10% tax on foreign exchange transactions for imports – how it can affect business

17/ 08/ 2022

Recently, the media unveils the information that the concept of introducing a 10% tax on the purchase of currency for import transactions is being elaborated in Ukraine. Undoubtedly, business is aware of the complexity of the situation that the country experiences now and that the authorities are trying to stabilize the macroeconomic situation and the balance of payments in the state with such an initiative. However, business and people of Ukraine, as well as the whole country, found themselves in unprecedented conditions, and the economic front can be held if we listen to each other and cooperate – to create regulations that are effective and favourable for all stakeholders. Therefore, the European Business Association has analysed the concept of the proposed tax and calls on the state to pay attention to the potential risks and take them into account when making a decision. So, business fears that this initiative may be considered by countries as additional taxation of imports. Namely, a discriminatory measure against goods and services from countries that have granted Ukraine the most favourable terms for exports and cancelled customs duties. Thus, in accordance with Regulation (EU) 2022/870 of the European Parliament and of the Council of May 30, 2022, on temporary measures to liberalize trade, Ukraine must refrain from applying new import duties or any other charges on imports, new quantitative restrictions or equivalent measures, discriminatory administrative measures. Given the abovementioned, the implementation of such a measure requires preliminary negotiations with the EU and the World Trade Organization. Among other things, the additional tax will inevitably be reflected in the prices for the final consumer, which will lead to an increase in the price of products, including socially significant and vital ones, for example, medicines and medical products. Therefore, there is a risk of inflation due to an increase in the cost of the food basket. And, as a result, to support the solvency of citizens, there may be a need to apply compensatory measures. Besides, the mechanism of introducing an additional tax will require coordination with the state-regulated prices (markups) for goods, as it will lead to an increase in the price of the corresponding products, which will require a corresponding adjustment of such prices. Moreover, today some companies are forced to import their own products (or some components for their production) to Ukraine from neighbouring European countries because their production facilities (partly or completely) are located either in the temporarily occupied territory or in the immediate proximity to the combat zone. Therefore, foreign economic activity for such companies is a significant or even the only source of support for their operational activities. And such measures for an additional tax on the purchase of foreign exchange funds can potentially lead to the introduction of a situation where it will be economically unprofitable to return foreign exchange earnings to Ukraine, and Ukraine may lose even more than gain an additional resource. Meanwhile, the list of imported goods includes oil products, gas, coal, gasoline, medicines, active pharmaceutical ingredients for the production of medicines, and telecommunication equipment used for the development and restoration of telecommunication networks. In fact, these are critical imported goods, which cannot be replaced (produced) in Ukraine. Besides, additional taxation of foreign exchange transactions may lead to increased pressure exclusively on transparent businesses that officially pay taxes, and the shadow sector of the economy, which works with cash currency funds or other schemes, will remain in a competitive advantage on the Ukrainian market. At the same time, it is likely that with the introduction of additional import taxation, the volumes of official import operations will further decrease, which will not lead to an increase in tax revenues. At the same time, this may have the opposite effect in the form of an increase in the volume of commodity smuggling. It is obvious that Ukraine needs investments in wartime, but the introduction of additional taxation for companies looks like a tax on investments in Ukraine. Thus, according to the EBA member companies, the increase in the cost of capital investments for those projects that have already started may lead to their suspension. It will also affect the fulfillment of bilateral commitments under investment protection agreements with a number of countries, as such restrictions may violate them. Therefore, the European Business Association appeals to Prime Minister of Ukraine Denys Shmyhal, Deputy Prime Minister of Ukraine - Minister of Economy of Ukraine Yulia Svyrydenko, Minister of Finance of Ukraine Serhii Marchenko, Governor of the National Bank of Ukraine Kyrylo Shevchenko, Chairman of the VRU Committee on Finance, Tax and Customs policy of Ukraine, Danylo Hetmantsev, with a call to fully assess the risks of the introduction of this tax both for the state and, particularly, for business, before making a decision. After all, the lions share of companies given current circumstances may simply not be able to withstand such a burden, because of which the reduction or even the closure of companies may be the result. And these are revenues to the state budget, jobs, and salaries provided by businesses to the people, etc. At the same time, if necessary, the business community offers to hold a broad discussion where companies can voice all possible consequences and effects for business.

