In the Stream of Change

The hot summer period in Ukraine is accompanied by streamlined legislative changes across various rules of the business climate. The UJBL editorial staff has asked experts from Ukrainian law firms to comment on selected laws recently signed by the President, his legislative initiatives and last amendments to currency regulations from the NBU.

What are advantages of the new Act of Ukraine On Amending the Tax Code of Ukraine Regarding Improvement of Administration of VAT of 16 July 2015, No.643-VIII? What categories of taxpayers will be affected by the current amendments?

Valeriya Tarasenko,  partner, head of tax practice, Pavlenko Legal Group

Although the System of VAT Electronic Administration (SEA) is heavily criticized by businesses, recently adopted amendments to the TCU shall improve electronic administration for all VAT payers. In particular, amendments related to a VAT invoice shorten the number of compulsory requisites of issued VAT invoice, extend the period of VAT credit declaration based on a registered VAT invoice, cancel the compulsory amounts to which taxpayers could issue VAT invoices, permit VAT credit based on a copy of VAT return extracted from the SEA. In addition, the new Act significantly simplified the issuing of VAT invoices by companies that have continues supplies of goods (works, services) to buyers. Unlike in previous Act, such companies can issue one consolidated VAT invoice at the end of each months to each buyer. 

Starting from 1 August 2015 additional electronic accounts for output VAT will be opened for agricultural companies applying special tax regime. Unlike previous legislation when funds to special accounts were credited only after submission of VAT return, funds from such electronic accounts shall promptly be transferred to special accounts of agricultural companies by the State Treasury Service of Ukraine. 

The new Act has also addressed one of the main concerns of tax payers regarding implementation of the SEA rules. No penalty shall be charged for late registration of VAT invoices issued before 1 October 2015. Taking into account that penalty can amount up to 40%, such temporary relief shall give certain comfort to tax payers to test application of the SEA.

In the framework of tax reform the head of state has attracted attention to the plans to reduce taxation of wage fund. How do you assess the idea of combining the personal income tax, social security contribution and military duty into a single payroll tax?

Vasyl  Mishchenko,  associate, AEQUO

One of the concepts elaborated within the tax reform design process, which has recently gained great public attention, is the idea of unification of personal income tax, social security contribution and military duty into a single payroll tax. Although there is not much detail known about exactly how legislation under review should look, the possible effects of the idea’s implementation may be concluded as follows.

There is no doubt that the single payroll tax shall be easier to account for by the taxpayers and to administer by the tax authorities. This, in particular, shall be the result of a single approach to the tax accounting rules, combined tax collection and audit procedures. If fixed at reasonable rates, introduction of a single tax will reduce the tax burden on average-sized personal incomes, which, in turn may effectively result in bringing salary funds of the employers out of the shadows.

On the other side, combining the single social contribution (which is formally not treated as tax at the moment) with personal income tax implies that the combined tax shall be subject to general rules set out by Ukrainian tax legislation. In practical terms this will mean broadening the tax base, which will be achieved by at least two factors: (i) the new tax will also apply to incomes, which are beyond the scope of the single social contribution and (ii) as opposed to effective rules applicable to the latter, most probably taxable basis will not be capped. All the above will lead to higher taxation of above-average incomes.

It is now not clear what will happen with taxation of entrepreneurs and, in particular, with the simplified system of taxation for individuals. As opposed to the first part of personal income taxation reform, abolition of the single tax for individuals will most probably uncover resistance from the side of small businesses, unless replaced with reasonable alternative regime (e.g. reduced payroll tax rate with a well-defined list of expenses allowed for deduction).

How can new provisions of the Act of Ukraine On Amending Certain Acts of Ukraine Regarding Ensuring Competition in Production of Electricity from Alternative Sources of Energy of 4 June 2015, No.514-VIII have an impact on attracting investment into the sector?

Yaroslav Petrov,  counsel,  Asters Law Firm

The Draft Act No.2010-d, adopted by the Verkhovna Rada on 4 June 2015 and signed by the President of Ukraine on 14 July 2015 significantly changes regulations on the use of “green” tariff and can stimulate the development of projects for production of electricity from renewable energy sources.

The Act introduces several significant additions and changes to the existing regime. For instance, according to the adopted Act the “green” tariff is fixed in Euros until 2030. Indexation to Euros is made quarterly, but not monthly. Electricity produced by stations from renewable energy sources, except for the volumes used for their own needs, will be paid as per the “green” tariff. The rule of “local content” is canceled and surcharge to the “green” tariff is instead introduced as a stimulating factor in cases when using domestic equipment.

