Slava Vlasov, Partner, PriceWaterhouseCoopers (PwC) and Oleg Shmal, PwC Ukraine Assistant Manager, write:
The most recent draft Tax Code offered for public discussion is a much more qualitative document than the one passed in the first reading, but it still requires further discussion between business and the government.
The text we currently see shows that the authorities are willing to listen to the voice of business; and this is what we believe is the most important outcome of the publication.
Another positive thing is that the tax administration regime (i.e. correspondence of the rights and obligations of the taxpayer and the tax office) mostly remains in the current status quo. While business would appreciate more simplified tax rules, maintaining some kind of stability is something that even pessimists should recognise as a value. There has also been much mention of the revival of the “conflict of interest” rule, which we believe is one of the backbone principles of the Ukrainian tax system. Because of this, according to the amended draft, the lack of clarity in the law would result in judgements in favour of the taxpayer as well as legal entities getting some assurance against the practice of controversial interpretations of the tax rules.
The changes in tax accounting rules are not particularly significant. The model remains generally the same as in the draft adopted in the first reading.
The corporate income tax is still expected to come closer to the statutory accounting. We do appreciate that some unreasonable rules were excluded or softened (e.g. deduction of royalties, operations with non-residents, deduction on later-provided documents, etc.).
However, some others still remain. The prohibition to utilise accumulated foreign exchange losses will result in a significant additional tax burden for international groups’ subsidiaries and Ukrainian companies integrated in the world economy. A 15% tax on payments of intangible assets to non-residents and a limitation of the deductibility of royalties to a small percentage of profits is not in line with global best practices and does not give Ukraine a competitive advantage in attracting new modern technologies into the country.
The introduction of tax holidays for priority investment projects (i.e. significantly reducing the regular corporate income tax rate for 5 years if the tax saving is re-invested) instead of the very disagreeable investment tax credit (as proposed in the draft of the first reading) is a positive, but middle-of-the-road step. On the one hand, it may stimulate investment activity from entirely new businesses – both foreign and domestic – for the benefit of the Ukrainian economy; on the other hand, this incentive does not stimulate the expansion of existing businesses. Also, the draft states that the authorities will decide who will get the right for the privileges, which may not be as transparent as a clear set of requirements for the incentive and a clear mechanism of further control by the tax authorities of its actual use.
We also do not see in the proposed draft a significant reducing of time spent on tax accounting functions (and their respective cost). The list of rules that are not based on statutory accounting to be inherited from the current law tends to grow. This is not always negative from a tax burden perspective, but requires additional efforts in tax accounting (e.g. taxation of operations with securities).
The requirement to calculate the differences between statutory and tax profits introduced by the draft adopted in the first reading still exists. Separate taxation of head-offices and branches will also result in additional administrative costs, while the prohibition of offsetting intra-company losses (between head-offices and branches) is a purely tax-driven attempt to get more money where no additional value is generated.
There are changes in the VAT regime that we believe are more positive in comparison with the draft adopted in the first reading. Among these are the revival of VAT bonds on import of fixed assets, staying with the current regime of reorganisations and extending to the year of the period during which the VAT invoices may be credited (there was a 3 month limitation in the previous draft).
Please consider that the VAT rate remains the same as in the draft adopted in the first reading – 20% for 2011 and then a gradual reduction to 17% in 2014 (but now it is set not by the VAT section, but by the Transition Regulations).
At the same time, the question of untimely VAT refunds remains. What we would appreciate in the final Tax Code is an introduction of compulsory late payment interest in cases of untimely tax refunds. This may be a clear sign of recognition of the mutual responsibility of businesses and government which is the foundational principle for not only a declared, but real partnership.
To summarise, the draft we now have is an important step in developing a transparent tax environment in Ukraine; and now the business community has a unique opportunity to share with politicians and authorities their vision of a Ukrainian tax system that we believe would be one in which stability, mutual responsibility and transparency are realised as being more important than mere temporary privileges.
PricewaterhouseCoopers is actively involved in the discussion of the draft Tax Code with politicians and authorities and is going to address the aforementioned ideas during the public consideration of the draft.
