Ukraine’s superficial tax cuts not enough to tackle local economic challenges

Amid the economic shock caused by COVID-19 quarantine measures that will now last until April 24, the Ukrainian parliament has adopted legislation aimed at providing businesses with economic relief.

The two laws passed on March 18 reduce taxation to help the economy survive. They affect 18,000 local companies in sectors like transportation, entertainment, agriculture, hospitality, retail, and even education.

For two months until May 31, these businesses won’t have to pay rent to the state, the land tax and the real estate tax on non-residential property, while private entrepreneurs will be exempt from the social tax and are allowed to delay paying their 5% income tax for the first quarter (usually due in March).

The laws also ban tax audits for people and businesses during the period of the quarantine.

These measures will cost Ukraine roughly $300 million, the equivalent of 0.2% of gross domestic product, according to the Center for Economic Strategy.

But Constantin Solyar, partner at law firm Asters, told the Kyiv Post that this is not enough. In his view, Ukraine cannot provide more as the state itself is under fiscal pressure, which is likely to last for a long time. It simply can’t afford bigger fiscal measures to give a boost to the economy.

While Solyar acknowledged the effort of the government, he said officials made a mistake with the two-month income tax delay: Businesses will still have to pay it. Exemption from the social tax – roughly $30 a month – seems useless too, he said.

“They clearly missed the point in the two-month exemption for filing and paying individual income tax,” Solyar told the Kyiv Post. “Instead of exempting (everyone from taxes), the government should have identified the most vulnerable types of businesses and given them a bit more to survive.”

Hlib Vyshlinsky,  executive director at the Center for Economic Strategy, said the shady labor market, where employers dodge taxes by officially paying only minimum wage and giving the rest of the money off the books, makes it hard for the government to come up with effective solutions.

“Ukraine can’t give tax breaks because people pay very little in taxes. We can’t compensate employees for wages, because (officially) they are only paid a minimum wage at best,” Vyshlinsky said during a press conference held online on March 25.

Denys Vergeles, counsel at law firm Nobles, echoed Vyshlinsky, saying that an extended quarantine would deeply affect businesses and they would need more tax cuts.

“Significant income tax cuts, tax holidays or direct subsidies from the government might be needed,” he said.

Meanwhile, the government hasn’t created any measures concerning private tenants, leaving renters and rentees to agree on the terms themselves, with the latter trying to use the quarantine as an excuse to pay less for rent, Vergeles said.

Vyshlinsky doesn’t like the situation where businesses must step forward and pay their money for things the government should be doing. He blames the government’s attitude.

“It reflects the general custom in Ukraine: ‘We are the poor government but we have power, and you are the rich businesses, you must comply and pay for all,’” Vyshlinsky said.

Economic effect, other initiatives

Ukraine’s industry has already lost about $180 million in revenue over the first week of the shutdown that started on March 16, representatives of the Center for Economic Strategy stated on March 20.

Hence, if the quarantine was extended for several months, Ukraine’s GDP would fall by 9% in 2020, and the hryvnia exchange rate might reach Hr 35 to the U.S. dollar, the Union of Ukrainian Entrepreneurs, which represents over 800 companies, wrote on its website on March 20.

Meanwhile, former Economy Minister Tymofiy Mylovanov estimated that at least 500,000 people would lose their jobs due to the coronavirus crisis.

Ukrainian officials have also previously estimated that it will cost about $4 billion just to fight COVID-19. They said they need more money from the International Monetary Fund (IMF), and talks are ongoing with the international lender over a $5.5-billion extended fund facility. Ukraine could also receive part of a possible $50-billion coronavirus rescue package from the IMF for developing countries affected by COVID-19..

Amid the uncertainty, the Ukrainian government took another step to help the local economy: On March 24, it announced the creation a $7.2-billion stabilization fund, with Ukrainian Prime Minister Denys Shmygal saying that it would be “absolutely enough” to sustain vulnerable people whose incomes are disrupted by the COVID-19 epidemic.

However, Shmygal didn’t announce any further details, leaving Vyshlinsky from the Center for Economic Strategy skeptical. First, the government forces businesses to close and shuts down public transportation, and now it can’t properly communicate on how it will help the economy, he said.

“It does practically nothing to support (the economy),” he added.

Read also : Shmygal: Cabinet will create stabilization fund