Government shows commitment to general financial services reform. Brendan Malkin reports.
The Ukrainian Union of Lessors (UUL) had good reason last month to pat itself on the back. On the same day that it hosted its first international leasing conference, it also witnessed the registration before Ukraine’s parliamentary tax committee of a leasing bill which aims to create a more favourable environment for asset finance in the Eastern European country.
The association, which through its in-house lawyer, Tatiana Fedorova, was instrumental in drawing-up the bill, has come a long way since its formation just five years ago.
The main feature of the bill, which has to travel through five stages before entering the statute book, is expected to clear up discrepancies over Ukraine’s controversial VAT regime.
At present, lessors are liable, with some partial exemptions, for VAT payments at a series of stages during the course of a lease. These stages are: at the point when assets are returned at the end of leases; upon payment of interest and commissions; and also when compensation is paid in residential real estate transactions. The leasing bill calls for the elimination of all these liabilities.
It also seeks to make sure lessors are not liable for tax if they repossess assets. Currently, VAT is imposed on assets repossessed based on their residual value, according to Fedorova.
Given the difficulties lessors face when repossessing assets, it’s hardly surprising that the draft law also calls for a reduction in the period in which lessors can “break off their leasing agreements”, from 30 days down to 15.
Article 11 of the bill will also make it mandatory for lessees to return assets if they fail to make regular lease payments. Ownership rights, transfer conditions, supplier responsibilities and warranties are all covered in the bill.
Time for a change
The timing of the draft law appears to be significant. Ukrainian lessors, along with the bulk of the country’s financial services providers, suffered heavy losses as a result of writedowns, fraud and bad debt during the banking crisis.
Some of these losses could have been avoided if a decent collections and repossession system had existed in Ukraine. This bill will go some way, although not the whole way, to rectifying this problem.
Corruption, bribery, fraud and inefficiency, however, are still rife (see Reforms tackle Ukrainian lessor’s tax problems) and more legislation will be needed to cure the system of all its ills.
Another issue the introduction of the bill will raise is that, for the first time, lessors will find themselves being properly, or at least nearly properly, regulated.
Until now, the only regulatory requirements imposed on Ukrainian lessors were for them to register themselves and to provide quarterly financial results.
While Western lessors are generally suspicious of regulation, their Ukrainian counterparts, on the other hand, regard regulation as providing them with opportunities to do business in a market more freed of corruption and lessee malpractice.
Meanwhile, although the bill is still subject to feedback from various government ministries, as well as voting before parliament, the chances of it succeeding seem high, particularly given the Ukraine government’s apparent commitment for economic reform.
Speaking at the UUL’s conference last month, Vasyl Volga, chair of the state committee for regulation of financial services markets in Ukraine, listed numerous regulatory reforms currently on the country’s legislative agenda.
As well as making general comments on the need for “maintaining high transparency in the financial services sector”, “promotion of self regulation”, and “countering money laundering”, he also focused on the phased introduction of “prudential oversight” which might ultimately introduce a clutch of new reforms, including Solvency II, Basel II, IAIS, IOPS and WOCCU.
Volga also emphasised the existence of a “draft law in parliament with regards to the development of financial markets”. A UUL spokesperson said the government has placed financial market improvements high on its 2010-15 agenda.
Volga also appears supportive of Ukraine’s relatively fledgling, leasing community. A draft law has been drawn up requiring lessors to ensure they have sufficient reserves against bad debt, a requirement currently in place for banks.
In addition, he called for “more publicity for leasing, the holding of annual leasing conferences, and the drawing up of a curriculum of leasing activities”.
Nonetheless, while all these measures will improve conditions, the fact remains they are being pushed through without the support afforded to countries within the European Union.
For Ukrainian leasing to reach its full potential, Ukraine will have to clean up its tax and legal systems, and create conditions to allow more capital to be freed up for its financial services sector.