Crucial Decisions

Following a recently established tradition, the UJBL continues to pick out the most notable initiatives suggested by Ukraine’s lawmakers. This issue includes intently considering those newly-adopted documents related to public administration. This particularly concerns new functions of the Accounting Chamber of Ukraine, taxation, currency regulation and sanctions finally imposed by Ukraine. Drafting contains the views of experts on mediation, anti-corruption efforts and agriculture.  

What new functions has the Accounting Chamber received in accordance with the new On the Accounting Chamber Act of Ukraine of 2 July 2015, No.576-VIII? How does it affect the role of the body in terms of efficacy and financial audit in public administration?

Evgen Filonenko,  senior associate, FCLEX Law Firm

Based on the analysis of the new On the Accounting Chamber Act of Ukraine of 2 July 2015, No.576-VIII (hereinafter — the Act), the Accounting Chamber is vested with a number of new powers, including, in particular, the conduct of efficacy audit and financial audit of revenues to the state budget of Ukraine and their use, as to management of state property objects in the part regarding the provision of contributions (payments) to the state budget of Ukraine of the funds received by the state as the owner of the objects, as to the creation, maintenance and repayment of the state debt and others.

However, it is in the context of the new functions of the Accounting Chamber that the new Act does not meet the constitutional provisions on the legal status of the Accounting Chamber and is inconsistent with relevant current legislation in Ukraine.

According to the new Act, the Accounting Chamber carries out efficacy audits of internal control of state spending units, as well as internal audit of the Accounting Chamber. However, according to the Budget Code of Ukraine and the On Main Principles of State Financial Control in Ukraine Act the function of monitoring the condition of internal control and internal audit of state spending units is assigned to the powers of a body of state financial control.

Thus, the legal conflict between the cited legal provisions leads to incomplete legal regulation of relations in the sphere of performance of efficacy audit and financial audit in public administration.

What possible abuses on the part of abusive taxpayers are possible according to the Act of Ukraine On Amending the Tax Code of Ukraine regarding Taxation of Non-profitable Organizations of 17 July 2015, No.652-VIII?

Galyna Melnyk,  tax lawyer, Ilyashev and Partners  

In July 2015 the Ukrainian Parliament adopted one more Act amending the Tax Code of Ukraine. Inter alia this Act envisages corporate profit tax incentive for taxpayers providing funds and other resources (such as means of individual protection, drugs, food products, personal hygiene items, etc.) for the purposes of the antiterrorist operation carried out in East Ukraine.                

Namely, under the newly adopted Act, until the end of antiterrorist operation, taxpayers providing funds and resources for the aforesaid purposes will not fall within the scope of Para 140.5.9 of the Tax Code of Ukraine. This paragraph requires that taxpayers shall increase their corporate profit tax base by the amount of funds, price of goods, works, services donated to non-profitable organizations (in case such donations exceed 4% of taxable profit of the previous reporting year).

Yet this incentive may be seen as giving grounds for tax evasion through the use of non-profitable organizations. In particular, non-profitable organizations aimed at helping the antiterrorist operation may be used as interagents between abusive taxpayers and unified taxpayers in cash-out chains. In contrast to usual cash-out models with direct payments to unified taxpayers, deductibility under which are often challenged by the tax authorities as fictitious, payments to non-profit organizations do not imply such risks for the taxpayer. In their turn, non-profite organizations are not subject to thorough tax inspections of their interactions with unified taxpayers, which allows them to purchase items for the antiterrorist operation under over-inflated prices with no or almost no tax risks.

The Resolution of the National Bank of Ukraine On Handling the Situation on the Monetary and Foreign Exchange Markets of Ukraine of 3 September 2015, No.581 reinforces temporary restrictions regarding foreign currency operations. How does it affect the economic activity of enterprises?

