On 19 November the Ukrainian Parliament has passed the Tax Code. The deputies of the Parliament are giving themselves a few more days to finalize this document and submit it to the President for signature. The Head of the Parliamentary Committee for Tax and Customs policy – which is in charge of the development of the Code – publicly stated that major disputed provisions of the Tax Code have been agreed upon with the presidential administration and that a veto of the Code would be highly unlikely.

So we can expect that on 1 January 2011, the draft Tax Code – which has sparked heated debates in the Parliament and drawn healthy criticism from the international business community as well as small domestic businesses – will become law. Exception is made for the profits tax chapter, one of the most debatable. This chapter will come into effect on 1 April 2011. Nobody can yet say what exactly the law will look like as the document is changing every day in parliamentary discussions. Therefore, the logical question is whether this brand new Tax Code is a good or bad thing for international businesses that operate in Ukraine or have Ukraine in mind for potential expansion.

Earlier this year, in the days following the presidential elections in Ukraine, the new Ukrainian Government publicly declared its intention to reform the tax system. In light of this declaration, it was, in our professional view, a good thing for both Ukraine and Ukrainian and international businesses, to have codified tax rules that would replace the hundreds of currently existing laws, regulations and interpretations, which are in many cases inconsistent with one another.

Does this really mean the end of the tax reforms to which Ukraine has been committed? No, in fact, this probably means only the start of these reforms. It matters a great deal for the business community what the Tax Code looks like now, but no less important is what will happen with the implementation and changes of this document in the first couple of years after its enactment. Much will depend not only on the new rules of law, but on the approach that the Ukrainian authorities will take in monitoring the impact of the changes on business and adjusting the new rules in a way that makes the Ukrainian economy attractive to new foreign investment.

PricewaterhouseCoopers is actively involved in discussions of the proposed new tax rules, concerns of the international business community and their suggestions on ways forward with the Ukrainian Government and Parliament. Based on these discussions, we would like to offer the foreign business community the following food for thought.


Key Points of the New Tax Code and Its Impact on Ukrainian Businesses

The Ukrainian Government presents the new Tax Code as a very progressive document that, among other measures, reduces the rates of major taxes (Corporate Profits Tax and VAT), eliminates a number of small but burdensome local taxes that currently exist in particular regions or towns of Ukraine, unifies statutory and tax accounting rules and simplifies the VAT recovery procedures, the latter of which is currently a major tax issue for exporters in Ukraine.

It should be noted, however, that the tax rates are not the major tax issue for Ukraine; they are quite comparable with other European tax rates. Tax administration is the real issue, given that Ukraine is currently ranked tax-wise by the World Bank as one of the least attractive countries when it comes to ease of doing business.

Initially, Ukrainian business was shocked by the version of the draft Tax Code, passed by the Ukrainian Parliament in the first reading in June 2010. That version was based on the assumption that a taxpayer is always wrong and guilty. Inconsistent compilation of existing tax laws with significant revision of rules for tax audits, tax assessments and appeals against them in the favour of the tax authorities, in combination with the proposal to give the tax office almost unlimited powers to control business and collect taxes at own discretion, were the reasons why business said a clear “no” to that document. The business community expressed a clear view to the authorities that that version of the Tax Code would never ease doing business in Ukraine.

Now, reading the version that is being voted on by the Parliament, we are glad to say that the voice of business was heard by the authorities. Most disputable and arrogant administrative rules were taken out of the draft and the following key principles were introduced into the Code:

Unification and simplification of tax rules. The terminology of the document is much more consistent than the one in the original draft. The first steps are taken toward unifying statutory financial and tax accounting, which eases the lives of accountants and finance personnel. Still, many other things need to be done in this area after the adoption of the Tax Code, i.e. unification of statutory accounting rules with the international financial reporting standards, simplification of the procedures to prepare the tax returns, etc.


The Code has also reflected the concept of stability of tax rules, i.e. prohibition of retroactive enforcement of future tax changes that would be unfavourable for business, as well as at least 6 months prior notice to business of any future significant changes in this document.

Simplification of tax administration. As mentioned above, tax administration rules are, at least, no worse than the current rules. In addition, the authorities have agreed to introduce less frequent and more simplified tax reporting for relatively small businesses.


This is only the first step in the improvement of tax administration in Ukraine. What goes beyond the Tax Code is the qualitative improvement of tax audits. The tax authorities must understand the industries they are auditing, market trends and the financial indicators of these industries at a particular point of time, so that the tax audits are focused on the identification and understanding of deviations from these trends and indications for a particular taxpayer, as well as discussing their rationale with the taxpayer prior to tax assessment.

