Joint ventures with foreign investment lose favored treatment while local companies get a break
e category of companies while implementing new privileges for another class of businesses.
The government says the law, which was signed by President Leonid Kuchma this month, is a needed reform that repealed 10-year-old tax breaks for joint ventures with foreign investment. The government says it expects the law to generate more than $100 million annually in additional tax revenues.
Analysts supported repeal of the tax breaks, which they said were unmerited. Some, like Volodymyr Kotenko of Andersen, an accounting firm, feel that the new law goes too far in the other direction, giving the advantage to companies that lack foreign investment.
Kotenko said the government felt that the tax privileges were too costly and economically unsound. But the new law “ultimately puts companies [that have foreign investment] at a disadvantage,” he said.
“This will negatively affect the image of Ukraine. It gives the impression that the government is giving an advantage to local business over businesses with foreign investment,” he added.
Parliament granted tax breaks in 1992 to attract foreign investment. Companies with foreign investment equal to at least 20 percent of their statutory capital were eligible to receive the benefits, which included an exemption from paying the country’s 20 percent value added tax, some other excise taxes and import duties.
Rather than attracting large sums of foreign investment, the tax breaks largely benefited local business groups, according to Andrian Opaits, a lawyer at Western Ukrainian Management Consulting.
Opaits said Ukrainian and Russian petroleum importers, which realized millions of dollars in tax savings, typically used the tax breaks. Opaits said many of the importers did not have genuine foreign investment. Rather than attracting foreign funds, Ukrainian cash was sent offshore, to be “invested” later by front companies.
Opaits said that that Ukrainian and Russian petroleum importers will suffer the most from the law’s repeal.
Kotenko said repealing the tax breaks would create negative cash flows for Ukrainian cigarette manufacturers, which import large quantities of tobacco.
While both praised cancellation of the tax breaks, Opaits said he felt that parliament acted too late. He said that even without Rada action, the privileges were scheduled to expire this year. That may explain why the bill met no major political opposition in parliament, he added.
Andersen’s Kotenko said a provision in the law deprives joint ventures with foreign investment from using a VAT payment mechanism available to other importers.
Now, importers with foreign investment will be prohibited from using promissory notes to pay VAT when products are imported. Using promissory notes, called veksel, gives importers 30 days to offset liability for the VAT against any VAT refunds due. Now, importers with foreign investment will be forced to pay VAT in cash when they import products, while importers without foreign backing may continue to issue promissory notes.
Kotenko warns that all businesses with Western investors that are dependent on imports will be affected by the repeal of the right to use promissory notes.
Paying VAT in cash and waiting for a refund from the government can be a problem. Ukraine presently owes an estimated Hr 6 billion in VAT refunds, according to some sources. It commonly takes the government from six months to a year to refund VAT, despite a legal obligation to process reimbursements within weeks.
