Changes Abound

The end of 2015 saw new legislative changes and developments in various areas of business regulation. Thus, The UJBL editorial staff has enlisted the help of experts to comment upon some of them. Our latest digest includes, to a greater extent, innovations in the taxation system, among which are the unified social contribution,  personal income tax and simplified taxation regime, changes in the banking and financial sphere, regulations of  public procurement,  land allotment procedure and not only.

The Act of Ukraine On Amending the Tax Code of Ukraine and Certain Legislative Acts of Ukraine Regarding Ensuring of Balance of Budgetary Revenues in 2016 of 24 December 2015, No.909-VIII introduced substantial changes to the tax system. How do you assess the initiatives regarding the unified social contribution and personal income tax? Is it worth expecting salaries to come out of the “shadow” sector of the economy?

Larysa Vrublevska,

partner, ILC EUCON

The rates of taxation of incomes in the form of wages have changed, but only persons whose wages are higher than 10 minimum salaries (in 2016 — UAH 13,780) will be able to perceive a reduction in the tax burden. An employee with a salary of UAH 10,000 received UAH 8,200  after tax, and he will continue to receive the same amount as cancellation of the payment in the UST (unified social tax) (3,6%) is compensated by the increase in the PIT (personal income tax) rate by 3%. And the accruals on the pay-roll fund shall, of course, decrease more substantially. For the same salary of UAH 10,000 the employer shall, on average, pay less UST by the sum of UAH 1,500. At present it is not possible to expect that salaries will come out of the economy’s shadow sector but I do know many companies which have increased wages for their employees from 1st January 2016 by a minimum of their savings in taxes. 

The Act of Ukraine No.909-VIII introduced changes to the simplified taxation system. How does innovation affect the work of the agribusinesses? 

Oleksiy Khomyakov,

partner, Asters

The government presented some surprising legislative innovations at Christmas via Act No.909-VIII of 24 December 2015 for Ukrainian agribusinesses: i) “grace period” for special VAT regime valid for agribusiness; ii) introduction of VAT utilization split ratio for agribusiness depending on its specialization (grain, cattle breeding, dairy industry and others) and iii) increased tax ratios for the simplified taxation system (4th group) applicable to agribusiness. The most troublesome issue of this simplified taxation regime raised heated discussions among Ukrainian business communities. The IMF has demanded that Ukrainian authorities create equal conditions for any businesses, requiring them to abolish such preferential tax treatment for agribusiness. Following heated discussion, the Ukrainian Parliament and local government eventually agreed with our IMF allies to leave the VAT regime with some adjustments for agriculture in 2016. However, starting from 1 January 2017 Ukrainian agribusinesses will be required to follow general VAT administration rules and special VAT treatment for the agribusiness will be scrapped. Specifically, in 2016 Ukrainian agribusinesses would be required to split the VAT due amounts, remitting a certain portion immediately to the state budget and utilizing the remaining VAT part in its agribusiness. In previous years, agribusinesses could fully use such VAT payable (if any) in its regular agribusiness. Needless to say that these legislative changes will have an adverse effect on agribusiness, taking into account the turbulent pricing of major commodities during the current global downturn. It appears that the “golden era” of Ukrainian agribusiness tycoons is coming to an end, and Ukrainian agrigroups would need to implement European best practices to remain competitive in a more stringent global business environment.

How does the innovation of Act No.909-VIII in the simplified taxation system affect the tax optimization of large businesses? 

Pavlo Shovak, 

associate, Avellum Partners

The single tax, a simplified taxation regime designed for small businesses, is widely used in Ukraine. However, the tax benefits of the regime are so attractive that not only small businesses use it. Middle-sized and big businesses arrange their transactions in a way that allows them to apply those benefits as well in order to optimize the overall tax burden. 

For this reason, the government has made several attempts to reform the single tax to make its application more burdensome and less attractive. However, the latest changes introduced to the single tax by Act No.909-VIII, are relatively insufficient in comparison with the initial suggestions put forward by the government. The Act increased tax rates for payers of 3rd and 4th groups of the single tax and decreased the revenue threshold for payers of 3rd group of the single tax from UAH 20 million to UAH 5 million.  These amendments make 3rd and 4th groups of the single tax less tax effective than before. However, they are unlikely to fully prevent big businesses from using single taxpayers for tax optimization purposes. Meanwhile, the reduction in the revenue threshold for the 3rd group of the single tax would require rearrangement of the existing structures. To preserve the tax efficiency of the structure with payers of the 3rd group of the single tax their numbers should be dramatically increased. This would make new structures much harder to administer and, therefore, significantly less attractive for big structures or projects.

In what way does the Regulation on abolition of monthly advance corporate tax payments, implementation of quarterly corporate profit tax reporting for enterprises whose tax year revenue exceeds UAH 20 million, affect their work?