Gabriel Aslanian,  counsel, Asters

By its recent Resolution No.581 the National Bank of Ukraine (NBU) extended the period on prohibiting early repayment of loans provided by non-resident lenders until 4 December 2015. Furthermore, Resolution No.581 reiterates the prohibition of: repatriation of proceeds received by foreign investors from the sale of Ukrainian issuers’ securities away from stock exchanges; repatriation of proceeds received by foreign investors from the sale of their corporate rights in legal entities, which are not documented as shares, or via reduction of Ukrainian entities’ charter capitals or withdrawal from such entities; repatriation of dividends to foreign investors; and making payments on the basis of individual licenses issued by the NBU, including investing outside of Ukraine (with some exceptions).

By Resolution No.581, the NBU has reinforced the aforementioned restrictions introducing the prohibition of registration of amendments to the cross-border loan agreements of Ukrainian borrowers (other than the banks) contemplating the substitution of the parties thereunder, being eventually a prohibition of cross-border and domestic loan assignment to foreign entities. Given that loan assignments are broadly used as an intragroup cash flow instrument, the newly-introduced prohibition has reportedly affected the operations in question.

The harsh restrictions introduced by the NBU are frequently reported to be in line with the recommendations of the International Monetary Fund aimed at minimizing the outflow of foreign currency from Ukraine and preventing further devaluation of the Hryvnia. Overall, these painful measures are not welcomed by the private sector, resulting in a standstill in Ukrainian companies’ presence on international capital markets and generally freezing the interest of foreign investors in Ukraine.

In what ways could the recently adopted sanctions on the side of Ukraine affect national business? What other legislative acts should Ukrainian authorities adopt in the near term?

Volga Sheyko,  associate, Asters

The Decree of the President of Ukraine No.549/2015 of 16 September 2015 implements the decision of the National Defense and Security Council of Ukraine on imposing special economic and other restrictive measures (sanctions) on 105 legal entities for a period of one year. Among the enlisted companies there are representatives of such spheres as air transport, railway transport, banking, IT sector, lottery companies as well as public organizations and even military battalions. The Decree states that various types of sanctions will be imposed on each legal entity. For example, transit through Ukraine has been prohibited for the Pervaya Gruzovaya Company railway operator (Moscow), and the Kaspersky Lab and Doctor Web IT companies haven’t been allowed to take part in public procurement of goods and services in Ukraine.

But neither the Decree nor the On Sanctions Act of Ukraine makes any provisions for specific procedures to implement these restrictions. According to the Decree, the implementation and monitoring of the effectiveness of sanctions has been assigned to the Cabinet of Ministers of Ukraine, the Security Service of Ukraine, the National Bank of Ukraine and the Prosecutor-General’s Office of Ukraine. I suppose that these bodies will develop the tools for implementing different types of restrictions. In my opinion, attempts to violate sanctions against public organizations and battalions will entail criminal liability. I think that in this case the Ukrainian state will have an opportunity to test the new and still controversial institute of investigation in absentia with reference to both residents and non-residents.

How do you evaluate the initiatives of the Draft Act On Amending the Tax Code of Ukraine regarding Additional Taxation Conditions for Investments in the Production of Agricultural Products of 1 September 2015, No.3003? How could it affect the attraction of investments to the agricultural sector?

Kseniya Shein,  senior associate,  Alexandrov &  Partners

The amendments offered in the Draft Act are aimed at determining the peculiarities of the taxation of investors in terms of agricultural production sharing agreements.

Thus, MPs suggest exempting investors (operators) from taxes and duties except for the single tax provided for payers of the fourth group, value added tax provided for subjects of a special tax regime in accordance with Article 209 of the Tax Code of Ukraine, and taxes on the salary and other types of remuneration and benefits. In its turn, the payment of other taxes and duties during the term of the production sharing agreement is to be replaced by the sharing of products between the state and the investor.

This Draft Act can increase the investment attractiveness of Ukraine by reducing the tax burden. However, the amendments to the Tax Code of Ukraine are not enough. In addition, the On Production Sharing Agreements Act of Ukraine is to be amended in order to extend its effect over agricultural production, to define the features of conclusion of agricultural production sharing agreements, and to establish the procedure for acquiring the right to use land for agricultural purposes and for registering such rights, as well as the Land Code of Ukraine and other legislative acts require amending.

