Ukraine parliament approves 2016 budget and mild tax reform

Ukraine’s parliament, the Verkhovna Rada, approved a mild tax reform on Dec. 24, before passing the 2016 central budget in the early morning of Dec. 25. As a result of the new tax rules, adjusted from the Finance Ministry’s original draft, the budget’s revenue target was reduced to UAH 595.1 bln (from an initial UAH 601.4 bln) and spending was cut to UAH 667.7 bln (from UAH 674.1 bln). The 2016 budget deficit was left unchanged at UAH 83.7 bln (3.7% of expected GDP). About 20 changes were introduced in the budget in the last week, said Finance Minister Natalie Jaresko.

 

The tax changes ended up being a compromise between deeper tax reforms proposed by the Cabinet and a group of MPs led by Nina Yuzhanina. The final version of the tax changes is not publicly available (only the draft dated Dec. 22, which was modified in the Rada), so most of the information on the changes could only be cobbled together from media reports.

 

The changes include the payroll tax being reduced to 22% (from 41% currently, but more than the 20% that MinFin initially called for), preservation of simplified tax system for SMEs, a flat personal income tax at 18%, the introduction of two registers for VAT reimbursement for exporters (one register for companies with exports accounting for more than 40% of their turnover and the second for others) and partial preservation of the special taxation regime for agri-producers, according to the RBK-Ukraine news agency.

 

As was outlined in the Dec. 22 draft, agricultural companies will pay 75% of VAT to the state budget and retain for their own purposes 25%, as of 2016 (compared to 100% in 2015). This item was amended to allow crop producers to retain 15% of VAT, poultry and pork producers to retain 50% of VAT and cattle farmers to retain 80% of VAT, according to the epravda.com.ua news site. Exporters of farming commodities will be eligible to reimburse VAT paid.

 

Private natural gas producers got their long-awaited tax reduction from 55% of the natural gas price (and 28% for those mining gas from deposits deeper than 5,000m) to 29% (and 14% from deposits deeper than 5,000m), according to Interfax-Ukraine report.

 

Besides the budget, the Rada approved other important legislation: an electronic procurement system was introduced to record and monitor all public procurements, interim import duties were abolished, and bank secrecy was lifted for those citizens who receive social payments such as benefits, pensions, privileges, etc.

 

Alexander Paraschiy: The budget’s approval was impressive considering it adheres to the IMF requirement of a 3.7% of GDP deficit while substantially cutting the payroll tax. The chances for relatively fast approval were in doubt amid opposition from businesses and state workers, as well as several parliamentary factions. Indeed, this budget was very close to what the IMF approved in what promises the next wire from the fund (about USD 1.7 bln) arriving already in January. The new electronic procurement system, as well as the new transparency for benefit recipients, are breakthroughs that introduce an unprecedented level of accountability to the nation’s fiscal accounts.

 

Private gas production companies finally got their taxes lifted, enabling them to significantly increase their operating cash flow in 2016 and to possibly restart their investment projects. The prices of JKX Oil & Gas (JKX LN) and Regal Petroleum (RPT LN) stock may advance on this news, while Serinus Energy (SEN PW) – which recently decided to exit Ukraine – won’t be affected any more.

 

The legislation is also slightly encouraging for listed crop farming companies since they still will retain some portion of their VAT obligations, while the reduced payroll tax will likely cover their increased VAT burden. VAT reimbursement for grain exprters will also benefit farmers who will get better domestic prices for their produce. A smaller-than-planned VAT payment rate for poultry producers will benefit Ukraine’s leading chicken meat producer MHP (MHPC LI) and possibly leading egg producer Avangardco (AVGR LI).