Separate demand accounts opened with Ukrainian banks meant to collect VAT payments, transfer them to the state budget, and also reflecting funds involved in such payments and compensations, will be effective as of April 1, 2004. President Leonid Kuchma signed an order on March 10 aimed at expediting the institution of such VAT bank accounts — previously scheduled for July 1. The Presidential Administration’s press service announced that the edict amends the previous one, dated March 1, 2004, and that the president has instructed the cabinet and NBU to work out and implement by March 20 VAT- central-bank-transfer procedures, as well as those embracing VAT money movement via taxpayers’ bank accounts.
The president also signed a directive setting up a special commission to check observance of the law when administering and compensating VAT. Its task is to prevent unauthorized budget expenses and help make the VAT administration and compensation proceedings transparent. The commission will be headed by Tetiana Korniakova, Chairperson of the Committee Against Corruption and Organized Crime Under the President of Ukraine. She is authorized to enlist research centers, audit firms, experts from central and local executive authorities, enterprises, institutions, and organizations (with the knowledge and consent of their respective leaderships) as well as to receive any such information and documents from executive authorities that might appear instrumental for the commission’s performance. This commission must submit its first progress report to the president by July 1.
First Vice Premier Mykola Azarov, the key promoter of such special accounts, earlier explained that “the ideology is quite simple and understandable; a taxpayer has a special bank account to accumulate the VAT payments and expenses, meaning that all this money will always be there. The taxpayer won’t have to make any transfers anywhere. He will only have to recompense VAT amounts due large exporters, which he will have accumulated owing to zero export tax rate.” Mr. Azarov feels certain that “by instituting such special accounts, we will solve the VAT nonpayment problem once and for all.” He also stresses that such accounts will make it possible to lower the current VAT rate (20%), adding that “I would, however, approach this aspect rather carefully; it would take about three months working with that system of special accounts, analyzing the results ... to lower the tax rate.” (Ukraine’s president twice vetoed bills lowering the VAT rate to 17% {as of January 1, 2005} and 15% {as of January 1, 2006}.)
It should be further pointed out that Pres. Kuchma and other high officials have on more than one occasion described the current VAT as the most criminalized tax, stressing that it no longer plays its original budget-formative role. Viktor Zhvatiuk, Deputy Chairman of the State Tax Administration of Ukraine and Chief of the Tax Militia, declared that the state had received UAH 62 billion after imposing VAT in 1997, but that the state had paid UAH 68 billion worth of VAT compensations due exporters.
NBU Head Serhiy Tyhypko believes that introducing special VAT accounts will be no problem for Ukrainian banks. His advisor Valery Lytvytsky, however, responded to the idea with a degree of skepticism: “Let’s hope that the president’s decision to speed up the institution of such special accounts will help us solve this problem. It is also true, however, that Bulgaria was the first to do this, and its experience shows that the system has advantages as well as shortcomings. There is perhaps a certain parity between pros and cons. At this stage in Ukraine, the advantages seem to prevail. Although — as is often the case in this country — when it comes to carrying out a project, the outcome proves the exact opposite to the expected result. There is always a difference between the idea in a given executive order and the way that order is implemented. It’s important that this difference be reduced to a minimum in this case. Besides, this measure should not be regarded as a cure-all. It can produce the desired result — better fill the central budget — only when implemented in conjunction with other measures. Also, we must remember about the placement of bonds. The government has an opportunity to make them more liquid, more attractive debt instruments. And we must simply compensate VAT payments to exporters — if it’s legitimate and we can be reasonably sure that there are no criminal connections. In fact, we should strive to make such compensation in excess of the sum included in the budget as the limiting one...” The official opinion sounds optimistic, of course, showing no response whatever to any other opinions expressing anxiety over the date launching the special bank accounts.
COMMENTARY
Volodymyr MAISTRYSHYN, member of the parliamentar y budget committee and subcommittee chairman:
We’re actually seeing the beginning of the tax reform that we’ve discussed for so long. This year they’ve introduced changes in legislation, lowering three main budget-forming tax rates: the value added, company, and individual tax. I can understand the head of the state being worried about ef fectively transferring this money to the budget. That’ s precisely the purpose of the presidential order to speed up the institution of special VAT accounts. The problem is that the amount of this tax, according to this year’s budget, should be in the neighborhood of 14 billion hryvnias (compared to some UAH 8 billion collected last year). Analysis, however, indicates that at least UAH 30-35 billion could be provided. In other words, we are obviously collecting much less than we could, with over one half of what is being accrued. It is true that VAT, as a budget-forming tax, has problems being collected. Therefore, we must enhance the ef fectiveness of its administration. These special accounts are meant to do just that. These special accounts are practiced in the ener gy sector to pay current electricity bills. They have been applied for several years and proved quite ef fective. I think that this mechanism will make it possible to avoid tax evasion.
Valery KONOVALIUK, first deputy chairman of the parliamentary budget committee:
VAT presents a chronic problem; considering budget implementation results since the start of this year, we can see that this tax has exhausted itself as a budget income source and is unable to secure the returns planned by this budget program. The special accounts introduced by the presidential edict apparently signify enhanced responsibility for and control over the collection of this tax; they are intended to secure budget revenue implementation, since these payments remain in a critical state. I believe that it would be best to form an interfaction group or a task force made up of people of the Finance and Banking Oversight Committee to draft the relevant bill, including innovation clauses laid down in the presidential edict, so we could at least sum up the diver gences inherent to this tax. As a result, instituting a 17% (perhaps 15%) VAT rate in January 2005 would have to be carried out so this tax could actually act as a budget implementation regulator, while keeping all enterprises functioning and having a positive impact on the Ukrainian economy.
Leonid RUBANENKO, President, Association of Ukrainian Tax Consultants:
Stepping up special accounts sounds good, but it proves ef fective mostly with regard to lar ge corporate taxpayers, like the Illich Metallur gical Combine of Mariupol. They will, of course, see this as a promising option, but it will mean little in terms of solving problems to the rest. Of course, we must see how it works first. Everything seems in order on paper. However, everything seemed in a far better order in bill No. 4000-1 vetoed by the president... W e believe that a number of aspects should be singled out of the VAT complex and that we should proceed to draft a single law incorporating the best ideas, including such special bank accounts (this bill ought to have been passed in September), along with new procedures of imposing the value added tax on business transactions.