It should be noted that lawmakers have tried to apply the production sharing agreements to agricultural business by introducing the Act of Ukraine On Amending Certain Legislative Acts of Ukraine regarding Application of Production Sharing Agreements to other Activities of 1 November 2012, No.11319. However, this attempt has gone nowhere. The Main Research Administration concluded that application of the agricultural production sharing agreements could be possible only under a special Act and as a legal experiment towards a certain entity or territory for up to 5 years in order to decide on the feasibility of using production sharing agreements in the Ukrainian agricultural sector, and did not support the Draft Act.

However, this is only a Draft Act, and it remains to be seen what will happen in practice.

The Draft Act On Amending Some Acts of Ukraine on Government Procurement in Order to Bringing  in Line with International Standards and Take Measures to Overcome Corruption of 16 June 2015, No.2087a, adopted in the first reading, introduces a number of provisions relating to the reform of this sector. Please comment on the proposed amendments from the point of their possible anti-corruption effect.

Anna Litvinova,  associate, AEQUO

The Draft Act On Amending Some Acts of Ukraine on Government Procurement in Order to Come into Line with International Standards and Take Measures to Overcome Corruption, No.2087a (the Draft Act) was, at last, adopted by the Verkhovna Rada of Ukraine on 15 September.

This is a crucial step in reforming the system of government procurement and definitely a positive one. The Draft Act is supposed to lower the level of corruption risks, to facilitate participation of businesses in procurement procedures, and to bring the system of state procurements into line with international standards. From the point of view of the possible anti-corruption effect the following initiatives should be highlighted: the Draft Act (i) provides for public access to information on public tenders, their prices, owners of enterprises and protocols of assessments; (ii) obliges the participants to disclose information about their beneficial owners, which shall increase the transparency of the procurement process; besides that (iii) the participants may apply for detailed explanation of the reasons for their disqualification or rejection of their proposal. The Draft Act also prevents deliberate blocking of tenders through the appeal procedure.

The next step of the government procurement reform will be adoption of the related bill on conducting public procurements through electronic platform, which is expected in October.

Hopefully these positive initiatives will lead to success of the reform and help to overcome the corruption component of public procurement procedures. The further success of the reform will very much depend on the actual implementation and good faith interpretation of the adopted rules by the authorized state authorities and courts.

The Committee on Legal Policy and Justice of the Verkhovna Rada of Ukraine has considered Draft Acts of Ukraine On Mediation of 27 March 2015, No.2480 and On Mediation of 9 April 2015, No.2480-1 and returned them for revision. What factors is it important to take into account upon regulation of mediation?

Dr. Svitlana Khedacertified mediator, counsel, head of labor & compliance,  Sayenko Kharenko

 

Ukraine belongs to the continental legal system and, as a result, its citizens in general trust only those institutions that are prescribed by law and so are hesitant to choose something that exists only in the writings and speeches of experts. Thus, the absence of the On Mediation Act sends the wrong message to potential consumers of mediation services — namely that the state does not treat it seriously. This results in low demand for the service which, consequently, does not generate supply and feeds a negative attitude, thereby benefiting the opponents of mediation. Therefore, enactment of the On Mediation Act could actually trigger mediation development in Ukraine.

On the other hand, the authors of Draft Act On Mediation, No.2480-1 seem to misinterpret the nature of this Act. They do not distinguish between litigation and mediation as a form of amicable dispute settlement where flexibility and voluntary performance of the reached agreement are at its core.

The On Mediation Act should be adopted as a framework act, the primary purpose of which is to encourage the spread of mediation in Ukraine by declaring it part of state policy. The details should be left for the mediation centres to be reflected in their rules and for the parties to the dispute. The Draft Act On Mediation, No.2480 (even though not without flaws) serves this purpose much better. Thus, the mediation community will be more welcoming of an Act based on the Draft Act On Mediation, No.2480.