Draft law #5600 is an additional burden on Ukrainian business.
Although the original idea behind draft law #5600 on balancing out the budget flows was to increase rent payments for high ore prices to boost state revenue, a closer look at its clauses reveals that the initial perception is misleading. Not only does #5600 divert away from its original goal, but it has also turned into a monstrous piece of legislation resembling draft law #1210 on improving tax administration.
In brief, #5600 proposes to increase the tax burden in a number of areas. One of the notable examples is a 20 percent value-added tax on the second and subsequent sales of real estate. As a result, a 20 percent spike in construction costs will follow. Such a move will be detrimental to the economy of Ukraine, and an already low amount of construction projects will drop further.
Ukraine is not building nearly enough to meet the needs of consumers. Based on the current volume of construction, the renewability of the housing stock is 100 years. For example, in China, it’s 20 years, and five times more homes are built there.
The said draft law doesn’t provide an impact assessment of the increased rent payments and how such a turn will affect the construction market. However, the outcomes are quite straightforward. An increase in price results in fewer sales, and, therefore, we should aspire to make construction in Ukraine as cheap as possible both time and price-wise.
This bill also increases the tax burden in other sensitive areas, such as the introduction of a new means of taxing land. Initiatives of such nature are not new though. A year ago, a group of Ukrainian parliamentarians, sought to introduce a minimum tax burden on 1 hectare of land (draft law #3131) which didn’t generate enough support and was very negatively received by farmers and the agricultural industry. Luckily, the President intervened at that time and, as a consequence, draft law #3131-d – which was much better both in terms of rates and terms implemented – was passed.
For example, the rate on land used for the forage harvester was reduced five times and the rate for farmers went down by two and a half times. Additionally, farmers received a two-year tax deferral which gave them a chance to adapt to the legal changes.
Draft law 5600, on the contrary, channels the worst elements of #3131. It is peculiar that instead of trying to move towards policies that would benefit Ukrainians and boost the economy, we move backward.
Lastly, everywhere across the world bonuses and tax incentives are given out to stimulate the development of renewable energy, or often it is even fully exempt from taxes. #5600 Ukraine introduces a green tariff – an excise duty. I am not aware of such a tax existing anywhere in the world.
The most important development of #5600 is tax enslavement. If the draft law is passed, those who have a tax debt will not be able to leave Ukraine. Under such circumstances, foreign investors whose debts might not be calculated correctly, will not be released abroad unless the tax authority decides otherwise. #5600 will expand the powers of the tax authority and its incentives to accept bribes even further. Ukraine will stop being seen in any way attractive to foreign investors. We cannot let this happen.
Furthermore, the legislative procedure used to uphold these changes goes against common sense. When the Ministry of Finance wants to stop some kind of reform, they usually say that some policy contradicts relevant EU directives, or that the deadline for changing the legislation has not been observed. The Ministry of Finance has proposed to introduce a change in tax rates from tomorrow, the 1st of July.
#5600 is unpopular for many good reasons. No business association has endorsed it. But despite a lack of common ground with the business and civil society, both the Ministry of Finance and the Ukrainian parliament are pushing for this law.
The Office of Simple Solutions and Results has been advocating for a coherent DABI (State Architectural and Construction Inspectorate) reform to liberalize the construction process, and #5600 poses a deadly threat to these efforts. Overall, most pro-freedom reforms in Ukraine will be blocked if this disastrous law comes into being. I, therefore, encourage members of Verkhovna Rada and all Ukrainian policymakers to stop #5600. We don’t have much time left, but not all is lost, and every vote and every voice counts.
