Ukraine may postpone scheduled tax cuts due to budget gaps

Ukrainian authorities may postpone cuts in the value-added tax and enterprise profit tax that were scheduled for 2014 to prevent a decline in budget revenue during the current slow economic growth period, Minister of Revenues and Duties Oleksandr Klymenko reported to Reuters on October 15. He said the scheduled tax cut (VAT to 17% from 20% starting Jan. 1, 2014; and enterprise profit tax to 16% from 19%) will decrease budget revenue by UAH 25 bln. Klymenko also cited the IMF’s recommendation against such a tax cut in the current circumstances.

Alexander Paraschiy: We’re not surprised by such an approach by the authorities. In light of the current budget revenue shortfall, tax authorities have been in a desperate search for additional sources of state collections. A transfer-pricing control has been introduced, excise duties have increased and the National Bank of Ukraine (NBU) is pumping into the budget more and more cash. Against this backdrop, cutting rates for the two most critical taxes that generate more than 50% of central budget collections was a really fancy idea that was bound to fail.

Still, even without tax cuts, there is a big question on how the authorities plan to balance the pre-election budget in 2014. So far, only a blank 2014 budget draft (with only macro-parameters) has been submitted to parliament to meet the budget’s formal deadline. Meanwhile, the actual document has not been made available even to Cabinet members, which means that authorities face a real dilemma in the fiscal area.