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Business asks to revise legislative changes concerning taxation

04/ 06/ 2021
  This week, the Verkhovna Rada registered draft law №5600, which proposes to amend the Tax Code of Ukraine and other tax regulations. According to EBA experts, the document does not take into account the current economic and financial condition of the business and may create a disproportionate burden on the economy of Ukraine. Business is concern about the rule which restricts large taxpayers to carry forward losses. Thus, in the case of banks, the losses of previous years reduce the bank regulatory capital affecting the economic standards of banks. However, the NBU, as the state regulator of banking institutions, can decide to terminate the banks operations in case of its non-compliance and unprofitable activities. It can also require from troubled banks additional capitalization measures, suspend the banking license, introduce the requirements for increased reserve payments, prohibit the payment of dividends, limit / suspend payments under certain agreements with persons who have a significant share or indirect significant participation in the bank, or even revoke the banking license. One of the main arguments for restricting the recognition of carryforward losses is that such losses may be fictitious, artificially generated to minimize the company’s financial result for reduced tax burden. However, according to the EBA member companies, the losses of companies in 2014-2015 were mainly accumulated for an objective reason, namely due to the devaluation of the hryvnia. Companies, which import the equipment, suffered great losses, as payment for it was already made at the new rate. And despite the losses, during 2015-2020 the companies continued to invest in the country and work here. At present, the problem of attracting financing and investment is acute for all countries in the world, so the stability of the tax system and legal certainty come to the fore, as these are the factors that contribute to increasing the investment attractiveness of the country. Therefore, according to the Association, the introduction of the rule of limiting the accumulation of losses in the short and long term will worsen the investment attractiveness of the country precisely because of the unpredictability of tax legislation not only for the future but also for past tax periods. Also, the business does not support the proposed changes, which impose restrictions on the accumulation of stocks by tobacco manufacturers before the rise of excise tax rates by setting a special coefficient of 1.5 to the excise tax on tobacco products sales that are in excess of 115% of average monthly sales of such products or its import for the previous 9 months. In case such changes are adopted, due to higher tax rates, producers and importers of tobacco products will be forced to artificially reduce sales, regardless of market demand. This, in turn, can lead to restrictions on business freedom and worsening competition in the market. Besides, the abolition of the procedure for suspending licenses for excisable goods operations and the expansion of the grounds for revocation of these licenses, according to business representatives, will complicate the situation for both taxpayers and regulators. At present, the procedure for suspending licenses implies studying the taxpayer’s actual circumstances and promptly restoring the effect of a license if the taxpayer eliminates the grounds for its suspension without the need to revoke the license. Moreover, changes to the beer sales excise tax calculation methodology require the establishment of a sufficient transition period for their implementation. The initiative to introduce an excise tax on the sale of RES-produced electricity is also of concern to the international and Ukrainian business community, as the introduction of additional taxes on electricity from RES will lead to non-compliance with the agreements between the CMU and RES market participants. According to preliminary calculations, the introduction of excise duty will lead to additional costs for RES producers of UAH 1.63 billion annually. The introduction of excise duty also actually reduces the size of the green tariff by an additional 3.2%, while the Memorandum sets out the maximum levels of reduction of green tariffs. Thus, the excise tax on electricity from RES may lead to the termination of already started investment projects and will hinder the achievement of the strategic goal of our country, in particular, achieving 25% of the share of electricity from RES in energy balance of Ukraine. Moreover, such changes should be discussed with the Energy Community Secretariat before adoption, which, unfortunately, has not been done so far. Also, from July 1, 2021, the draft law provides for the indexation of rent for the use of radiofrequency resources of Ukraine at 5%. However, the draft law did not take into account that the Action Plan on Creating Conditions for the Development of Mobile Broadband Access, approved by the Cabinet of Ministers, established a moratorium on indexation of rent for the use of radiofrequency resource for radio communication of the cellular radio type for 48 months. And telecommunications operators are making significant investments in infrastructure development, expanding the coverage of quality telecommunications services to the population and territories, the volume of which, according to rough estimates of industry experts, will be about 15 billion UAH in the next few years. At the same time, businesses are forced to state that such significant and additional investment obligations are imposed on mobile operators of Ukraine in comparison with the approved investment plans against the background of a significant tax burden. Therefore, according to business representatives, any changes in rental rates are currently premature. At the same time, the draft law maintains a simultaneous increase in environmental tax rates, land fees, and rent payments. Although in 2020 Ukrainian industry fell by 5.2%, companies continued to invest in environmental measures. The companies have invested UAH 41.3 billion in environmental protection, while the mining and metallurgical industries have even increased their contribution by 27% and plan to further expand funding for environmental issues due to new international climate and environmental challenges. However, the fiscal initiatives proposed in the middle of the year may not only lead to a revision of the investment plans of large budget-generating enterprises but also give a negative signal to potential foreign investors who could become drivers of decarbonization of the Ukrainian economy. Moreover, the threefold increase in eco-tax rates for CO2 emissions does not look like a concern for the environment, but as a means of replenishing the state budget as the issue of targeted use of these revenues has not yet been resolved. Besides, the business has certain comments on the administration of taxes and fees, the RSO application, etc. Thus, taking into account the principle of stability of tax legislation, the changes proposed by the draft law cannot be made later than 6 months from the beginning of the new budget period, in which the new rules will apply. Meanwhile, the draft currently implies the entry into force of the rules from July 1st, so we propose to specify the effective date from January 1, 2022. The European Business Association appeals to the Prime Minister of Ukraine – Mr. Denys Shmyhal and the Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy - Mr. Danylo Hetmantsev to take into account the business proposals, which were sent by an official letter, and not to violate the principles of stable tax policy. We hope that the voice of a business that works and pays taxes in the country will be heard!   Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

