25 percent tax carrot
The Ukrainian government promises to remove income tax obligations on the food service sector before the Euro-2012 soccer championships, said Deputy Prime Minister Borys Kolesnikov, implying that this tax carrot — rather than the stick — was meant to give a fresh impetus to the industry.
A five-year zero company tax rate is what those currently in power in Ukraine appear to have in mind with regard to Ukraine’s restaurants. Add to this the opportunity of free state advertising for restaurants, cafes, snack bars, etc., with English menus and the facilities required to service Visa and Master cards. Kolesnikov said the Cabinet was considering the possibility of adding such restaurant/cafe/bar data to the official websites and airing ads in the government-controlled media, provided every official requirement is met.
20 PERCENT LUCKY ONES
This Ukrainian government’s initiative caught most restaurant experts completely unawares. Yaroslav Zhulilo, president of the Anticrisis Study Center, says the economic bottom line is a zero income tax rate in regard to the whole leisure and hospitality sector, something easier said than done. Spot government support of small restaurants, roadside cafes, and diners in touristic localities would be more reasonable.
Ukraine’s restaurant market won’t be able to enjoy this tax incentive fully, as most restaurants and cafes in Ukraine are subject to simplified tax procedures, or to a fixed company tax. In other words, they do not pay the full amount anyway. “This government initiative will benefit only 20 percent of the Ukrainian restaurateurs, allowing them to reduce their expenses a little,” Olha Nasonova, a catering business expert, told The Day.
She says Kolesnikov’s project is strategically correct; it envisages progress in the catering business in Ukraine. But it is exposed to the red tape. The proposal made by the deputy prime minister is mainly psychological in its goals. In her opinion, such innovative ideas will make restaurants more attractive for investors, including businesspeople accustomed to operating on a more rigid market. This market, estimated at 50-percent-saturation by experts, can allow such expansion.
BACK IN THE SHADOW, TO SAVE WHAT’S LEFT OF PROFITABILITY
It is practically impossible to assess the central budget loses incurred due to the proposal. Says Nasonova: “An average restaurant’s daily revenue amounts to 3,000 hryvnias, with only 1,000 on record. There are restaurants in Kyiv that earn 20,000 hryvnias a day, with 3,000 entered in the books. Of course, they do it to survive. If they disclosed their total revenue, they’d end up practically empty-handed, what with the 20 percent VAT and 25 percent company income tax.
Ukraine’s catering business is down by 50 percent, compared to any period before the financial crisis struck. Nasonova explains, “before the crisis, the average profit margin in the catering business was between 15 and 20 percent. Today, it is seven to ten percent — and this is regarded as good, all things considered.” Expert estimates point to some one thousand restaurants that have gone bankrupt during the year. The restaurant market is showing an annual ten percent increment, but only by boosting food and drink prices.
RESTAURANTS CLOSING, INTERNET CAFES, REGULATORY AUTHORITIES IN HOT PURSUIT, AND SOARING PRICES
The Day polled its experts, and their findings indicate that Ukraine’s catering business assets will suffice to provide for the Euro-2012 Soccer Finals. However, this is unrelated to the company income tax. There are a number of other factors at play, acting against domestic restaurateurs, above all the situation on the housing market. Most Ukrainian restaurateurs operate on leased premises, with a rising number of Internet clubs emerging as a strong rival, especially this year. They can offer the proprietor higher rents. Nasonova told The Day she knew of five such examples in Kyiv, where cafes closed and then reopened as Internet clubs.
Food price hikes are another factor that makes the life of Ukrainian restaurateurs difficult. The third factor is the current government’s effort to bring the restaurant market under control. In March and April 2010, practically all restaurants, cafes, and diners in Ukraine were exposed to devastating inspections by sanitary, fire safety, and other authorities leaving them with heavy fines to pay for what they deemed as violations of the existing [countless and practically incomprehensible] regulations.
Nasonova: “There is an organization known as Blahoustrii [current bureaucratese for (a) an improvement of public services and (b) the planning and organization of public services] that poses a real threat to the Ukrainian capital’s restaurateurs, considering that most of them run summer terraces without having any documents, simply because getting this kind of document is practically impossible. And so they are levied fines and slip envelops into the pockets of watchful inspectors, the sums thus paid far exceed that of the government-proposed tax incentive. The battle-hardened restaurateurs are skeptical about the 25 percent tax rate cut: they are content to put aside the usual two-to-five-thousand-hryvnia bribes, but they can’t see any better prospects for their businesses.”
HOTEL BUSINESS: GOOD AND BAD EXPERIENCE
Under the current Ukrainian legislation, the hotel business is rid of the company income tax. Kolesnikov says, however, that Ukraine doesn’t have enough hotels to accommodate Euro-2012 players and guests. And so the incumbent administration has to work hard to provide financial incentives to encourage the owners of hotels to expand and upgrade their premises. In fact, Deputy Prime Minister Kolesnikov declared that the government was prepared to refund the loan interest for the owners of hotels conducting major repairs.