Galyna Melnyk,

lawyer, Ilyashev and Partners

As of 1 January 2016 new amendments to the Tax Code of Ukraine (the TCU) introduced by the Act No.909-VIII came into effect. The amended TCU no longer provides for advance corporate tax (CPT) payments (except for dividend distributions) and establishes quarterly corporate profit tax reporting and payment for those taxpayers whose previous tax year revenue exceeds UAH 20 million. The aforesaid advanced corporate tax payments implied that the taxpayers had to make monthly contributions to the budget actually calculated on the basis of the profit in the previous tax year with no regard to the profitability of the tax year in which such payments were made. This led to situations where taxpayers had to pay CPT during a lossmaking tax year only because they had reported taxable profit in the previous reporting period, which only contributed to the deterioration of their financial state and resulted in huge overpayments to the budget. Moreover, in practice taxpayers faced major difficulties trying to use these overpayments for decreasing their tax obligations.

Taxpayers are currently released from an obligation to make such burdensome crediting of the state budget via advance contributions and are allowed to pay CPT based on taxable profit actually reported in the exact period for which the CPT payment is to be made (tax quarter). Hopefully, this amendment will help to balance a company’s tax burden and actual financial standing.

How do you assess an impact of the Act of Ukraine On Amending the Act of Ukraine On Measures Aimed at Support of Capitalization and Restructuring of Banks of 24 December 2015, No.913-VIII on stabilization of the financial economic situation in Ukraine?

Oleksandr  Biryukov, 

counsel, LCF   

The idea to promote banks to raise their capital in times of difficulty is certainly a good one. It stipulates commercial banks acquire additional resources to assure their financial stability and, what is more important, secure fulfillment of the contractual obligations of clients. There is no doubt that this should improve the situation of the Ukrainian economy’s financial sector.

Nevertheless, some questions regarding the way to carry out this idea may arise: is it necessary to adopt a temporary act to encourage commercial banks to do their best to retain their marketability; and is adoption of a new separate act in the area of regulation of banks an appropriate way to assure the economic security of the state and citizens, facilitate the stability of banks activity, minimization of the negative consequences of a difficult situation in Ukraine, particularly because of temporary occupation of certain territories of Ukraine and lasting Anti-Terrorist Operation (see: the preamble of the Act). To the best of my knowledge, there is one specific Act in Ukraine which is totally and exclusively devoted to regulating the country’s banking activity — the On Banks and Banking Activity Act of Ukraine.

So, the main question is this: why do Ukrainian lawmakers correct the regulation of banks that already exist, instead of making necessary amendments to the special Act purely devoted to regulating banking activity in the country?

On 8 December 2015 the Acts of Ukraine On Amending the Land Code of Ukraine Regarding Improvement of Mechanism of Transfer of Land Plots Alienated for Public Exigencies or Grounded on Public Necessity, No.862-VIII and On Amending Article 50 of the Act of Ukraine On the System of Land Tenure Regarding Simplification of the Procedure on Creating Projects of the System of Land Tenure for Allotment of Land Plots, No.863-VIII were adopted. Assess the Acts from the point of view of creating the conditions for the implementation of investment projects.  

Sergii Korniienko,

сounsel, Antika Law Firm

These Acts are timely and important for Ukraine, because it is a step ahead to simplify the existing land allotment procedure.

By adopting Act of Ukraine No.862-VIII, the Ukrainian Parliament clearly defined which state body or local authority has the right to adopt a decision to transfer the forcibly alienated land plot to the applicant for further development thereof. Unfortunately, in the past we did not have a clear division of powers among state bodies and the local authority for such cases. It was always a big question as to which kind of state or local authority is authorized to pass a decision to transfer land plots which had been forcibly alienated for social necessity in accordance with the procedure set forth by the Land Code. Of course, it had negative consequences, inter alia, financial losses, for both the applicant (investor), who cannot completely avoid the risk that the decision to transfer him the previously alienated land plot had been taken by the proper authority, and the state or local community, who could not legally grant such kind of land plot to the applicant due to the lack of powers defined by Act and, as a result, didn’t receive the land tax or land rent payments in aforementioned cases.

From my perspective, Act of Ukraine No.863-VIII will also have a positive impact and simplify the procedure on preparing land allotment projects. Based on such Act of Ukraine, from 1 January 2016 each land allotment project should be supplied with copies of legal documents with respect to the immovable property objects with III-V difficulty level. Thus, it is not necessary to supplement the land allotment projects with copies of legal documents for the objects of immovable property located at the land plot if the difficulty level of such objects is less than III-d category.

On 25 December 2015 the On Public Procurement Act of Ukraine was adopted. What regulations have to favour the rise of the level of competition in the sphere of public procurement and reduce the level of corruption? 

Anna Litvinova,

associate, Aequo

State procurement procedures in Ukraine are currently regulated by two principal legislative Acts: On State Procurement Act  and On Specifics of Procurement in Certain Sectors of Economic Activity Act. Both legislative Acts will be repealed by the newly-adopted On Public Procurement Act of Ukraine (the Public Procurement Act), once it comes into force. The new Act will unify the legislative framework in the field of public procurement.

