You're reading: IMF accepts Ukraine’s budget, changes to tax code pending

Revisions to the state budget and tax code are still needed to secure $4 billion in financing from the International Monetary Fund and other Western lenders when parliament reconvenes on Jan. 26, officials say.

Ukraine’s austere financial plan, together with
the underlying legislation that parliament passed late on Dec. 25, was recently
endorsed by the IMF, Finance Minister Natalie Jaresko said on Jan. 11.

Jerome Vacher, the IMF’s envoy to Ukraine,
said that the budget itself is “consistent with the (IMF) program’s
objectives.” However, discussions continue on some remaining issues – notably
on structural fiscal reforms that are needed to ensure medium-term fiscal
sustainability, Vacher said.

Jaresko said the IMF is considering not only
the adoption of the 2016 budget, “but the execution of all the preliminary
conditions and structural benchmarks, the terms of which were scheduled before
the end of December 2015, when making its decision about the disbursement of
the next tranche.”

This year’s budget foresees Hr 595 billion
($23.8 billion) in revenues, and expenditures of Hr 668 billion ($26.7
billion).

The budget deficit is expected to fall from
4.1 percent of gross domestic product in 2015 to 3.7 percent this year, as
agreed with the IMF. The maximum deficit is set at Hr 84 billion ($3.35
billion). That’s one of the key requirements Ukraine has to meet to secure the
next installment of the IMF’s $17.5 billion lending program.

An IMF board meeting on whether to allocate
$1.7 billion to Ukraine will take place in February the latest, according to
Ukraine’s Finance Ministry.

According to Empire State Capital, a
Kyiv-based investment firm, it is likely that the IMF’s decision on the next
financial installment will come only in March.

But by that time, more changes might be
required, experts say.

Ivan Miklos, the former finance
minister of Slovakia and an adviser to Jaresko and Economy Minister Aivaras
Abromavicius, says that the main problem with the IMF program and Ukrainian
reforms is that the loan package is an essential but not sufficient
precondition for transforming the country.

In written comments to the Kyiv Post, Miklos
said that Ukraine needs “much more” than funding because it also has to become
a “high growth, competitive economy.”

Overhauling the taxation system is an
important structural reform that needs be implemented, according to Miklos.

“From this point of view, the IMF’s interest is to have such a tax
system that will secure fiscal consolidation and sustainable public finances,”
Miklos said. “But Ukraine’s tax system (together with other reforms) also has
to create conditions for high and sustainable economic growth.”

Viktor Kryvenko, deputy chairman of
parliament’s budget committee, says that single social payment and income tax rates
should be changed.

“I don’t believe it’s possible to change it
within this year, but so far we made a ‘great’ present for commodity-driven big
business by introducing a new single social payment rate of 22 percent
(compared to previous rates ranging from 36.76 to 49.7 percent) – because we
won’t take those (company’s revenues) out of the shadows,” Kryvenko told the
Kyiv Post.

As a result, big companies will benefit, he
said. Meanwhile, the changes will be a burden for small- and medium-sized
businesses. At least 40 percent of the country’s economy, or $34 billion, goes
under the radar of government agencies and officials.

Supporting employees of the technology
industry, who enjoy a much lower tax burden with the simplified tax system, and
the pharmaceuticals sector is crucial to sustaining Ukraine’s economy,
according to Kryvenko.

The value-added tax on pharmaceuticals will
stay at 7 percent in the government’s proposed tax plan, despite previous
intentions to raise it to 20 percent. “We need to create such conditions for
them so that they won’t leave the country,” Kryvenko said.

Viktoria Ptashnyk, a lawmaker and member of
parliament’s economy committee, said that parliament should focus on
dismantling the fraudulent value-added tax refund schemes from which companies
illicitly benefit. The bill passed by parliament suggested that two
simultaneous registers of taxpayers will be kept.

“These (registers) will be impossible to keep,
and so the committees need to work out a proper tax code by April,” Ptashnyk
told the Kyiv Post.

The taxation system for agricultural producers
may also be revised, Jaresko said. In December parliament partially retained
into this year value-added tax breaks given to farmers. Under the current
terms, according to Dragon Capital, they get to retain VAT receipts as follows:
80 percent for cattle farmers, 15 percent for crop farmers, and 50 percent for
all other producers.

Kyiv Post staff writer Olena Goncharova can be reached at [email protected]