IMF warns Ukraine against radical tax cuts

Nina Yuzhanina, the head of Ukraine’s parliamentary tax committee, announced on Oct. 21 she is going to submit a tax reform plan based on radical tax cuts to parliament next week. Her tax code draft, as presented earlier, foresees more radical tax cuts than the Finance Ministry’s plan, including a 15% VAT tax (compared to the current 20% and MinFin’s 20% proposal) and a 15% corporate profit tax applied to distributed profit only (compared to the current 18% and MinFin’s 20% proposal).

Yuzhanina stated that IMF representative Jerome Vacher warned her on the need to ensure a balanced budget, the Interfax-Ukraine news agency reported. “Vacher warned that if the draft is registered now, he will make a statement that the IMF mission does not support it,” reported the pravda.com.ua news site, citing Yuzhanina.

Yuzhanina claimed that some experts estimate a UAH 15 bln drop in tax revenue from the adoption of this reform, according to an Interfax report. That estimate is in deep contrast to MinFin’s estimates of the consequences of such radical tax initiative. Recall, Finance Minister Natalie Jaresko reported last week that MinFin’s tax reform draft could lead to reduced state revenues of UAH 60 bln, while more radical reforms (like what Yuzhanina has proposed) would lead to a UAH 120-200 bln plunge in budget revenue.

Alexander Paraschiy: Thus far, it’s hard to believe Yuzhanina’s assertion that the revenue lost from a radical tax cut could be simultaneously compensated by boosted tax proceeds from de-shadowing. Therefore, we consider the tax committee’s initiative to be part of populist politics. Moreover, we see a low chance that the IMF, which has demanded a reduction in Ukraine’s budget deficit next year, will share the optimism of Yuzhanina.

We expect that this initiative won’t be approved as it will be opposed by the IMF, which is not only the main creditor to Ukraine but also a trigger for other bilateral and multilateral loans for the country. Instead, hopefully from pressure from the IMF and the Finance Ministry, the government will initiate a broad discussion on cutting of budget spending after the weekend’s local elections.