Draft Law of Ukraine

"On Value Added Tax"

It’s necessary to remind that in July 2002 the Cabinet of Ministers of Ukraine proposed the draft of nearly the same content N1277. Verkhovna Rada did not pass that draft law. Alternative version thereof N 1277-1 prepared by the People’s Deputies – members of the Finance and Banking Committee - was passed instead of the above draft. Now the profiling committee is preparing this draft for second reading.

This draft is aimed at introducing a more strict procedure of value added tax refund from the budget, prolonging VAT refund term and depriving certain categories of taxpayers of their right to such refund, establishing special taxation regimes for newly created enterprise and enterprises which have tax debts, nullifying the possibility of tax bill use for majority of taxpayers importing goods, and restructuring VAT budget debts.

Accomplishment of these goals will, on the one hand, reinforce fiscal nature of the value added tax and substantially increase tax pressure on taxpayers, and, on the other hand, will reduce responsibility of the state before taxpayers for refund of value added tax.

In accordance with this draft the term for acquiring the right to tax refund shall be 12 fiscal periods. Such VAT refund term, if fixed in legislation, will not allow many taxpayers to receive refund from the budget of relevant taxes in good time. Virtually, the state will have the right to use funds of business entities for free during 12 fiscal periods. Business entities, in their turn, will not be able to use these funds during the same term.

Refund of value added tax to taxpayers engaged in export transactions may take place, pursuant to this draft, if there is a written confirmation of the bank proving the fact that a non-resident purchaser has paid for exported goods (works, services) and made settlements with suppliers for the supplied goods (works, services) used to manufacture the exported products. It is proposed to add Article 8 of the Law with new clause 8.8. Pursuant to this clause, export refund shall not take place if the cargo customs declaration, with relevant notes of the customs authority, is missing.

This draft establishes the procedure for determining tax base on the basis of usual prices. If goods are sold at the prices 10 percent lower than the usual prices tax base shall be determined on the basis of usual prices reduced by 10 percent. Usual prices are applied in other countries where value added tax exists, but these prices are used to determine tax base only for sales of goods to related persons.

According to this draft, the so-called voluntary restructuring of VAT budget arrears is to take place during the first quarter of 2003. This restructuring will affect debts not repaid by January 1, 2003. It will be implemented by way of allowing payment of a debt by installments during the period of 36 months. ‘Voluntary’ state debts restructuring practice shows that this process is of forced nature. If these practices are applied taxpayers will have to ‘agree’ with restructuring of state debts and, correspondingly, to provide for free of charge use their funds for the term of 36 months.

Actually this draft cancels clause 11.5 of article 11 of the Law of Ukraine “On Value Added Tax” for majority of taxpayers. It should be mentioned that the above clause stipulated the procedure of fulfillment of tax liabilities with respect to payment of value added tax at importation of goods by means of issuance of a tax bill for the amount of a tax liability. Only taxpayers whose turnover of taxed transactions for the last 12 months has exceeded UAH 10 million will be allowed to issue tax bills.