Changes in tax legislation on the New Year’s eve or what the legislator is ready to do in order to fill the State Budget

20 December, 2013 Newsletters

During the last week the Verkhovna Rada of Ukraine was resolving the important issues: in general regarding the State Budget for 2014 and regarding the tax revenues to the State Budget. In order to ‘ensure the stability of tax revenues to the budget during the year 2014’ it was suggested to postpone application of the reduced VAT and CPT rates from January 1, 2014 to January 1, 2015, as well as a number of other changes to the tax legislation were proposed (for instance, one of them disallows accounting of negative value of the financial result of transactions with securities, etc.).

Initially the propositions regarding the amendments to the tax legislation were stated in the Draft Law on the State Budget for the Year 2014. As we stated before, the change of provisions of tax legislation by the Law on the State Budget is unconstitutional.

Our position is also shared by the Central Scientific Expert Department of the Verkhovna Rada of Ukraine, which in its Resolution provided rather critical qualification of the Draft Law on the State Budget regarding introducing amendments to other laws:

“The Draft Law (particularly its paragraphs 3-6 of the Final Provisions) extended a long-lived negative practice of suspension by the Law on the State Budget of Ukraine the legal force of effective legislative acts or introducing the amendments to them, which contradicts numerous Decisions of the Constitutional Court of Ukraine. Particularly, these are the Decision of July 9, 2007, […], as well as of May 22, 2008 No. 10-rp/2008, […]. In case of necessity of suspension of legal force of the laws or introducing the changes or amendments to them, or recognizing their invalidity, separate laws should be used”.

The similar legal view […] is also presented in the Decisions of the Constitutional Court of Ukraine of November 30, 2010 No. 22-rp/2010,  […].

We would like to draw your attention also to the fact that the propositions regarding the change of conditions of taxation in 2014, foreseen by the Draft Law, do not correspond with the principle of stability of tax legislation, established in subpara. 4.1.9 of para. 4.1 of Article 4 of the Tax Code of Ukraine, according to which “amendments to any components of taxes and duties cannot be made later than six months before the beginning of the new budget period, in which such new rules and rates would be effective. Taxes and duties, their rates as well as tax exemptions cannot be amended during the budget year”, as well as it contradicts the provisions of para. 3 of Article 27 of the Budget Code of Ukraine, according to which ‘laws of Ukraine or their separate provisions, which influence the indexes of the budget (reduce revenues to the budget and/or increase expenditures of the budget) and which are adopted after July 15 of the year, which precedes the planned year, shall enter into force not earlier than the beginning of the budget period, which follows the planned year, apart from the foreseen by the Law of Ukraine “On Some Issues of Debts Of Enterprises of the Military-Industrial Complex – Members of the State Concern “Ukroboronprom” and on Ensuring Their Stable Development”.

It should be noted that abidance of such principle allows the business entities to plan their activity both for the next budget period and for the future, which has a positive impact on their financial activity. At the same time failure to abide the stated provisions of the Tax Code of Ukraine, first of all, brings instability in work of most of the business entities, since increasing of the taxes’ and duties’ rates or amendments in order of their payment forces them to review their production and financial plans, conditions of agreements with suppliers and consumers, which in some cases become unprofitable and lead to cessation of such agreements. Secondly, the constant change of taxes’ and duties’ rates, order of their payment has a negative impact on the investment image of the country, which, accordingly, restrains their receipt by Ukraine. Thirdly, increase of tax burden on national business and, respectively, growth of prices for goods and services, leads to social discontent, which today is at critical point”. 

As the practice shows, the qualification of the Central Scientific Expert Department by itself is not an obstacle for introducing the amendments to the tax legislation by the law on the State Budget. That is why it is logical to suppose, that an obstacle for introducing the amendments to tax legislation by the Law on State Budget or the Year 2014 was lack of time for adoption and entering into legal force of such Law. Thus, the consideration of the respective Draft Law was postponed at first from December 19 to December 24, 2013, and after that to January 16, 2014, when it was necessary to amend the tax rates since January 1, 2014.

As we can see, the issue was resolved – on December 19 the Verkhovna Rada of Ukraine adopted separate Law on Amending the Tax Code of Ukraine Regarding Separate Tax Rates, which foresaw all amendments to the Tax Code which initially were proposed by the Law on the State Budget for the Year 2014.

And in this case the observation of the Central Scientific Expert Department of the Verkhovna Rada of Ukraine regarding the unlawfulness of introducing the amendments to any components of taxes and duties later than six months before the beginning of the new budget period (which are similar to those, which were made to the Draft Law on the State Budget for the Year 2014), did not become an obstacle for its adoption in general.

Thus, in spite of the fact of elimination of one of the breaches – the adoption of amendments to the Tax Code by a separate law, and not by the Law on the State Budget, the amendments introduced did not become lawful.

Besides, the Central Scientific Expert Department also noted that the postponement of the reduction of VAT and CPT rates to January 1, 2015 do not fully correspond with the targets, set by the Program on Economic Reforms for the years 2010-2014 “Wealthy Society, Competitive Economic, Effective State” and by the State Program of Intensification of Economic Development for the years 2013-2014, which foresee reduction of tax burden for the national business, strengthening of its position in international competition by reducing the share of taxes in business costs and reducing the time spent by taxpayers for the accrual and payment of taxes.

Also the breach of the order of submission of the Draft Law on Amending the Tax Code, namely:

“We would like to draw your attention also to the demands of provision 4 of Chapter XIX of the Tax Code of Ukraine, according to which the Cabinet of Ministers of Ukraine is a subject of the law of legislative initiative, which is authorized to propose on the yearly basis till June 1 to the Verkhovna Rada of Ukraine draft laws on introducing amendments to this Code regarding tax rates (including rates of excise tax), defined in absolute measures, taking into consideration consumer price indexes, price indexes of industrial products with regard to such taxes and duties, which obviously should submit draft laws of such contents to the Verkhovna Rada of Ukraine”.

However, the negative qualification did not stop the adoption of respectful legislative amendments, which, particularly:

  • postponed the reduction of the VAT rate (to 17 %) to January 1, 2015;
  • postponed the application of 16 % CPT rate to January 1, 2016, instead of it the rate for the year 2014 is set at the level of 18 %;
  • extended without time limitation the legal force of VAT exemption with regard to certain transactions on supply on the customs territory of Ukraine of grain crops of certain commodity items upon UCCFEA (previously it was foreseen by subpara. 1 of para. 15 of subsection 2 of Chapter XX of the TC of Ukraine);
  • prohibited the accounting of negative value of the financial result of transactions with securities, which occurred  before January 1, 2014 upon the results of next reporting periods.

We would like to remind that the Tax Code was so attractive during its adoption at the end of 2010 by promises of reducing the tax burden for business. However, as we can see our legislator is a master of his words: he can give it and he can take it back.

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Kind regards,

© TOV "KM Partners", 2013

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