Rapid Changes in Ukrainian Fiscal Legislation and Lack of Stable Rules

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On December 7, 2017, the Ukrainian Parliament had the day of Budget-2018. During one day, the Verkhovna Rada amended the Budget Code and Tax Code, as well as adopted the State Budget Law for 2018. The decisions were taken in a very non-transparent way with changes approved from the voice.

As a result, there is no 100% clarity on what was really approved by MPs. The deputies changed the legislation that contitutes a base for fiscal indicators foreseen in the Draft Budget for 2018. As a result, according to the Rules of procedures of the Verkhovna Rada the Draft Budget was to be sent to the third reading; instead, it was voted in one reading with more changes announced before the voting. Therefore, the budget sustainability in 2018 remains under concern. Here, we attempt to shortly outline the major changes in these important legislative acts. In the mid-December, the Speaker of the Parliament has not signed the draft laws as their texts and figures were not finalized yet.

Budget Code

The amendments to the Budget Code were the least controversial. They mostly reflected new legislation on the formation of the united territorial communities and the healthcare reform. Distribution of some revenues between local and central budgets were changed. Local government entities (LGE) are responsible for the co-financing of the healthcare facilities, which would receive payments for the provided healthcare by the National Health Service after it starts operating.

Apart from that, since the second half of 2018, the colleges (higher education institutions accredited at levels of I and II) are to become structures of institutes and universities (with accreditation levels of III and IV) to keep financing from central budget. Otherwise, they are to be financed at the account of LGEs.

Tax Code 

The amendments to the Tax Code became very controversial on the day of voting. The VR Committee on Tax and Custom Policy submitted the text of respective Draft Law for the second reading only in the morning of the voting day. The Committee proposed approving 177 out of 244 amendments by the MPs. During the voting, several of them were not supported by the Parliament.

Overall, drastic changes were approved for the VAT Section of the Tax Code. In particular, the MPs allowed paying VAT for 430 articles of imported machinery and equipment in equal monthly installments for up to 24 months without interest and penalties. This might substantially reduce the VAT base and result in lower than currently planned collections of VAT on imports.

Imports of electric cars is now not subject to VAT and excise. The deputies approved the VAT privileges for the purchase of software as well as extended VAT privileges for companies working in the aircraft construction and space programs.

The producers of sunflower seeds, soybeans, and rape will not be eligible for VAT refunds as the zero-rated VAT on their exports is to be introduced since March 2018. According to crop producers, they will lose about UAH 9-10 bn. Instead, the benefits will be received by processing companies.

Since the beginning of 2018, 7% VAT is applied to the supply of domestically produced and imported medical products and devices if they are included in the State Register of Medical Devices and Medicinal Products or meet the requirements of the relevant technical regulations. Imported medical products have to be allowed for entering and for use in Ukraine. There are no changes to 7% VAT on pharma products, but previously 7% VAT applied to non-pharma medical products in the Government-approved list.

The Parliament also revised rent payments for gas extraction from new gas wells, which will be set at 12% and 6% depending on the depth of the well. Rent payment for gas condensate is also to reduce from 45% to 29% and from 21% to 14% depending on the depth.

The MPs failed to approve the cap on the cash subsidy to livestock producers at UAH 150 m. This provision was necessary to ensure that respective subsidy is directed primarily to small and medium farmers.

Budget-2018 

Between the first and the second reading the Government increased planned revenues by UAH 36.6 bn to UAH 914 bn. Tax revenues account for the third of this increase (mostly additional EPT revenues) due to the changes in macroeconomic forecast. Target of VAT on imports was increased by UAH 2 bn, which now does not seem to be realistic due to expected reduction in VAT paid on imported investment goods. Higher central fiscal revenues from ecology tax (by UAH 1.2 bn) were attributed to changes in distribution of this tax between local and central budgets. Non-tax revenues were increased by UAH 23.3 bn due to additional revenues planned from dividends of SOEs (UAH 13.8 bn), higher transfer of the NBU profit to the budget, the sale of the 4G licenses (UAH 6.2 bn), and money from special confiscation (UAH 4.7 bn). However, during the voting MPs increased the target of central fiscal revenues further than it had been suggested by the Government.

The distribution of added revenues reflects interests of particular deputies or their groups, including local spending in electoral districts. Overall, the Budget received about new 40 programs without defined goals and KPIs. The spending on economic activity increased by UAH 7.3 bn.

Positive news are increased spending on the Food security service, road safety, maintenance and construction as well as Energy Efficiency Fund. However, the Government substantially increased support of coal mines, which is not properly justified. Additional UAH 2.2 bn were allocated for sports and culture (UAH 500 m for production of patriotic movies and the same amount for information security and promotion).

Subventions to the local budgets were increased by UAH 29.4 bn largely due to higher spending on housing and utility subsidies (by UAH 15.9% to UAH 71 bn, which reflects better real needs for the year). At the same time, the subvention for social and economic development of localities, which typically reflects vested interests, was renewed (UAH 5 bn).

Overall, the tradition to amend the draft laws during the voting by making changes via voice results in lower transparency. Even after the approved laws were published, the predictability will remain an issue. Some of the approved suggestions require the regulations to be approved by the Cabinet of Ministers. In particular, it relates to the VAT instalments on imported equipment. The procedure of subsidies allocation for livestock companies is also to be changed.

Moreover, during the voting the MPs asked the CMU to consider the possibility of revising upwards minimum wage from currently foreseen for 2018 level of UAH 3723 to UAH 4200. Prime Minister Volodymyr Groysman agrees with this approach. Thus, new minimum wage might become a reality either in July or in December 2018.

Oleksandra Betliy
The Institute for Economic Research and Policy Consulting - Kiev