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Draft law №5600: is it hello the 90s or a move forward?

13/ 07/ 2021
  The whole business community is currently discussing the scandalous draft law №5600, the norms of which are ill-considered and discriminatory. If implemented, the proposed changes could lead to an outflow of investment, the shutdown of transparent business, increased distrust of international partners in Ukraine, and, as a result, a shortfall in tax revenues in the long run. For the second year in a row, there has been a decline in investment in Ukraines economy. In 2020, Ukraine experienced the largest annual outflow of foreign investment in the last 20 years, which amounted to $ 868 million. Of course, the coronavirus crisis has made a significant contribution to this situation. Although several crises have taken place in the country throughout the past 20 years, not all of them have had such a negative impact on the investment situation in the country. So, is the ongoing crisis the current cause of investor pessimism? The answer is simple and complex at the same time. The inflow of investment requires a “healthy” environment for business in the country. How healthy is the environment in Ukraine now? – it is rather a rhetorical question. At the end of 2019, the Verkhovna Rada registered draft law №1210 (now Law 466), which was hastily adopted in an unacceptable version for business. The provisions of the draft law came into force without a proper transition period and without the timely adoption of the necessary bylaws. We no longer even mention the lack of adequate and timely explanatory work on the part of the Ministry of Finance and the tax authorities regarding these changes. However, as if realizing the gravity of what had been done and trying to somehow correct the consequences, the authorities hastily began to prepare amendments to the just adopted changes. As a result, Laws №786 and №1117 came up as an addition to Law №466 within a short period of time. It is easy to imagine how investors felt amid this legislative and law enforcement chaos. So, it is not surprising that many companies have been forced to reconsider their investment plans for Ukraine. During the discussion of law №466, the business warned about such consequences of hasty adoption of large-scale tax changes. At the end of 2 years, we must sadly state that our pessimistic predictions have come true. A similar story is currently repeating with draft law 5600, although there are some differences. Thus, the authorities have so far failed to explain to businesses their own motivation, which forced them to offer a range of extremely negative rules for transparent taxpayers (regarding tax losses, tax administration, VAT refunds, real estate taxation, and others). Therefore, business calls on the authorities to stick to common sense and not to support initiatives that will mainly affect conscientious taxpayers. Surely, speed in adopting change can have positive consequences, provided that it is a matter of accepting consensus-agreed changes. Currently, draft law №5600 causes unanimous dissatisfaction of business. Therefore, it is unacceptable not only to try to extend the draft law in an emergency but also to make a stubborn attempt to pass the draft law, which has been subjected to such devastating criticism by taxpayers. The transparent business community usually seeks to stay and work in a country for the long term. Therefore, before making any decision, the business tries to calculate its consequences as far as possible. Therefore, stable, and clear rules are essential for the business. The business is already tired of guessing what the next initiatives of MPs will be adopted and which authority will come next to collect extra revenue from the transparent business while turning a blind eye to the existence of global problems. Such a problem, for example, is the countrys shadow economy, which not only distorts competition among businesses but also fuels corruption among those in power. Legislative efforts should be aimed not at counteracting such problems, but at squeezing additional taxes from businesses and citizens who work openly and legally. So far, we see the opposite approach: incomprehensible loyalty to the shadow sector and undisguised aggression towards transparent business. The community calls on the team of Volodymyr Zelensky and MPs, in general, to take extremely seriously the risk of increasing the fiscal burden on transparent business. After all, even if some companies limit development and begin to diminish (due to discriminatory changes and growing distrust of government), additional budget revenues will remain an unattainable dream. The reduction of tax revenues can trigger a chain reaction of further ill-considered decisions, including in the tax sphere. The consequences will be a further deterioration of the investment climate and the capacity of the state, which will require enormous efforts to overcome. The tenure of those in power is limited, so it should be used to leave a meaningful legacy in society. In the tax sphere, as in many others, the authorities must first and foremost be guided by the principle of do no harm. It is better not to change the tax rules than to change them for the worse. In any case, the proposed rules should be discussed in advance and accepted by those for whom they are primarily intended – the taxpayers. Meanwhile, the rules proposed by draft law 5600 are not approved by those who pay taxes. The European Business Association appeals to Volodymyr Zelensky, President of Ukraine, Denys Shmyhal, Prime Minister of Ukraine, and Dmytro Razumkov, Speaker of the Verkhovna Rada, to prevent the adoption of draft law №5600 in the second reading. It is now important to sit down at the negotiating table and create the most balanced tax document. After all, comprehensive tax initiatives are not accepted in a hurry. Business is ready for dialogue and on July 12 once again sent its proposals to the Government and the leaders of the factions in the Verkhovna Rada. It is important to respect the stability of tax legislation, which is constantly and very loudly emphasized by the business. Thus, it is inadmissible to put into effect any norms before January 1, 2023. Besides, it is by no means possible to return to the 1990s in the context of tax policy, such as VAT refunds. After all, the transparent business did not build all business processes to erase the positive achievements that have been gained over the years with a fleeting spark of political will.

