Ukraine approves 2015 budget, tax changes to be revised after IMF talks

The Verkhovna Rada, Ukraine’s parliament, adopted a series of key fiscal-related laws at its Dec. 27-28 sessions. Most of the laws were amended from their first drafts (refer to our news on the state budget and tax code on Dec. 24) though the Rada failed to provide the public with the final draft of all of them. So all that we know about them is from the comment of Prime Minister Arseniy Yatsenyuk, who read portions of the most critical amendments before the MPs voted.

 

Based on the available information, MPs approved changes to the tax code, including the introduction of a real estate property tax, a tax on “non-critical imports” (10% for food and 5% for other goods), and hiked taxes on income from deposits and dividends (up to 20% from 15% valid currently).

 

On top of that, the Rada reportedly voted to keep a high tax rate on natural gas production for all of 2015: 55% of the price of production from shallow wells (valid since August 2014 and as originally proposed) and 28% from deep wells (5 km and deeper, as valid since August 2014, but more than 20% as originally proposed for 2015). A moratorium on VAT reimbursement for grain exporters was also kept valid at least for 2015 (despite VAT reimbursement being supported by a majority of MPs in the first reading of the tax code amendments).

 

In other legislative initiatives, the Rada approved a radical payroll tax cut to 16.4% from 41% for those agreeing to boost official employee wages by more than 30% and to more than 3x the minimum wage (again, the exact text of this initiative has yet to be made public). This initiative is subject to cancellation should the IMF resist it, Yatsenyuk said.

 

On the early morning of Dec. 29, the Rada approved the law on the 2015 state budget, which was also amended. Only its parameters – as provided in the original draft – are available to the public right now. There were no radical changes in the law, according to certain members of the parliament and the Cabinet. They said the core parameters were set as initially planned, though they might be subject to some changes in the final version: a 31.6% yoy increase in central budget revenue to UAH 475.2 bln, a UAH 63.7 bln deficit (3.7% of GDP), and UAH 88 bln (5.1% of GDP) in additional quasi-fiscal needs.

 

The earlier drafted macro assumptions were: a 4.3% decline in real GDP, nominal GDP of UAH 1,721 bln (+11% yoy) and a UAH 17/USD exchange rate in 2015. The budget law stipulates that it can be amended on the Cabinet’s initiative by Feb. 15, after consultations with the IMF and other international creditors, Yatsenyuk said, who stated talks will start as soon as Jan. 7.

 

Alexander Paraschiy: What was passed on Dec. 29 isn’t the final spending plan, given that it was approved in a rush and will very likely be significantly changed after talks with the IMF. We should wait for the IMF mission to arrive and to comment on this weekend’s legislation for a clearer understanding of Ukraine’s future in 2015.

 

What is very likely to remain intact is a high natural gas production tax, which will harm JKX Oil & Gas (JKX LN), Serinus Energy (SEN PW) and Regal Petroleum (RPT LN), and the non-reimbursement of grain export VAT, which is slightly discouraging for Kernel (KER PW) and all Ukrainian farming companies.

 

The main intrigue of the Rada’s busy weekend was the payroll tax cut to 16.4%. Businesses have been striving for such a reduction for many years since the payroll tax was the main tax pressure on local business.

 

However, it is not clear what will be the mechanism of such a tax reduction (previously, the Finance Ministry always distorted the very idea of cutting the payroll tax by inserting various caveats and exceptions). Secondly, it is not clear what will be the IMF’s reaction since such a radical tax cut, if not compensated by an increase in official wages, will create a Pension Fund deficit of at least UAH 80 bln.