This week, the Verkhovna Rada registered draft law №5600, which proposes to amend the Tax Code of Ukraine and other tax regulations. According to EBA experts, the document does not take into account the current economic and financial condition of the business and may create a disproportionate burden on the economy of Ukraine.

Business is concern about the rule which restricts large taxpayers to carry forward losses. Thus, in the case of banks, the losses of previous years reduce the bank regulatory capital affecting the economic standards of banks. However, the NBU, as the state regulator of banking institutions, can decide to terminate the bank’s operations in case of its non-compliance and unprofitable activities. It can also require from troubled banks additional capitalization measures, suspend the banking license, introduce the requirements for increased reserve payments, prohibit the payment of dividends, limit / suspend payments under certain agreements with persons who have a significant share or indirect significant participation in the bank, or even revoke the banking license. One of the main arguments for restricting the recognition of carryforward losses is that such losses may be fictitious, artificially generated to minimize the company’s financial result for reduced tax burden. However, according to the EBA member companies, the losses of companies in 2014-2015 were mainly accumulated for an objective reason, namely due to the devaluation of the hryvnia. Companies, which import the equipment, suffered great losses, as payment for it was already made at the new rate. And despite the losses, during 2015-2020 the companies continued to invest in the country and work here.

At present, the problem of attracting financing and investment is acute for all countries in the world, so the stability of the tax system and legal certainty come to the fore, as these are the factors that contribute to increasing the investment attractiveness of the country. Therefore, according to the Association, the introduction of the rule of limiting the accumulation of losses in the short and long term will worsen the investment attractiveness of the country precisely because of the unpredictability of tax legislation not only for the future but also for past tax periods.

Also, the business does not support the proposed changes, which impose restrictions on the accumulation of stocks by tobacco manufacturers before the rise of excise tax rates by setting a special coefficient of 1.5 to the excise tax on tobacco products sales that are in excess of 115% of average monthly sales of such products or its import for the previous 9 months. In case such changes are adopted, due to higher tax rates, producers and importers of tobacco products will be forced to artificially reduce sales, regardless of market demand. This, in turn, can lead to restrictions on business freedom and worsening competition in the market.

