Draft law №5600 will have a negative impact on business in Ukraine
This conclusion was reached by participants of the EBA Expert Talk «Tax changes: double trouble or a reform?», which took place on June 23. The draft law may be considered tomorrow, June 24, at the relevant committee of the Verkhovna Rada, and we hope that the voice of business and a clear negative attitude to this initiative will be heard and taken into account by MPs when elaborating on this initiative.
Among the participants were representatives of business and Parliament who discussed the potential impact of draft law №5600 in the event of its adoption on certain sectors of the economy and the business climate as a whole. Within three thematic panels, the speakers discussed changes to the tax legislation in terms of administration, as well as the proposed environmental, resource, and excise taxation.
Participants of the first panel on tax administration agreed that the draft law was fraught with fiscal methods that would create unacceptable pressure on the business. The business sees only two acceptable scenarios regarding this draft law – either the draft will not be adopted at all or will be gradually revised with the participation of a wide range of stakeholders and adopted in a timeframe that would not violate the principle of tax stability.
“The Voice faction will not vote for draft law №5600,” stated Yaroslav Zheleznyak, first deputy chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, and a People’s Deputy of Ukraine.
“Nothing comes at surprise about the business community being concerned with this document,” said Volodymyr Kotenko, Head of Tax & Law Practice, EY Ukraine and chairman of the EBA Tax Committee, comparing the current legislative initiative to the controversial draft law №4101, which has been the subject of much debate.
Occasional attempts of the Ministry of Finance and the State Tax Service to introduce overtly fiscal norms in the draft law are a matter of concern. Therefore, to prevent this from becoming a dangerous trend, it is necessary to actively “stop” anti-business initiatives before the vote in the first reading. So far, 7 alternative draft laws have been submitted to draft №5600, the study of which would take time, so the most acceptable option for business is to reject draft law 5600 and develop a new one that covers the resource norms and abolish the norms on increasing administrative pressure altogether.
“It is wrong to make changes in the legislation exclusively for certain individuals,” said Mykola Solsky, chairman of the Verkhovna Rada Committee on Agrarian and Land Policy, a People’s Deputy of Ukraine. The draft law significantly affects the interests of the agricultural sector, and, according to Mr. Solsky, contains both the right things and the impractical ones. There has not been a meeting of the “Servants of the People” to discuss this draft law, but discussions on this topic are already taking place within the party.
Business representatives from Ovostar, IMC, and MHP said that the adoption of the draft law would create a crisis and increase corruption in Ukraine, as it affects a range of industries, including agriculture. Moreover, such initiatives will have a detrimental effect on the development of animal husbandry, namely high value-added products, which run counter to the provisions of the National Economic Strategy 2030 Strategy. This, in particular, will be a blow for the local budgets and regional development, as revenues from the single tax of agricultural producers of the 4th group (simplified taxation system) go to local budgets and income tax and VAT – to the State Budget of Ukraine. Thus, the development of communities will be negatively affected which may increase social tension.
In the second panel, participants discussed the impact of the proposed provisions on raising environmental and resource taxes. Thus, the EBA Industrial Ecology and Sustainable Development Committee Coordinator – Olga Boiko noted that in 2020, despite the difficult economic and social situation in the world, Ukrainian businesses continued to invest in environmental measures. The companies have invested more than 40 billion hryvnias in environmental protection, while the mining and metallurgical industries have even increased their eco contribution by 27% and plan to further expand funding for environmental issues due to new global climate and environmental challenges. And at the same time, there was no revision of tax rates.
In 17 years, taxes in the EU have increased by 52%, ie by 3% annually on average. In 2011, the EU developed a roadmap for a resource-efficient Europe, which clearly outlined the avoidance of labor taxation and the development of environmental taxation. In Ukraine, on the other hand, it is proposed to increase tax rates by some 300%, while the administration and the purpose of the environmental tax are questionable, as currently almost nothing is used to fund environmental measures from this tax. Thus, the last time eco-tax rates on CO2 emissions were raised 25 times in 2019, but Ukraine’s emissions were reduced by less than 10%. These facts once again confirm that environmental taxes in Ukraine, unfortunately, perform a purely fiscal function today, and the proposed increase in rates without comprehensive reform will only increase budget revenues and increase the burden on responsible businesses.
Ukraine cannot achieve European goals in the short term, as the capabilities of the Ukrainian economy must be taken into account when planning environmental goals. At the same time, the selectivity of industries in the current draft law looks odious. Thus, Serhii Plichko, CFO of PJSC ArcelorMittal Kryvyi Rih, said that each year their company produces 10-11 million tons of iron ore concentrate, of which only 2.5-3 million tons are exported. And draft law №5600 proposes to equate the value of ore used in Ukraine to that which is exported for tax purposes. In addition, the business representative complains about the impossibility of strategic long-term planning, because if the draft law is passed, then in the current conditions, the growth rate will be 700-800% for them. Besides, ArcelorMittal Kryvyi Rih has committed itself to reaching the European level of decarbonization by 2030 and to achieving carbon neutrality by 2050. The company has planned a $ 1 billion investment to achieve this goal. Draft law №5600 threatens the implementation of this plan, as it proposes to take away this resource from the company by fiscal methods. In developed countries, says Mr. Plichko, about 70% of investments in green projects are somehow compensated by the state. Unfortunately, we don’t even talk about it.
The panel discussion on excise taxation was focused mainly on the proposal of draft law №5600 to introduce an excise tax on green generation. The participants of the panel agreed that the excise tax on green electricity is an unacceptable idea, which contains contradictions in its essence. After all, the production and consumption of alternative energy should be encouraged, not, on the contrary, “punished” by the state with excessive taxation. In addition, this idea does not comply with the previously reached agreements with investors in green energy.
“The very idea of introducing an excise tax on green energy is absurd and contradicts the essence of the excise tax,” said Carl Sturen, CEO of Vindkraft Ukraine, Co-Chair of the EBA Energy Committee.
View the full video record of the discussion on the EBA Facebook page.
The European Business Association sincerely hopes that MPs understand the seriousness of this issue and will make a prudent and strategic decision not to support draft law №5600, so as not to create undue pressure on business and provoke a deepening crisis in Ukraine’s relations with its largest investors and taxpayers.