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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Oligarchs to foot war bill

Parliament votes for changes in Ukraine’s budget and Tax Code
5 August, 2014 - 11:25

“Implementing these proposals will make it possible to increase the resource of Ukraine’s 2014 consolidated budget by about 10.3 billion hryvnias,” says the explanatory note to Draft Law No. 4309a “On Introducing Changes to the Tax Code and Some Other Legislative Acts of Ukraine” (read about concrete taxation changes further on in this article). But parliament voted down the bill on gas transportation system privatization (21 votes short of approval) and sent it for another reading.

In general, the session seems to have been held as top secret. In the beginning, the MPs were going to hear the report of Defense Minister Valerii Heletei behind the closed door and promised to open it when they will begin to vote on the budget and the prime minister’s resignation. But the session was on the verge of disruption when the Svoboda faction demanded that Speaker Oleksandr Turchynov remove 30  “Kremlin agents” from the session hall, including the Party of Regions MPs Mykola Levchenko, Vladyslav Lukianov, and Oleksandr Yefremov. Yet this demand was ignored.

After hearing a report on the counter-terrorism operation, the MPs started, after a 20-minute pause, a… closed-door debate on the budget. As the MPs explained to The Day later, confidentiality was necessary to prevent some opponents of the mineral extraction tax rise from stirring up passions in the session hall.

The Verkhovna Rada session opened only when Ukraine’s President Petro Poroshenko came in. “The early parliamentary elections are already a reality. It is not because some members of parliament, politicians or officials want this. It is because 80 percent of Ukrainians are demanding this,” he said from a VIP seat. The MPs froze. But even after this “blessing” of the Constitution guarantor they speedily voted for Arsenii Yatseniuk to remain in the premier’s office. Only 16       MPs voted for his resignation and, therefore, against the Cabinet’s economic course. Yatseniuk’s response was prompt: “We have voted these bills into law…, and there will be no default in Ukraine.”

On the one hand, this behavior of the premier is quite logical – the problem of financing the counter-terrorism operation has gone off his shoulders for a few months. But, on the other hand, if a compromise about the problems of budget redistribution was considered quite realistic from the very beginning (the final version was without a provision on compulsory unpaid layoffs of public sector employees and social benefit cuts), then was it really necessary to display the Ukrainian government in not exactly the best light? An adult behavior should have been shown from the very outset.

Yet the main result of this parliamentary session is not the fact that Yatseniuk has remained in office. As The Day’s interviewees from the UDAR party claim, the “premier replacement stunt” was originally aimed at securing the No. 1 place in Poroshenko’s new political force. The session’s chief message is that oligarchs will foot the war bill.

“Pressure was successfully put on those oligarchs who did not want to pay a higher tax on the extraction of gas, oil, and iron ore,” independent MP Serhii Mishchenko told The Day.

His colleague, MP Yurii Derevianko says that steel- and gas-related businesses declare minimal cost efficiency, “even though we know only too well that this efficiency accumulates in offshore areas and other places. So, it is right to raise taxes in these sectors.”

“They show enormous profitability. The ‘guys’ will never die of increased tax rates. And the bill’s provision of the zero-taxation of gas in the first year of extraction is a good motivation for Ukrainian private companies to invest in gas production. This is the best possible compromise,” independent MP Oleksandr Dombrovsky says. He also adds it is good that the MPs were wise enough not to change taxation of the agro-industrial complex. “This sector is one of the basic motors of economic development. It takes 2-3 months to slow it down, but it will take years to restore it,” Dombrovsky says.


The first is about the taxation of enterprises’ profit. From now on, preferential taxation will be limited to the tax on jointly-invested business and institutions. The new law cancels the low-rate (10 percent) taxation of the profit derived from operations with securities and derivatives. It is also proposed to tax again the profits of hotel business and of the facilities that generate electric power exclusively from the renewable sources of energy.

The second is the value-added tax (VAT). In particular, the authors of this law want to increase, from November 1, 2014, the “threshold” for mandatory registration of an economic entity as a VAT payer by 700,000 hryvnias (from 300,000 to a million hryvnias) and to cancel VAT exemption for operations connected with the supply of timber, firewood, and woodwork wastes. At the same time, the export of grain and industrial crops will continue to be exempt from the VAT until December 31 this year.

In addition, the law calls for introducing electronic administration of the value-added tax from November 1 onwards. This will allow “reducing the possibility of abuses, making it impossible to obtain illegal budget refunds, and increasing budget revenues.” This means the VAT payer will have an account automatically created in the tax electronic administration system on the day of registration. Besides, tax bills will only be formed electronically and registered in the Single Record of Tax Bills irrespective of the VAT amount in one tax bill.

The third is excise taxation. The MPs suggest a 5-percent rise of excise duty specific rates and of the minimal excise duty on tobacco items. Also, from now on, drinks currently considered as dietary foodstuffs and containing 8.5       and more percent of ethyl alcohol will be classified as alcoholic beverages. These articles are subject to the same excise duty as vodka is, i.e., 70.53 hryvnias per liter of 100-percent alcohol. At the same time, alternative fuels will be temporarily taxed at rate of 99 euros for 1,000 kilograms from January 1, 2015.

The fourth is payment for mineral resources usage. Accordingly, by January 1, 2015, payment rates for the usage of household gas resources will be increased: from 28 to 55 percent for up to 5 km deep gas deposits and from 15 to 28 percent for deposits deeper than 5 km. Also before this date, a 45-percent rate will be set for oil and condensate from up to 5 km deep deposits and a 21-percent rate if the deposit is deeper than 5 km. Besides, the exploitation of iron ore deposits is temporarily (until January 1, 2015) subject to payment at the rate of 8 percent of their value, with due account of the content of a chemically pure metal. A 0.55 reduction coefficient will be applied to payment rates of the gas extracted from new wells (for two years from the date these wells have been entered into the State Register of Oil and Gas Wells).

By Natalia BILOUSOVA, Maria YUZYCH, The Day