The whole business community is currently discussing the scandalous draft law №5600, the norms of which are ill-considered and discriminatory. If implemented, the proposed changes could lead to an outflow of investment, the shutdown of transparent business, increased distrust of international partners in Ukraine, and, as a result, a shortfall in tax revenues in the long run.

For the second year in a row, there has been a decline in investment in Ukraine’s economy. In 2020, Ukraine experienced the largest annual outflow of foreign investment in the last 20 years, which amounted to $ 868 million. Of course, the coronavirus crisis has made a significant contribution to this situation. Although several crises have taken place in the country throughout the past 20 years, not all of them have had such a negative impact on the investment situation in the country. So, is the ongoing crisis the current cause of investor pessimism? The answer is simple and complex at the same time. The inflow of investment requires a “healthy” environment for business in the country. How healthy is the environment in Ukraine now? – it is rather a rhetorical question.

At the end of 2019, the Verkhovna Rada registered draft law №1210 (now Law 466), which was hastily adopted in an unacceptable version for business. The provisions of the draft law came into force without a proper transition period and without the timely adoption of the necessary bylaws. We no longer even mention the lack of adequate and timely explanatory work on the part of the Ministry of Finance and the tax authorities regarding these changes.

However, as if realizing the gravity of what had been done and trying to somehow correct the consequences, the authorities hastily began to prepare amendments to the just adopted changes. As a result, Laws №786 and №1117 came up as an addition to Law №466 within a short period of time.

It is easy to imagine how investors felt amid this legislative and law enforcement chaos.

So, it is not surprising that many companies have been forced to reconsider their investment plans for Ukraine.

During the discussion of law №466, the business warned about such consequences of hasty adoption of large-scale tax changes. At the end of 2 years, we must sadly state that our pessimistic predictions have come true.

A similar story is currently repeating with draft law 5600, although there are some differences. Thus, the authorities have so far failed to explain to businesses their own motivation, which forced them to offer a range of extremely negative rules for transparent taxpayers (regarding tax losses, tax administration, VAT refunds, real estate taxation, and others).

Therefore, business calls on the authorities to stick to common sense and not to support initiatives that will mainly affect conscientious taxpayers.

Surely, speed in adopting change can have positive consequences, provided that it is a matter of accepting consensus-agreed changes. Currently, draft law №5600 causes unanimous dissatisfaction of business. Therefore, it is unacceptable not only to try to “extend” the draft law in an emergency but also to make a stubborn attempt to pass the draft law, which has been subjected to such devastating criticism by taxpayers.

The transparent business community usually seeks to stay and work in a country for the long term. Therefore, before making any decision, the business tries to calculate its consequences as far as possible. Therefore, stable, and clear rules are essential for the business.

The business is already tired of guessing what the next initiatives of MPs will be adopted and which authority will come next to “collect extra revenue” from the transparent business while turning a blind eye to the existence of global problems.

Such a problem, for example, is the country’s shadow economy, which not only distorts competition among businesses but also fuels corruption among those in power. Legislative efforts should be aimed not at counteracting such problems, but at squeezing additional taxes from businesses and citizens who work openly and legally. So far, we see the opposite approach: incomprehensible loyalty to the shadow sector and undisguised aggression towards transparent business.

The community calls on the team of Volodymyr Zelensky and MPs, in general, to take extremely seriously the risk of increasing the fiscal burden on transparent business. After all, even if some companies limit development and begin to diminish (due to discriminatory changes and growing distrust of government), additional budget revenues will remain an unattainable dream. The reduction of tax revenues can trigger a chain reaction of further ill-considered decisions, including in the tax sphere. The consequences will be a further deterioration of the investment climate and the capacity of the state, which will require enormous efforts to overcome.

The tenure of those in power is limited, so it should be used to leave a meaningful legacy in society. In the tax sphere, as in many others, the authorities must first and foremost be guided by the principle of “do no harm.” It is better not to change the tax rules than to change them for the worse. In any case, the proposed rules should be discussed in advance and accepted by those for whom they are primarily intended – the taxpayers. Meanwhile, the rules proposed by draft law 5600 are not approved by those who pay taxes.

The European Business Association appeals to Volodymyr Zelensky, President of Ukraine, Denys Shmyhal, Prime Minister of Ukraine, and Dmytro Razumkov, Speaker of the Verkhovna Rada, to prevent the adoption of draft law №5600 in the second reading. It is now important to sit down at the negotiating table and create the most balanced tax document. After all, comprehensive tax initiatives are not accepted in a hurry. Business is ready for dialogue and on July 12 once again sent its proposals to the Government and the leaders of the factions in the Verkhovna Rada.

It is important to respect the stability of tax legislation, which is constantly and very loudly emphasized by the business. Thus, it is inadmissible to put into effect any norms before January 1, 2023. Besides, it is by no means possible to return to the 1990s in the context of tax policy, such as VAT refunds. After all, the transparent business did not build all business processes to erase the positive achievements that have been gained over the years with a fleeting spark of political will.

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