The Public Procurement Act introduces an electronic procurement system, which shall promote competition in the state procurement sector and decrease the level of corruption. It is expected that the e-procurement will ensure rapid exchange of documents and information, ensure disclosure of all proposals of participants following completion of the bid and create a model of e-procurement involving state and private business. This will ensure overall transparency and accountability of the public procurement process in Ukraine. 

Unlike the current act, the Public Procurement Act provides for only three public procurement procedures: a) open bids; b) competitive dialogue; and c) negotiable procurement procedure. Thus, it eliminates the following procedures: two-step bid, request for price offers and preliminary qualification of participants.

The Public Procurement Act was adopted by the Ukrainian Parliament on 25 December 2015; however it has still not been signed into law by Ukrainian President Petro Poroshenko.  Once this happens, the Public Procurement Act will come into force in two stages: 1) from 1 April 2016 the provisions of the law shall apply to government authorities and to entities operating in certain sectors (e.g. oil & gas, electricity, heating, transport, etc); and 2) from 1 August 2016 all public procurement will be conducted through the electronic bidding system.

Assess from the anti-corruption point of view the On Amendments to the Criminal Procedure Code of Ukraine regarding Criminal Cases Investigated by Prosecutors’ Offices Act of Ukraine of 24 December 2016, No.916-VIII.

Kateryna Gupalo,

counsel, Arzinger

As the National Anti-corruption Bureau of Ukraine (NABU) has begun to function, the question arose as to the future of criminal proceedings regarding corruption offences (allegedly) committed by the so-called top government echelons which were once investigated by the law-enforcement authorities. According to the investigative jurisdiction of such cases, it would undoubtedly be logical to refer them to the NABU and thus meet both the expectations of the public and the idea of the NABU as an independent authority for unbiased investigations regarding high officials.

At the same time, there is a de facto transitional period introduced by the On Amendments to the Criminal Procedure Code of Ukraine regarding Criminal Cases Investigated by Prosecutors’ Offices Act of Ukraine of 24 December 2016, No.916-VIII. In particular, under the Act, criminal cases regarding corruption offences of so-called top government echelons investigated by prosecutors’ offices will still be retained by the latter under investigation until the pre-trial investigation is over, though for no longer than two years.

In other words, the criminal proceedings that currently exist regarding the corruption offences of so-called top government echelons will not be referred to the NABU. For instance, our law office is rendering support in several criminal proceedings of respective category initiated by the Prosecutor-General’s Office of Ukraine, which remain there, respectively. However, the above provisions of the Act do not prevent the NABU from carrying out pre-trial investigations in criminal proceedings registered by the NABU itself.

On 24 November 2015 the Draft On Ensuring Widespread Export Expansion by Ukrainian Producers by Means of Insurance, Guarantee and Easing of Export Credit, No.2142a was adopted in the first reading. How do you assess the proposed legislative regulations on the establishment and operation of an export-credit agency?

Anzhela  Makhinova,

senior associate,  Sayenko Kharenko

On 24 November 2015 the Draft Act On Ensuring Widespread Export Expansion by the Ukrainian Producers by Means of Insurance, Guarantee and Easing of Export Credit, No.2142a (Draft Act) was adopted in the first reading.

In its Conclusion to the Draft Act, the Chief Scientific Expert Department of the Secretariat of the Ukrainian Parliament raised concerns as to compliance of the Draft Act with Article 3 and Annex I (paras  j and k) of the WTO Agreement on Subsidies and Countervailing Measures (the SCM Agreement) that directly prohibits subsidies contingent upon export performance.

Article 3.1(a) of the SCM Agreement directly prohibits subsidies contingent upon export performance. The illustrative list of the prohibited subsidies is set out in Annex I to the SCM Agreement. Notably, para (j) and (k) of Annex I among prohibited subsidies list provision by special institutions controlled by governments (i.e. the State Export Support Agency in the current case) of export credit guarantee or insurance programmes and export credits.

However, the SCM Agreement and Annex I directly establish the compliance of conditions with which allow avoiding recognition of an export subsidy as prohibited. For instance, Annex I recognizes as a prohibited export subsidy export credits at rates below those which exporters actually have to pay for the funds so employed, etc.

Moreover, paragraph (k) (2) of Annex I (so-called “safe haven”) sets out that if a WTO Member is a party to an international undertaking on official export credits (according to Canada — Aircraft (Article 21.5 — Brazil) it is the OECD Arrangement on Officially Supported Export Credits), or if in practice a Member applies the interest rates provisions of the relevant undertaking (i.e.the Commercial Interest Reference Rate under the OECD Arrangement (or a sector-specific minimum interest rate, if applicable)), an export credit practice which is in conformity with those provisions shall not be considered to be a prohibited export subsidy.

In order to use the above exceptions and avoid further WTO disputes, it goes without saying that the Draft Act should be at least supplemented by the relevant details of the OECD Arrangement (especially in view of the fact that Ukraine is not a party thereto).