be classified as reforms. However, we don’t believe such measures as the payroll tax reduction, disregarding the fact that it was widely demanded by the business community, will reach the results expected by authorities (the UAH 1.3 bln increase in tax collections): it will be relevant only for those wages that are more than double the minimum wage, which means a large part of businesses will not feel this tax reduction (businesses usually officially pay near minimum wages) and thus will not have incentive for legalizing wages. Also, a new tax on imports looks controversial to us. We can hardly expect it to generate the targeted level of income (the Finance Ministry anticipated UAH 17.6 bln in extra revenue) due to falling import volumes. At the same time, it will definitely generate more smuggling into the country. The law forbidding confiscation of mortgaged property on defaults will cost extra subsidies from the budget for the bailout of bankrupt banks. That’s besides ruining basic banking principles and Ukraine’s entire banking system. The increased chance that grain exporters will be eligible for VAT reimbursement is encouraging news for Kernel (KER PW) and Ukrainian farming companies. The mentioned laws have been approved only in the first reading, leaving some hope that substantial corrections might be introduced before final voting.