The statutory deadline under the Tax Code for making any substantial changes to tax law in the next year is approaching quickly. But it is already quite certain that this year, as usual, we will not see any tax changes by July 1, i.e., no less than six months before the new budget year, as required by law.
The first question is, then, whether we will see any changes at least a few months in advance, or if there will be changes during the Christmas holidays, and we only find out what has actually changed during the first weeks of next year. It is no secret that this was the kind of “negotiating technique” favored by the preceding government when dealing with parliament: to table proposals to amend taxes and the budget only in the dying days of the year, thus giving no opportunity for there to be a detailed discussion – just take it or leave it, basically. But the current relationship between the government and the parliament’s committees suggests that this won’t be the case, given the current balance of power. So we might expect that this year any changes will be proposed ahead of the usual, last-minute schedule. However, we will see.
Moreover, missing the statutory deadline for proposing changes gives the legal grounds to challenge the legitimacy of amendments for at least the next year: those unhappy with certain amendments may not accept them, and block their application for a year. An example from the past year is the transport tax, where several hundred court rulings in favor of taxpayers have already been issued. We can only support these motions, as under the Constitution the parliament has to obey the law, including the one on procedural requirements for making changes to tax legislation. There are no special exemptions granted under the rule of law to the parliament – the law has to be for everybody, or it is not a law. From a moral standpoint, it is difficult to claim that such changes are so urgent that formal legal requirements must be overridden – as has repeatedly been done for the last two years following the downfall of the regime of Viktor Yanukovych. So with the passing of the statutory deadlines there are already certain restraints on parliament as to the scope of possible tax changes.
While there is public demand for changes in the tax sphere, it is now more difficult to proceed with substantial change if this concerns change to legislation that has been introduced rather recently.
Take the alternative to corporate profit tax that has been debated, which is based on introducing a tax on exit capital (the withdrawal of capital from a business in Ukraine). The current model was put in place by the current coalition. Replacing it with an exit capital tax (which in view of the author of this article might be rather beneficial for the economy in general) is not only technically problematic, but also quite a complicated political exercise. But the benefits of such a shift, if finally decided, and if properly communicated, would be convincing to the majority of taxpayers and to the major creditors of Ukraine.
There is another, more “traditional” possible way to change corporate profit tax: cutting off losses carried forward, non-recognition of accrued foreign currency differences until realization, limiting certain deductions, and re-introducing criteria of proved relevance to a business as a pre-condition for deducting expenses. To the best of our knowledge, such proposals have not yet been drafted (unlike the exit tax above, for which there is already a draft bill), but such suggestions are already being made. If this way is chosen, then opposition from business to such changes is more than likely.
Taking into account the above, we cannot exclude that there will be no drastic changes this year. The parliament and the government have become somewhat more cautions when it comes to change, for various reasons. One is that already stated above – i.e., the need to explain why the change was not made by this coalition a long time ago. Another may be the authorities’ inability to manage the changes professionally, and achieve what they actually expect. This can be seen with the change to the VAT refund regime last year, and the granting of the respective rights to exporters of agricultural commodities, while simultaneous squeezing the rights of agricultural producers to hold on to their VAT. The idea was the VAT, or at least a substantial portion of it, should be paid to the state by agricultural producers and be used to make VAT refunds to exporters of agricultural commodities. However, it seems that when introducing these changes, the transitional effect was overlooked – namely, that which is exported this year (and for which a VAT refund is due) has to be purchased with VAT raised last year from agricultural producers, when the respective VAT was not due to the budget. This unexpected (or, better to say not duly forecasted) effect struck a significant blow to the balance of the budget this year. This, and some other developments, may make parliament more reluctant to introduce possibly substantial changes this year. And no substantial changes may be not the worst case scenario.
The loud calls for legislation to introduce checks on the operation of foreign companies and other tools of “deoffshoresation” are driven to a significant extent by the effect of “Panamagate” rather than demands from taxpayers. At the moment it is difficult to say how seriously the state may be taking proposals for such legislation.
The credit for making tax changes that was granted to the current coalition is already significantly depleted by the changes made in the last two years. For this reason, any further change will be more difficult to make, even if they are really needed. We hope this will not divert the authorities from making further efforts to make real positive changes (like introducing taxation merely on the withdrawal of capital instead of profit taxation) and giving up the policy of maintaining legal pressure on taxpayers by finally adopting draft bill No. 3448, concerning criminal proceedings on tax matters). If the above “deoffshoresation” efforts and some other draft legislation on tax control (like a “zero declaration” as the starting point for applying taxation based on indirect methods, with reference to unjustified expenses and property) becomes reality, then the importance of liberal changes may be especially high. It could be that a proper balance between stick and carrot in tax law will then bring some capital into Ukraine.