Besides, the abolition of the procedure for suspending licenses for excisable goods operations and the expansion of the grounds for revocation of these licenses, according to business representatives, will complicate the situation for both taxpayers and regulators. At present, the procedure for suspending licenses implies studying the taxpayer’s actual circumstances and promptly restoring the effect of a license if the taxpayer eliminates the grounds for its suspension without the need to revoke the license.

Moreover, changes to the beer sales excise tax calculation methodology require the establishment of a sufficient transition period for their implementation.

The initiative to introduce an excise tax on the sale of RES-produced electricity is also of concern to the international and Ukrainian business community, as the introduction of additional taxes on electricity from RES will lead to non-compliance with the agreements between the CMU and RES market participants. According to preliminary calculations, the introduction of excise duty will lead to additional costs for RES producers of UAH 1.63 billion annually. The introduction of excise duty also actually reduces the size of the “green” tariff by an additional 3.2%, while the Memorandum sets out the maximum levels of reduction of “green” tariffs. Thus, the excise tax on electricity from RES may lead to the termination of already started investment projects and will hinder the achievement of the strategic goal of our country, in particular, achieving 25% of the share of electricity from RES in energy balance of Ukraine. Moreover, such changes should be discussed with the Energy Community Secretariat before adoption, which, unfortunately, has not been done so far.

Also, from July 1, 2021, the draft law provides for the indexation of rent for the use of radiofrequency resources of Ukraine at 5%. However, the draft law did not take into account that the Action Plan on Creating Conditions for the Development of Mobile Broadband Access, approved by the Cabinet of Ministers, established a moratorium on indexation of rent for the use of radiofrequency resource for radio communication of the “cellular radio” type for 48 months. And telecommunications operators are making significant investments in infrastructure development, expanding the coverage of quality telecommunications services to the population and territories, the volume of which, according to rough estimates of industry experts, will be about 15 billion UAH in the next few years. At the same time, businesses are forced to state that such significant and additional investment obligations are imposed on mobile operators of Ukraine in comparison with the approved investment plans against the background of a significant tax burden. Therefore, according to business representatives, any changes in rental rates are currently premature.

At the same time, the draft law maintains a simultaneous increase in environmental tax rates, land fees, and rent payments. Although in 2020 Ukrainian industry fell by 5.2%, companies continued to invest in environmental measures. The companies have invested UAH 41.3 billion in environmental protection, while the mining and metallurgical industries have even increased their contribution by 27% and plan to further expand funding for environmental issues due to new international climate and environmental challenges. However, the fiscal initiatives proposed in the middle of the year may not only lead to a revision of the investment plans of large budget-generating enterprises but also give a negative signal to potential foreign investors who could become drivers of decarbonization of the Ukrainian economy.

Moreover, the threefold increase in eco-tax rates for CO2 emissions does not look like a concern for the environment, but as a means of replenishing the state budget as the issue of targeted use of these revenues has not yet been resolved.

Besides, the business has certain comments on the administration of taxes and fees, the RSO application, etc.

Thus, taking into account the principle of stability of tax legislation, the changes proposed by the draft law cannot be made later than 6 months from the beginning of the new budget period, in which the new rules will apply. Meanwhile, the draft currently implies the entry into force of the rules from July 1st, so we propose to specify the effective date from January 1, 2022.

The European Business Association appeals to the Prime Minister of Ukraine – Mr. Denys Shmyhal and the Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy – Mr. Danylo Hetmantsev to take into account the business proposals, which were sent by an official letter, and not to violate the principles of stable tax policy. We hope that the voice of a business that works and pays taxes in the country will be heard!

 

Be the first to learn about the latest EBA news with our Telegram-channel EBAUkraine.

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