Tax code reform in Ukraine signals a major win for UEFF

The political environment in Ukraine has been ripe for reform since the 2014 Euromaidan Revolution that ousted Russian-aligned president Viktor Yanukovych. Seeking to end many of the stifling taxes and barriers to entry which have negatively impacted the economic freedom of the Ukrainian people since the days of the Soviet Union, Kyiv-based Atlas Network partner Ukrainian Economic Freedoms Foundation (UEFF) has overseen legislative victories which have dramatically cut taxes and simplified bureaucratic processes for Ukrainian citizens.

“In 2017 Parliament adopted three pieces of legislation that were developed by UEFF,” said Maryan Zabotskyy, director of UEFF. “In one of the laws we managed to deregulate the use of electronic documents. The other two concerned taxation. The biggest one was a set of 10 amendments to the Tax Code that resolved burning issues for taxpayers, ranging from property taxes to capital flows taxation. We estimate that as a result of these changes taxpayers will save at least $125 million in direct costs, while the size of associated corruption will drop by another $20 million.”

The reforms pushed for by UEFF which have been passed by the Verkhovna Rada (the Ukrainian parliament) and signed into law include the implementation of a central database for local and municipal tax rates, the elimination of a 15 percent tax on syndicated loans, the implementation of a cap on agricultural subsidies, the exclusion of a local soft drink, kvas, from alcohol excise duties, the deregulation of wine and cognac production, and the elimination of an 18 percent tax on dividends, among more.

The reforms include:

• Implementation of a cap and eventual removal of agricultural subsidies – prior to reform, nearly half of the UAH 4 billion (about USD $150 million) in agricultural subsidies granted by the Ukrainian government went to only two large poultry producers, which received $52 million and $22 million respectively. Both of these companies were highly profitable without the subsidy. Since passing this reform, the Ukrainian government has completely defunded this type of subsidy, saving hundreds of millions in taxpayer money. Atlas Network partner Economichna Pravda was the first to calculate and publish the data about the subsidy program, leading to massive public outcry and demand for the program’s end.
  
• Implementation of a centralized database of locally set tax rates (land and property taxes) – there are over ten thousand local village and city councils in Ukraine, and each can set its own land and property tax rates. This had created an accounting headache for companies operating in multiple cities throughout the country. For example, an electricity company can have a line of wires occupying land plots in hundreds of municipalities. Each year the accountants of these businesses spent hundreds of hours studying and collecting information on tax rates in each of the municipalities in which they had property. Now, a centralized database on local land and property taxes will provide all that information in one place, accessible online. UEFF estimates thousands of man hours of work spent managing taxes will now be saved.
  
• Introduction of uniform reporting on profit for corporations – under the previous system different types of companies had different requirements for reporting annual profit to be taxed, leading to confusion and waste. The new system sets a uniform date for all companies to report: 60 days after the year’s end.
  
• Exclusion of a traditional local soft drink called “kvas” with alcohol content below 1.2 percent from excise duties and regulations. Kvas is produced from brewed grain – the type which is used to bake bread – and has a very small alcohol content (between 0.4 to 0.9 percent). Previously local legislation named all drinks having alcohol content higher than 0.5 percent as alcoholic beverages requiring special regulations and excise duty taxation. The law now exempts kvas from this rule and it will be regulated as a non-alcohol beverage so long as its alcohol content does not exceed 1.2 percent. Previously, kvas had been regulated as if it were a beer.
  
• Elimination of 18 percent tax on dividends paid by those that don’t pay profit tax – previously some sectors that were not taxed based on profit but through other taxes still had to pay taxes on dividends. For example, agriculture companies in Ukraine don’t pay profit taxes but rather a fixed amount per each hectare of land they use. However, they were still taxed at 18 percent when paying out dividends to non-residents.
  
• Elimination of 15 percent tax on interest paid on syndicated loans – up until the financial crisis of 2008, syndicated loans had been a popular means of attracting investment in Ukrainian companies. Use of these loans has revived somewhat but has been hamstrung by a 15 percent tax on interest rates paid on these loans. For example, a 7 percent interest Eurobond actually was worth 8.05 percent for the borrower because of the tax.

The successful reforms of former fiscal years include the elimination of an export tax on grains and oilseeds, the elimination of 29 different permits and licenses mainly in agriculture, and improvement of land property rights. All this was among 17 different pieces of legislation developed by UEFF and adopted by Ukrainian Parliament.

“Our key goal is to achieve greater economic freedom by helping pass concrete regulatory changes,” explained Zablotskyy. “We specifically focus on eliminating corruption, lowering taxes and improving property rights. We chose a particular strategy where we invest heavily into drafting legal texts, thus making regulatory proposals simpler to offer to MPs. So far this has been working very well for us and we will continue in this direction.”

The impact of these reforms for the Ukrainian taxpayer has been significant. The total impact of the tax and subsidy cuts promoted by UEFF since 2014 exceeds $1.1 billion (1.1 percent of Ukraine’s GDP) in taxpayer money saved. The size of corruption eliminated is estimated at $293 million annually.

Ukrainian Economic Freedoms Foundation won Atlas Network’s Europe Liberty Award in 2017 for its work to abolish the ban on the sale of agricultural land in Ukraine.