Officials in Lviv oblast have again paralyzed dozens of foreign-backed sewing shops in their region by toying with the country’s tax legislation. On June 19, regional tax officials stopped accepting promissory notes as temporary payment for imported raw textile materials.
The authorities’ refusal to accept promissory notes has brought the oblast’s textile shops, most of which sew clothing and other garments for European firms, to an abrupt halt – for the second time this year – and elicited protest from a Kyiv-based advocacy group.
“This is the second time in recent months that the entire industry has come to a virtual halt,” said Andry Beyzyk, who chairs the Kyiv-based European Business Association’s western Ukraine committee. “Most of the Ukrainian companies established by foreign investors are literally paralyzed,” reads a letter of protest issued by the EBA on July 5.
Ukrainian legislation permits firms to import raw materials duty- and tax-free on a 90-day basis, which means that the materials should be processed and exported within the three month period.
By issuing a promissory note, firms avoid pulling funds out of their cash flow in order to temporarily pay the import duties and value added tax, which would be refunded at a later date.
As of July 7, some textile shops were being issued authorization by regional tax officials for promissory notes, while others were not.
This is not the first time this year that the region’s authorities have created havoc in the textile industry by manipulating tax legislation.
In mid-April, customs officials in western Ukraine effectively brought the region’s textile industry to a halt when they demanded that import duties and value-added tax be paid on imported raw materials, even though taxes had not been officially imposed on the materials.
Lviv officials kept the controversial taxes, which halted operations at several of the region’s sewing shops, in place for one month.
The strange sequence of events has left many investors in the region wondering whether investing in Ukraine is worthwhile at all.
“During the past seven years, about 60 European companies have invested in the light [textile] industry in western Ukraine, creating over 20,000 jobs.
[Today, these companies are] not receiving raw materials, and consequently, are not producing anything,” the EBA said in its letter, addressed to the newly appointed State Tax Administration head Fedir Yaroshenko, First Deputy Prime Minister in charge of financial issues Mykola Azarov, and Steffen Skovmand, acting head of the European Commission’s delegation to Ukraine.“But the most important risk they run is losing their clients [in Europe,]” the letter continues.”
Lviv’s Tax Administration has been tightlipped. A spokesperson declined to discuss the situation in detail, insisting that no laws had been violated.
However, textile shops and the EBA disagree.
The situation “contradicts the law and orders of the State Tax Administration and also the Instruction of the President of Ukraine [Leonid Kuchma] ‘On Measures as to Intensification of Corruption-fighting within the State Tax Service’ as of June 21, 2004,” the EBA said in its letter.
The EBA added that the situation could reduce the investment attractiveness of western Ukraine, which could, in turn, cause difficult economic and social consequences for the region.
On average, western Ukrainian textile shops employ between 100 and several hundred Ukrainian workers, primarily females.
The textile shops are typically located in small villages where jobs are scarce.
Salaries average about $100 per month.
Investors are attracted to the region’s low-cost workforce and close proximity to Europe.