Another positive example of the improvement of tax administration is the introduction of a single personal income tax rate for both Ukrainian tax residents and non-residents alike. Currently, non-residents are subject to tax at a double rate and to establish Ukrainian tax residency is a long and burdensome process, requiring lots of time and effort for both individuals and their employers.

We would separately like to mention that the Tax Code has introduced the concept of “automatic” VAT refund, which, as we have mentioned earlier, is one of the key tax issues for exporters in Ukraine. The procedure for the refund is very straightforward; it allows transparent businesses to get cash from the Government in a few weeks, compared to months and years of waiting which has been the case to date. However, for this new rule to work, the Government still has to develop an electronic register for all VAT invoices in the country and make this register work efficiently. This is no easy task and may take time to complete.

Mutual responsibilities of businesses and the Government in the tax sphere. Given that the Ukrainian tax system is still developing, tax penalties on bona fide companies should be fair. International businesses are glad that the Government heard their concerns on this issue and significantly reduced tax penalties in the Tax Code.


Another positive change is that the Government has agreed to be financially liable for late refund of VAT. Late payment interest payable by the Government is introduced for each day of delay of the refund.

Given that the Tax Code is a brand new document, if adopted in November 2010 and made effective in January 2011, it will give very little time to businesses to adopt to the changes, i.e. read the document, adjust accounting policies and procedures, make necessary changes into accounting software and reorganize tax-compliance and tax-planning functions. The authorities have agreed to set a “grace period” of 6 months after the introduction of the Tax Code. A nominal penalty of 1 Ukrainian Hryvna will apply to tax violations committed during this period. This is a good initiative, but given that the Code introduces many changes in tax rules, 6 months may not be sufficient for all businesses.


Impact of the Code on Foreign Investment into Ukraine

The proposed improvements of the tax rules will clearly lead to a reduction of state budget revenues in the short term. It is our understanding that in trying to compensate for this, the Ukrainian authorities have introduced in the Tax Code several significant limitations for businesses that negatively impact foreign investors in Ukraine. They include, for example:

Prohibition for businesses to deduct fees for consulting, advertising and marketing services payable to non-residents, unless such non-residents create permanent establishments in Ukraine and tax the above fees in Ukraine;

Limitations for business to deduct royalties and engineering fees payable to non-residents, unless such non-residents create permanent establishments in Ukraine and tax the above fees in Ukraine;

Introduction of VAT-exempt status for grain operations, except for the supply of grain by farmers. This effectively means that VAT paid to farmers becomes an extra cost for international grain traders.


We understand that the Government’s rationale for these limitations is to prevent tax schemes used by non-transparent businesses in order to reduce their Ukrainian tax liabilities. Transparent international businesses fully support this intention, but the format of the limitations is unacceptable to them.

Take services payable to non-residents for example. Recharge of group costs as a service fee is a generally accepted business practice for multinational groups. It is aimed at the allocation of relevant costs to the entities that obtain economic benefits from services. If the proposed rule in the Tax Code is not changed, the investment image of Ukraine will be seriously damaged in the eyes of foreign investors. As a result, further foreign investments in Ukraine may not be attractive for international businesses compared to opportunities in neighbouring countries. In addition, Ukrainian subsidiaries of international businesses will incur additional tax costs (corporate profits tax, VAT, excise tax if applicable) via increases in the prices of their goods, works and services in Ukraine. As a result, Ukrainian consumers will suffer from higher prices on high quality products.

The Ukrainian authorities need to revisit this and other rules that discriminate against international businesses. In our view, the best way to balance the interests of both the Government and businesses is to follow best international practices. For example, it is well known that no developed countries prohibit the deduction of service fees payable to foreign suppliers. As a rule, service fees payable to unrelated foreign suppliers are fully tax deductible. When such payments are made to a related party, other countries allow tax deduction to the extent that the payments do not exceed the level of similar payments to unrelated parties (the “arm’s-length” principle). Other countries have developed their transfer pricing legislation that defines “arms-length” and Ukraine should introduce the same rules and apply them consistently.

A final aspect worth mentioning when discussing the new Tax Code is that it does not offer any specific tax incentives for foreign investments. While the incentives as such should not be a decisive factor for an investor to make a decision to invest or not, they may serve to differentiate Ukraine from neighbouring countries in the eyes of a particular investor. We believe that Ukraine need to revisit its approach to stimulating foreign investment activity.

By Slava Vlasov, Partner, PricewaterhouseCoopers

SC Group, Ukraine


  1. when i was searching yahoo just for this issue, I feel that its no answer for me , but thanks god , your article save me from this;2

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