You're reading: Targeted tax breaks: Boon for all, or only for insiders?

Companies in select industries are set to benefit from tax breaks and other incentives on Jan. 1 if they meet certain investment, jobs creation and salary requirements.

On Sept. 28, President Viktor Yanukovych signed a bill that is designed to “introduce innovative and energy-saving technologies, create new jobs and (promote) regional development.”

It will come into force on Jan. 1, but the Cabinet of Ministers only has three months to draft secondary legislation to ensure the law doesn’t contradict existing rules and provide implementation instructions.
Less than 800 words, the bill lacks specifics but outlines a list of tax incentives for companies who meet certain criteria.

According to the bill, only companies who operate in still undefined “priority economic sectors” can qualify for a zero percent profit tax rate if they embark on new or existing reconstruction or modernization projects. They also will be exempt from customs duties on equipment and components used in investment projects and will be entitled to issue value-added tax promissory notes upon the import of such equipment and components that should be settled in 60 days, reads a report by auditing giant PwC.

The profit tax rate will rise to 8 percent from 2018 to 2022 on income derived from the investment projects.

Priority economic areas are vaguely defined in the bill: “…sectors aimed at meeting the needs of society in high-technological, competitive ecologically clean products, high-quality services that carry out the state’s policy with regard to the development of production and export potential, and the creation of new jobs.”

The loose wording has raised suspicions that the bill will benefit insiders.

“There’s suspicion in economic circles that this is just another lobbied law for concrete people, for the benefit of certain financial-industrial groups,” said Andriy Novak, an economist and head of the Committee of Economists of Ukraine. “Besides, you can’t improve the investment climate with one law, you need to improve the banking system, the judicial system to protect investments, corruption…there’s just so much more that needs to be done.”

Some qualification criteria furthermore is puzzling and vary based on a company’s size. Thus, small businesses qualify if they invest at least 500,000 euros, create at least 25 jobs and pay employees a salary that is at least 2.5 times the minimum monthly salary set on Jan. 1 of the reporting year.
The minimum monthly salary currently is 112 euros as of Oct. 1.

Andriy Novak

“I doubt small businesses have the financial means (at least 500,000 euros) to qualify,” said Yulia Drohovoz, head of the economic committee at the Ukrainian Union of Industrialists and Entrepreneurs.
She added that it’s unlikely that a small business, which usually employs up to 50 employees, normally has the capacity to hire 25 employees.

“This law (is mostly) for larger companies…tax incentives should presumably cover the investment that is made,” stated Yaroslav Guseynov, senior corporate tax manager at PwC.

Medium-sized businesses must invest at least 1 million euros, and create a minimum of 50 jobs. Investments by large companies must exceed 3 million euros with more than 150 jobs created.

Implementation and administration of the incentive program falls on the Cabinet of Ministers’ shoulders. This includes identifying the economic sector priority areas and awarding the incentives to companies who qualify.

PwC said the qualifying sectors likely will include the high-tech, eco-friendly, manufacturing and export-oriented industries.

“Overall, this is a positive first step,” said Guseynov. “It looks like renewable energy companies, as well as (exporters in) metallurgy and chemicals will benefit.”

After the bill was adopted in parliament in September, Deputy Prime Minister Serhiy Tigipko lauded it not only for its potential for regional development and large-scale job creation, but also for its multiplier effects.

“Its implementation will allow us in the coming years to build dozens of new industrial manufacturers and bring in billions of dollars in investment and create thousands of high-paying jobs in industry,” said Tigipko.

The social policy minister said that the creation of one job at an industrial enterprise allows for the creation of 10 jobs along the value chain of a particular industry in transport, communication, the financial sector, in trade and in construction.

Tigipko added: “The renewal of industry, we provide incentives for the return of hundreds of thousands of Ukrainians who are forced to seek work abroad.”

Guseynov was unconvinced, however.

“That won’t be the decisive factor for coming back,” he said.

And not everyone is so enthusiastic.

Julian Ries who heads Beiten Burkhardt law firm in Kyiv questioned why the law isn’t inclusive of the entire economy.

“But why create ‘most favorable investment conditions’ only for priority projects?” Ries asked rhetorically. “Why not create the most favorable investment conditions for everybody? Reading these kinds of laws, I sometimes have the impression that there is a long line of investors with deep pockets full of money, all impatiently waiting to pour money into and flood Ukraine. [Yet] Ukraine desperately tries to limit investment only to an exclusive circle of investors….”

Still, Drohovoz of the Ukrainian Union of Industrialists and Entrepreneurs said the law is needed to stimulate capital investment yet lamented the fact that the Cabinet of Ministers will be the sole deciding body of who qualifies.

“There’s so much secondary legislation that needs to be drafted, the criteria isn’t clear especially the priority investment areas; how will it function with other existing norms related to taxes, there’s so many unanswered questions,” said Drohovoz.

Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].