Cabinet Rolls Dice on Privileges

President Kuchma has banned the government from offering tax breaks to individual economic sectors and entities. In his opinion, this could entail considerable budget problems. “I categorically demand that the government stop its daily promises of new budgetary funding and privileges,” he declared.

It was after this demand made by the president during his meeting with the government that Prime Minister Anatoly Kinakh declared his intention to revive the critical imports policy, which envisions VAT exemptions for items listed by the government as critical import goods, Interfax-Ukraine reports, citing the Ukrainian premier. “We will make a decision on reviving critical import practices. This is vital for us,” the premier stated.

In addition, the government wants to revise VAT payment procedures. Premier Kinakh believes the VAT should be paid after the delivery of goods, not following their shipment. Earlier, the State Tax Administration had strongly objected to this idea.

The prime minister makes no secret of the fact that the proposals on tax breaks have been prepared by the Ukrainian Association of Industrialists and Entrepreneurs. The organization uniting the owners and managers of big enterprises is in its heyday now, pressing its leader for new privileges and so far receiving just promises from him. However, whether these promises will be fulfilled will apparently depend not only on the head of government. At any rate, President Kuchma sounded quite clear stating his attitude toward tax breaks: “The budget policy next year is to be extremely tough. If need be, it will have to be even tougher than last year’s.” Still, Cherkasy UAIE branch director Borys Raikov quite seriously proposed the premier assess possible VAT exemptions due to unfavorable business environment in the country.

Two weeks earlier, Minister for Industry Vasyl Hureyev made public government plans to award priority status to several sectors of industry. According to him, the government will give special support to engineering plants (specifically, to harvester producers), aviation and automobile plants (retaining tax breaks for AvtoZAZ-Daewoo in the face of EU protests), and light and wood-working industries. All these sectors, Mr. Hureyev confirmed, will receive tax breaks or substantial state investments next year.

Managers of Ukraine’s steel plants have already received pledges from the premier to retain their tax privileges, with Kinakh praising the pilot project whereby steel plants paid their income tax at 50% the rate. On his instructions, the Ministry for Industry is trying to improve the terms of the project in a bid to keep up the present high rate of industrial growth, with Minister Hureyev maintaining active consultations with steel plant managers, showing where the major improvements will take place.

Tax break moves by the cabinet have become a problem for International Monetary Fund experts who express their concern over Ukraine’s ability to service its foreign debt if the government continues to hand out privileges to its favored sectors. Vice Premier Vasyl Rohovy who has been assigned by President Kuchma to maintain dialog with the IMF said that the projected tax breaks is an issue of dispute in the talks with the IMF.

It is quite obvious that the policy of granting most favored sector status to chosen industrial sectors will give the opposition extra ammunition to criticize the premier, as privileges handed out on the eve of parliamentary elections will doom the government to become the target for accusations of far from unselfish lobbying the interests of some structures. Taking into account the mounting intensity of pre-election political sentiments, the cries of those without tax breaks could fall on willing ears. And it is no secret that it is the owners and managers of large enterprises who make the decisions on donating to parties’ war chests.

Without doubt, the Ukrainian economy needs lower taxes, something which is clear to all Ukrainians except the leaders of the Ministry of Finance. But the promises of a tax bonanza could become a major disappointment to those given them, for judging by President Kuchma’s statement, there is no consensus in the executive on the new tax breaks initiatives by the government.