The Rada's decision to pass a bill that continues tax privileges extended to mining and metallurgical companies may prove to be a double-edged sword.
The Rada decision to pass a bill that extends the life of three-year-old tax privile for Ukraine`s mining and metallurgical companies may prove to be a double-edged sword.
The bill, which passed Jan. 17, empowers the government to provide tax incentives to a handful of select companies. Those approved for the incentives would pay the country’s full 30 percent profit tax but could apply to the government and parliament’s industrial policy committee for a rebate of up to half the tax paid. To qualify for a rebate firms need to prove that the money would be spent to improve the company’s efficiency and competitiveness.
Prime Minister Anatoly Kinakh said the privileges are needed to buoy the country’s economy and boost hard currency reserves in the face of a global slowdown. The industry accounts for about 40 percent of the nation’s exports and provides the country with about 40 percent of its hard currency earnings.
If President Leonid Kuchma signs the bill, it could trigger additional economic sanctions against the country’s metallurgy plants, enterprises already at odds with foreign competitors. Those competitors could charge their Ukrainian counterparts with dumping cheaper and state-subsidized metal on their turf.
“These incentives could make Ukrainian companies more susceptible to anti-dumping investigations initiated by foreign competitors,” said Ihor Zhyhyr, a metallurgy analyst at Prometal, a Web site that follows the industry.
Still, the International Monetary Fund, which generally opposes unilateral tax breaks as unfair and economically unwarranted, is reserving criticism.
“According to our preliminary assessment, these benefits are much better than the blanket tax breaks from last year,” said Lorenzo Figliuoli, the IMF’s representative in Ukraine. “[The bill] reserves a part of revenue from corporate income tax to finance good restructuring proposals put forward by the enterprises and approved by the government.”
Figliuoli added that the fund is “generally against tax benefits or subsidies of any sort.”
A veto could be hard for Kuchma’s allies to swallow. Industry groups that lobbied hard to win the privileges are aligned with the one-third of parliament that is traditionally centrist and pro-presidential.
“I’m 99 percent certain that Kuchma will sign it,” Prometal’s Zhyhyr said. “This law was spearheaded by parliament’s influential industrial lobby, which is affiliated with Kinakh’s [Ukrainian Union of Industrialists and Entrepreneurs].”
Zhyhyr said the rebate is intended to be spent to improve efficiency and competitiveness. But companies have failed to use the cash for that purpose in the past.
When the privileges were first introduced in 1999, many metallurgical companies were granted a flat 9 percent profit tax rate – less than a third of the 30 percent profit tax other companies pay. After opponents complained about the special treatment, the tax was raised to 15 percent. Now all businesses will pay the standard 30 percent profit tax, with a select few eligible to halve their rate through the rebate plan.
The tax savings could leave Ukraine’s metallurgical mills open to attack by foreign competitors intent upon pursuing anti-dumping sanctions. The charge that Ukrainian manufacturers were getting unfair subsidies from their government could be hard to combat.
Oleh Zahnitko, an attorney for Magister and Partners who has represented the government and metallurgical companies in anti-dumping investigations, said metallurgical plants receiving the incentives would be most threatened by companies from countries that recognize Ukraine as a market economy. He said it is much harder for foreign companies to win anti-dumping cases when their countries do not yet recognize Ukraine as a market economy.
Russian metallurgical plants launched such a case against their Ukrainian counterparts last year, but the case has not been resolved, Zahnitko said.
The incentives could harm Ukraine in other ways.
“If [the incentives] are ruled illegal, they could negatively affect negotiations on Ukraine’s accession to the WTO,” Zahnitko said.
The bill could also make it easier for government officials to abuse their power, added Prometal’s Zhyhyr.
The bill authorizes the government – with the approval of parliament’s industrial committee – to decide which companies are entitled to refunds.
Some government officials, including Deputy Prime Minister Vasyl Rohovy, oppose the unilateral tax privileges. Rohovy argued that an across-the-board profit tax cut would have been fairer. Others, such as State Tax Administration Deputy Chief Oleksy Shytra, worry that the Rada’s budget committee failed to assess the incentives’ economic impact.