Recently, the media unveils the information that the concept of introducing a 10% tax on the purchase of currency for import transactions is being elaborated in Ukraine.

Undoubtedly, business is aware of the complexity of the situation that the country experiences now and that the authorities are trying to stabilize the macroeconomic situation and the balance of payments in the state with such an initiative.

However, business and people of Ukraine, as well as the whole country, found themselves in unprecedented conditions, and the economic front can be held if we listen to each other and cooperate – to create regulations that are effective and favourable for all stakeholders. Therefore, the European Business Association has analysed the concept of the proposed tax and calls on the state to pay attention to the potential risks and take them into account when making a decision.

So, business fears that this initiative may be considered by countries as additional taxation of imports. Namely, a discriminatory measure against goods and services from countries that have granted Ukraine the most favourable terms for exports and cancelled customs duties. Thus, in accordance with Regulation (EU) 2022/870 of the European Parliament and of the Council of May 30, 2022, on temporary measures to liberalize trade, Ukraine must refrain from applying new import duties or any other charges on imports, new quantitative restrictions or equivalent measures, discriminatory administrative measures. Given the abovementioned, the implementation of such a measure requires preliminary negotiations with the EU and the World Trade Organization.

Among other things, the additional tax will inevitably be reflected in the prices for the final consumer, which will lead to an increase in the price of products, including socially significant and vital ones, for example, medicines and medical products. Therefore, there is a risk of inflation due to an increase in the cost of the food basket. And, as a result, to support the solvency of citizens, there may be a need to apply compensatory measures. Besides, the mechanism of introducing an additional tax will require coordination with the state-regulated prices (markups) for goods, as it will lead to an increase in the price of the corresponding products, which will require a corresponding adjustment of such prices.

Moreover, today some companies are forced to import their own products (or some components for their production) to Ukraine from neighbouring European countries because their production facilities (partly or completely) are located either in the temporarily occupied territory or in the immediate proximity to the combat zone. Therefore, foreign economic activity for such companies is a significant or even the only source of support for their operational activities. And such measures for an additional tax on the purchase of foreign exchange funds can potentially lead to the introduction of a situation where it will be economically unprofitable to return foreign exchange earnings to Ukraine, and Ukraine may lose even more than gain an additional resource.

Meanwhile, the list of imported goods includes oil products, gas, coal, gasoline, medicines, active pharmaceutical ingredients for the production of medicines, and telecommunication equipment used for the development and restoration of telecommunication networks. In fact, these are critical imported goods, which cannot be replaced (produced) in Ukraine.

Besides, additional taxation of foreign exchange transactions may lead to increased pressure exclusively on transparent businesses that officially pay taxes, and the shadow sector of the economy, which works with cash currency funds or other “schemes”, will remain in a competitive advantage on the Ukrainian market. At the same time, it is likely that with the introduction of additional import taxation, the volumes of official import operations will further decrease, which will not lead to an increase in tax revenues. At the same time, this may have the opposite effect in the form of an increase in the volume of commodity smuggling.

It is obvious that Ukraine needs investments in wartime, but the introduction of additional taxation for companies looks like a tax on investments in Ukraine. Thus, according to the EBA member companies, the increase in the cost of capital investments for those projects that have already started may lead to their suspension. It will also affect the fulfillment of bilateral commitments under investment protection agreements with a number of countries, as such restrictions may violate them.

Therefore, the European Business Association appeals to Prime Minister of Ukraine Denys Shmyhal, Deputy Prime Minister of Ukraine – Minister of Economy of Ukraine Yulia Svyrydenko, Minister of Finance of Ukraine Serhii Marchenko, Governor of the National Bank of Ukraine Kyrylo Shevchenko, Chairman of the VRU Committee on Finance, Tax and Customs policy of Ukraine, Danylo Hetmantsev, with a call to fully assess the risks of the introduction of this tax both for the state and, particularly, for business, before making a decision. After all, the lion’s share of companies given current circumstances may simply not be able to withstand such a burden, because of which the reduction or even the closure of companies may be the result. And these are revenues to the state budget, jobs, and salaries provided by businesses to the people, etc. At the same time, if necessary, the business community offers to hold a broad discussion where companies can voice all possible consequences and effects for business.