Olesia Safronova (UNIAN)
Ukraine’s key creditor, the International Monetary Fund (IMF), before
allocating another tranche of financial aid, has strongly recommended that the
Ukrainian authorities reviewed the tax legislation, lighten banking
restrictions, improve operations with state assets and show concrete results in
the fight against corruption.
The
issue of Ukraine's relations with its main creditor, the #IMF, is back on
political agenda. IMF doubts that Kyiv is able to implement reforms and fight
corruption effectively. Just six months ago, IMF’s Managing Director Christine
Lagarde said that the pace of Ukraine’s reforms was “astonishing” to the world.
But last week, she made it clear to the Ukrainian authorities that a
cooperation program is about to halt. "Without a substantial new effort to
invigorate governance reforms and fight corruption, it is hard to see how the
IMF-supported program can continue and be successful," Ms
Lagarde said in a statement.
U.S. Ambassador to Ukraine Geoffrey R. Pyatt was also
quick to respond: " Statements of the International Monetary Fund on a
slow progress in improving governance and fighting corruption in Ukraine is
another argument for completing reload of reform-oriented Ukrainian
government.” That “reload” wording has surely made some of Ukraine’s
politicians feel anxious.
The top officials also became agitated and the first
persons of the state. President Petro Poroshenko and Prime Minister Arseniy
Yatsenyuk have once again publicly taken an oath of allegiance to the reform
and intolerance to corruption.
Yatsenyuk announced the government's action plan for
2016 consisting of 376 steps, while the Head of State has even spoken with Ms.
Lagarde on the phone. As a result, the idea was born of a road map of urgent
reform. Apparently, this document is intended to complement the coalition
agreement of the pro-European parliamentary majority and other statements made
by various branches of power of intention to carry out a rapid transformation
of the national economy and the system of state governance.
Finance Minister Natalie Jaresko reported that a joint
team of President’s Administration and the government is already working on a
draft of the road map of reform. Moreover, it covers the priority issues of
economic development and state governance, including privatization and
anti-corruption policy, for example, in terms of e-declaration of the
officials’ income.
Even those who usually criticize the Cabinet for
excessive attraction to foreign loans, this time were discussing the IMF topic.
One of them, ex-Minister of Finance and MP Viktor Pynzenyk wrote on Facebook:
"We cannot do without the IMF loan."
The IMF pill was bitter but effective. The prospects
of seeing a locked door at the headquarters of Ukraine’s key lender have
stirred Kyiv up and not only made the authorities think hard about the road map
of reform, but also press ahead with a memorandum on the second revision of the
Extended Fund Facility (EFF) cooperation program the Fund approved a year ago,
under which we expect to receive another $5.8 billion in 2016.
There are plenty of versions of this draft memorandum
spun by the Ukrainian media. But it remains unclear, which draft is actually
final, if any. Nothing has been sent to Washington yet. Sources say that the
document with the top signatures might be sent to the IMF not earlier than
February 16 -- the date of the Cabinet’s report in the Rada.
At the same time, Washington has already sent a
package of proposals to Kyiv. To help the Ukrainian reformers, the Fund sent
two substantial reports -- on taxation and state assets management, which
actually resembled a cookbook in terms of preciseness of requirements.
The Fund has surely emphasized that the documents are
solely recommendations, and it’s up to Ukraine whether to accept or reject
them. But the price of free interpretation of this “recipe” is well known: if
you don’t follow the advice – you’ll roll back to the economic recession, even
deeper devaluation of the hryvnia and a new round of political turbulence. And
the Ukrainian soup will once again be spoiled.
A painful recipe of tax recovery
As part of the tax reform, the Fund considers it necessary to revise approaches
to the "simplified" taxation, change the number of tax rates,
maintain a unified social security contribution, as well as introduce a
progressive income tax (PIT).
According to the IMF analysts, legal entities and VAT
payers can no longer claim to be liable for "simplified" taxation,
because such a "benefit" has become a real loophole for tax evasion.
The Fund is confident that the single social payment
should be paid at a much higher rate - 28% against the current 22%. The sharp
decline in the rate of the single social payment is considered dangerous,
possible only if there are certain compensators.
The IMF offers to compensate reduction in SSC with a
combination of the following measures: “Increase the VAT rate from 20% to 21%,
eliminate the preferential VAT rate on pharmaceuticals [today’s rate is 7%],
eliminate special regimes for agriculture, increase excise tax rates, increase
corporate income tax (CPT) from 18% to 20%, as well as introduce a third PIT
rate of 25% on incomes higher than UAH 15,000," reads the report.
The income tax rate is also offered to be made partly
“progressive.” In conditions of sharp inflationary shocks, the IMF considers
acceptable to think through the mechanism of indexation of income tax taking
into account the inflation index.
Just as tough are recommendations to strengthen
control over calculation of tax payments. In this context, the Fund offers to
go for an unprecedented step: lower the bar of banking secrecy. "The SFS
can obtain bank statements only with a court order and the information so
obtained is restricted generally to general account balances. A decisive push against
an expanding informal sector would require softening bank secrecy laws, for
example, requiring only the intermediation of the central bank to obtain the
information," the report says. In order to make real steps in tackling
shadow economy it is necessary to soften the legislation on banking secrecy.