In accordance with the adopted Act, starting from 1 July 2015 the “green” tariff for solar power plants of industrial purpose is reduced to the level of 0.17 Euros per kWh. For solar energy generating stations built in 2016, the “green” tariff will come to 0.16 Euros and in 2017-2019 it will be 0.15 Euros. This figure is double the average European tariff, so the solar energy market in Ukraine will retain its relevance. The “green” tariff is also introduced for power plants using geothermal energy sources and will be 0.15 Euros.

In my opinion, adoption of this Act is significant both for the development of renewable energy in Ukraine and for the country’s entire economic growth.

Is it threatening for Ukrainian manufacturers of wood-particle board to lose wood because of the Act of Ukraine On Amending Certain Acts of Ukraine Regarding Ensuring Competition in Production of Electricity from Alternative Sources of Energy of 4 June 2015, No.514-VIII, that allows burning it so  as to produce “green” energy? Is the cost of electricity for citizens expected to rise?

Maryna Ilchuk,  associate, Arzinger

Pursuant to the Act No.514-VIII, woodchips, pellets, granules and energy crops (for example, corn silage) as “products of forestry and agriculture” will be included in the concept of biomass, complies with Directive 2009/28/EC of the European Parliament and of the Council on the promotion of the use of energy from renewable sources, which Ukraine is obliged to implement as a Member of the Energy Community.

It should be admitted that this could also result in certain competition in the use of woodchips by the chipboard industry (lower-grade wood that is commonly used for the production of pulp, paper and particle board, namely furniture making sector) and the energy market. In this regard, some European countries adopt legislation aimed at regulating such competition. Thus, according to the European Commission Document State of Play on the Sustainability of Solid and Gaseous Biomass Used for Electricity, Heating and Cooling in the EU of 28 July 2014, in Belgium wood feed stocks, which are suitable for the wood-processing industry, do not fall under the Flemish Green Power Certificates, whereas under Polish regulation stem wood (with a diameter above a certain size) is not eligible for national financial incentives for renewables.  However, the question of competition shall be considered taking into account the market of wood pellets production, as well as on the presence of board production in the country, but for Ukraine the main business driver currently shall be the increase in energy prices and lack of its own energy sources, as the main government policy is to promote substitution of natural gas and getting rid of dependence on energy sources. In addition, pellets shall not be forgotten, as they come under the definition of biomass, which may be produced not only of woodchips, but also out of agricultural waste, such as corn waste, straw, waste mill products, sunflower husks, chicken litter, etc.

As regards the risk of rises in electricity prices for households, world practice shows that a 10% of renewables in the overall energy production results in influence of the green tariff on the final bill for the consumer by up to 20-30%. Thus, taking into account the fact that the share of renewable energy in Ukraine is about 1-1.5% of generation capacity, the risk of electricity prices rising for households is definitely exaggerated.

What currency regulation rules create the greatest restrictions for business? How do you evaluate the effect of recent regulatory acts adopted by the NBU?

Dmytro  Orendarets,  senior associate, Clifford Chance LLC 

Ukraine has for a long time been infamous for its very strict currency control rules. In view of the ongoing financial and banking crisis and dramatic devaluation of the national currency, Ukrainian currency control regulations have become even stricter. Among the long-lasting currency control restrictions which have affected the business in Ukraine the most, we would note the mandatory registration of cross-border currency loans, the cost of funds caps set by the NBU at a level below the market one, the price evaluation act requirement for cross-border payments over a certain amount (currently EUR 50,000), extensive licensing requirements (such as licences for payments in foreign currency or investing abroad). In addition, with the deterioration of the economic and financial situation in the country following the occupation of Crimea and the outbreak of the conflict in the East, the NBU introduced a number of additional currency control restrictions in order to stabilise the national currency and decrease the dependency of our economy on foreign exchange. In our view, the most restrictive of such measures are the requirement on the mandatory sale by legal entities and private entrepreneurs of 75% of their export proceeds, the prohibition on early prepayment of cross-border loans and payment of dividends, numerous thresholds and cumbersome procedures for transactions with foreign exchange. We appreciate that, given the current instability in the currency market, the NBU cannot lift all of the above restrictions. At the same time, we believe that eliminating the loan registration requirement, lifting the prohibitions on early prepayment of loans and softening the restrictions on payment of dividends from Ukraine, should improve the overall image of our country in the eyes of foreign investors and result in an increasing inflow of foreign currency into the country. Finally, it is no secret that only true reforms (rather than administrative measures) will give confidence to our business and people and lead them to keep their money inside the country.