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July 1, 2010updated 12 Apr 2017 4:22pm

Reforms tackle Ukrainian lessor’s tax problems

Ukraines tax system is rife with bribery and ambiguity and consequently remains a thorn in the side of most local leasing companies, despite efforts by local tax authorities to improve the system.

By Brendan Malkin

Ukrainian lessors still blighted by bribery and intimidation.

 

Ukraine’s tax system is rife with bribery and ambiguity and consequently remains a thorn in the side of most local leasing companies, despite efforts by local tax authorities to improve the system.

However, the focus in recent weeks has been on problems to do with the country’s VAT system.

Historically, the government has been slow in returning input VAT paid by lessors and other taxpaying companies to the tax authorities.

Now, in a seemingly bizarre – yet not entirely unique – move, Ukraine’s Cabinet of Ministers has published a resolution, one of the consequences of which will be that none of this VAT will be paid.

It is not all bad news, however. In exchange for not refunding this VAT, the resolution offers taxpaying companies the opportunity to receive, free of charge, what the government is calling “government domestic loan bonds”.

Leasing companies, therefore, will at least get back the money owed to them by the government, albeit through this bond rather than the VAT repayment route. The value of the bonds should match the amount in unpaid VAT arrears.

The bad news is that lessors will not get the money all in one lump sum. The bonds, while offering a yield of 5.5%, mature in five years.

For the government this represents a midway solution. While on the one hand it is being forced to pay back the money owed to Ukrainian leasing companies, on the other it can spread this repayment over a five-year period.

In the words of Vladimir Kotenko, head of Tax and Law at Ernst & Young Ukraine: “Instead of making VAT refund in cash, the government will give to the private companies these bonds. Effectively this is a deferral of the VAT cash refund.

“By not refunding VAT to the private companies in cash now, the government will be able to spend the thus ‘saved’ money to finance other programmes requiring funding from the budget.”

Leasing companies, meanwhile, have not only had to cope with these government failures to pay back their VAT, they have also had to deal with the fact that VAT is imposed on them at several stages of a lease: 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.

 

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