For example, making information available simply upon the appropriate decision
of the National Bank, according to the Fund’s recommendations.
The eternal issue of the search of additional budget
revenues - excise duties – was not left out, either. he recommendations are to
“Increase excises on beer to UAH2.48/lt and 3.10/lt in the next two years, on
wine – from UAH 0.01/lt to UAH 0.05/lt and UAH 0.1/lt in the next two years, on
spirits – from UAH 70.53/lt to UAH 105/lt and UAH 123/lt in the next two
years.” Sales of pure alcohol are recommended to be taxed, with subsequent
reimbursement if alcohol is not sold for the production of alcoholic beverages.
At the same time, the rate of excise duty on petroleum
products, according to the IMF analysts, is at an optimal level - 13%. So it’s
up to the effective administration of the excise tax and the fight against
smuggling.
Order in state assets
Recommendations for the management of state property are also substantial.
Firstly, the Ukrainian authorities were recommended to make an inventory of
state-owned real estate and land. The Fund believes that all this wealth is not
even really counted as the existing inventories do not cover the entire array
of available disaggregated data. Therefore, it is difficult to expect from the
state any effective management and use of its assets. But there comes a time to
start doing something about it.
Secondly, the Fund has advised to determine criteria
for the creation and liquidation of state-owned enterprises and standardize their
reporting. According to the IMF, such companies should report annually, and not
on corporate websites, but in the Verkhovna Rada. Thus, all branches of power
will be involved in managing state-owned enterprises.
In addition, the IMF supported the establishment of
one or more state holdings, which would combine state companies and would be
controlled by independent directors, devoid of political pressure. Earlier this
idea was actively lobbied by the Ministry of Economic Development, but for
several reasons it has not developed into any clear pattern.
However, the IMF does not have a common vision of how
to create these holding companies. The most efficient way seems to be creating
several structures for the management of groups of state assets.
The disadvantage of this model is its high cost due to
the need to attract a large number of qualified managers, as well as the risk
of a return to the status quo when there is a certain layer of experts and
managers, and they once again lead to a fragmented approach to the management
of state property, according to the IMF report.
A difficult compromise
In fact, Ukraine is now given a new set of requirements for transformation in
the most significant areas. The country’s foreign partners will surely assess
the implementation of reforms over a certain period. Finance minister Jaresko
noted that "there will be no tranches without reform." But some
ingredients from the IMF recipe will obviously cause controversy.
The Ukrainian bankers are not at all enthusiastic
about the prospects of the disclosure of banking information. "It is
difficult to say how this recommendation will or can be realized. The
requirements for disclosure of information by banks in favor of tax control
were only getting tougher in recent years amid global crisis," chief
economist of the Department of Strategic Planning at UniCredit Bank Andriy
Prykhodko has told UNIAN in his comments.
Financiers are anxious about the reaction to changes
in "simplified" tax system. In their opinion, the restrictions for
will lead to the growth of the shadow economy: the middle class of
entrepreneurs with an income of over $5 million will not move to the regular
taxation system. The experts note that the IMF-proposed approach does not take
into account the possible consequences for the economy.
Director of DA VINCI analytical group Anatolii Baronin
agrees with this point. "The IMF offers template options, which do not
take into account the situation in the country. For example, increased excise
taxes on beer and spirits, the demand for which traditionally increases in
times of crisis, will lead to an increase in the proportion of home-alcohol
production,” said the expert. “IMF proposals do not consider the changes in
purchasing power. Resource opportunities of filling the budget by increasing
excise taxes are already at the point where the introduction of additional
measures will have the opposite effect - reduction in budget revenues due to
falling demand and sales."
Baronin is positive that the proposed increase in the
tax burden in general will have no positive effect as it narrows the already
extremely unstable domestic demand against the backdrop of apparent stagnation
of foreign markets for Ukraine.
"I believe it would be easier for the IMF to set
specific parameters, like reducing the 1.5% budget deficit, increasing the
budget revenues to 2%, rather than offering dysfunctional solutions, which will
have the opposite effect," said Baronin.
Doctor of economic sciences, Anatolii Huley emphasized
that it’s not difficult to accept all proposals. But it is difficult to work
out a strategy for each figure and recommendation. The expert believes that the
lack of such strategy will only add turbulence into the business environment,
which needs solutions, not "the good intentions from the past."
"In fact, the IMF proposals are also good
intentions, which we should meet with the same good intentions to find a
compromise. We need to take today's analytics and use it to perform
calculations and to present solutions. The Fund’s suggestions are the
foundation for dialogue," said the economist.
The key in this dialog should be the ability of the
parties to hear each other’s arguments, as well as the determination of the
Ukrainian government to move from promises of action to real reform. A twenty-year
history of relations between Ukraine and the International Monetary Fund,
unfortunately, is replete with examples of bitter failures. So, the caution of
the Fund's functionaries toward Kyiv’s promises can be understood. However,
these issues in relations should not cover with fog the exceptional importance
of the objective – transformation of Ukraine into an economically and socially
successful state. And the main thing here is for Ukraine not to spoil the soup
by using too many recipes all at the same time. The representative of a nation
that truly understands the importance of accuracy and timeliness in cooking,
Christine Lagarde, should also understand this.
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