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Categorized | Economy

Kiev targets oligarchs with new budget bill

Posted on December 28, 2014

Recession-battered and war-torn Ukraine overhauled its business-choking tax system late on Sunday, promising to lower the burden on small businesses and lower-income citizens while closing loopholes long exploited by influential oligarchs.

The package of legislation adopted after 9pm on Sunday also envisions controversial increases in import duties to help stabilise stretched state finances and counter a balance of payments crisis.

    The laws are to form the revenue-boosting backbone of a new austerity-packed 2015 budget officials hope will unlock fresh multibillion-dollar bailouts from the International Monetary Fund and other western donors.

    A vote on the budget, which is expected to sharply cut subsidies and government spending, is expected to be held early on Monday.

    Adopted after 10 hours of gruelling negotiations that tested the unity of a pro-western coalition, the tax legislation aims to bolster small and medium-sized business and reduce a massive shadow economy while squeezing what officials described as a fairer share of revenue out of oligarch-owned businesses.

    Officials described the legislation as a new social contract for an economy that has long been seen as controlled by oligarchs.

    “We worked out the right package which will allow us, on the one side to introduce a fair taxation system, while on the other side, to fill the budget,” said Arseniy Yatseniuk, Ukraine’s prime minister.

    Controls were imposed on profits being funnelled to offshore tax havens through transfer pricing schemes.

    Oligarchs, Mr Yatseniuk insisted, “will no longer be able to hide their profits and fortunes in offshore zones”.

    In a bid to simplify business activity in a country notorious for having one of the world’s most unfriendly taxation systems, the total number of taxes will be streamlined from 22 types to 9.

    Rates for pension fund contributions, now at some 41 per cent, are to be cut by more than a half in coming years. Officials hope this measure will broaden the collection base, steering business away from the widespread practice of paying employee salaries under the table.

    The desperate moves to reboot long-term growth and fill short-term budget gaps come as gross domestic product contracted about 7 per cent this year on the heels of Russia’s annexation of Crimea and a continuing eight-month military stand-off with Russian-backed separatists controlling breakaway eastern regions.

    To finance increased defence spending despite further economic contraction expected next year, Kiev’s cash-strapped government plans to cut spending sharply by building fresh sources of revenue.

    Tax rates will be hiked sharply on luxury items including expensive automobiles, passive income, royalties, dividends from offshore entities, cigarettes and alcohol.

    A 10 per cent tax has been slapped upon lotteries; property taxes on large apartments and homes are being introduced; and fees for hydrocarbon production will be increased.

    The decision to no longer refund value added tax to traders on the export of grain could spark protests from international agribusinesses that have invested heavily into the country.

    After much debate, lawmakers approved government plans to introduce additional 5-10 per cent custom duties on imported goods for one year.

    Mr Yatseniuk said his government would explain the dire need for the protective measures in consultation with other WTO member countries and the EU, with which Kiev this year inked a free-trade agreement.

    Ukrainian officials hope the higher import duties will generate $1bn in additional revenue for a treasury that envisages a deficit of 3.7 per cent of gross domestic product next year.

    They are under pressure to adopt the budget before the end of this year in order to swiftly re-engage with the IMF.

    With fears of a financial meltdown spreading after central bank reserves halved this year to about one month of import coverage, the IMF concluded this month that Ukraine would need $15bn of additional support on top of its existing $17bn loan programme.