Inspecting The Ukrainian Tax Implications Of Russia’s Invasion

Valeria Tarasenko of Dentons Kyiv discusses the Ukrainian authorities’s tax coverage modifications in response to the Russian invasion.

This transcript has been edited for size and readability.

David D. Stewart: Welcome to the podcast. I am David Stewart, editor in chief of Tax Notes At the moment Worldwide. This week: conflict and tax.

Since February 24 Russia’s invasion of Ukraine has created Europe’s largest refugee disaster since World Conflict II, with greater than 10 million folks being pressured to go away their houses and numerous casualties amongst those that remained.

As of our recording right this moment, April 20, the conflict is ongoing with Russian forces refocusing their efforts within the east of the nation after failing to seize Kyiv and dropping their Black Sea flagship. The Ukrainian folks have mounted a fierce resistance to the invasion, and in opposition to lengthy odds the federal government in Kyiv continues to function and make tax coverage.

Tax Notes reporter Sarah Paez will be a part of us in a minute to inform us about her visitor, who spoke concerning the tax modifications made in response to the invasion and what the long run would possibly maintain.

Sarah, welcome again to the podcast.

Sarah Paez: Thanks. It is nice to be again.

David D. Stewart: Now, I perceive you lately spoke with somebody about Ukraine’s tax state of affairs earlier than and through the conflict. May you inform us about your visitor?

Sarah Paez: Certain. I spoke with Valeria Tarasenko. She’s a tax advisor with Dentons, which is a multinational legislation agency with places of work in Ukraine. Previous to the conflict she was based mostly in Kyiv, however has since relocated to Austria along with her household to flee the preventing. Valeria has over 15 years of tax expertise advising Ukrainian corporations on cross-border tax structuring and tax-saving options, tax dispute resolutions, and tax litigation and determination of cross-border tax controversy.

David D. Stewart: What kind of matters did you discuss?

Sarah Paez: Properly, we mentioned among the main modifications to the Ukrainian tax system through the conflict, together with massive reductions within the company revenue tax charge and VAT and excise taxes on gas. Valeria additionally advised me a couple of comparatively new tax regime created by the Ukrainian authorities to encourage the success of the IT providers sector in Ukraine. It has been a boon for the IT business throughout a conflict during which most sectors have been hit very laborious economically. Lastly, we seemed forward at among the pending and attainable future tax modifications that might affect Ukraine’s post-war economic system.

David D. Stewart: All proper, let’s go to that interview.

Sarah Paez: Hello, Valeria. Welcome to the Tax Notes Speak podcast. It is so nice to have you ever right here.

Valeria Tarasenko: Oh, thanks.

Sarah Paez: I simply needed to kind of lead in with the Russian invasion of Ukraine. Ukraine has been plunged into this conflict, so might you inform us just a little bit about what the Ukrainian tax system has been like throughout wartime?

Valeria Tarasenko: Sure, you are proper, sadly brought on by the Russian invasion, it heated the Ukrainian economic system quite a bit, and we’ve got to adapt to perform in wartime. In fact, our Ukrainian authorities made numerous changes to arrange and help Ukrainian enterprise and tried to introduce some tax system that might work each for the state and for the enterprise. These days we’re not talking about some income, we’re talking concerning the survival of the enterprise.

The important thing message, which Ukrainian authorities addressed to all companies and inhabitants, is the companies have to take care of workplaces for Ukrainians and hopefully create new workplaces for Ukrainians which relocated from the japanese half to central and western Ukraine, the place it is roughly protected to function enterprise.

Sarah Paez: Properly, with that, what are among the modifications that Ukrainian companies have seen particularly of their company revenue tax?

Valeria Tarasenko: Ranging from April 1 Parliament adopted the legislation which diminished 18 p.c company revenue tax and the 20 p.c VAT to solely a single 2 p.c tax, which is calculated based mostly on the income the corporate had within the earlier quarter. So, just one tax is left, it is a 2 p.c income tax, which is clearly very low.

Nevertheless it’s completely voluntary. It isn’t that each enterprise is obliged to switch to this technique. Any enterprise which feels that taxes will likely be low underneath this 2 p.c single tax, they will voluntarily switch to the cost of this single tax.

Different corporations, if it would not match with their enterprise operations, for instance, their companies haven’t been harm by this conflict state of affairs in Ukraine, they will proceed paying common taxes as is described through the common time, not wartime. However in accordance with statistics, I noticed that numerous Ukrainian corporations, middle-sized and enormous companies, have already transferred to the cost of this 2 p.c income tax.

The one drawback this 2 p.c income tax has is the taxes need to be paid prematurely. You’re calculating this 2 p.c tax based mostly on the outcomes of the earlier month and pay tax prematurely. If companies can afford this, in fact they switch. If not, some companies desire to remain on the common system.

Secondly, this technique permits exemption from VAT, which make items, provides, and providers supplied by Ukrainian corporations, or imported from exterior, cheaper by 20 p.c, as a result of we’ve got 20 p.c VAT in Ukraine.

Plus, the reporting system can also be very simplified, so it is a quite simple process to submit tax returns and pay for the brand new taxes.

Sarah Paez: That is very complete. Additionally it actually sounds just like the Ukrainian authorities is kind of giving this feature to companies in case they’re actually struggling.

I needed to ask you just a little bit extra about excise taxes and the way these would possibly have an effect on the import and export of products through the conflict and in addition VAT. The VAT on the import and provide of petroleum has been diminished from 20 p.c to 7 p.c. Are you able to discuss just a little bit extra about that and what that is provided to the Ukrainian forces and in addition probably Ukrainian households?

Valeria Tarasenko: Sure, really it means quite a bit as a result of I keep in mind, inside two weeks after the invasion began, costs of petroleum went up by 50 p.c, which is quite a bit. It signifies that as soon as costs to petroleum went up, costs to different merchandise will even go up due to logistics. All the things is dependent upon petroleum. It was a proper determination to cancel excise tax on import and provide of petroleum and petroleum-related items, as a result of such items are topic to excise in Ukraine.

Plus, Parliament voted to cut back VAT on petroleum from 20 p.c to 7 p.c and costs on petroleum for retail clients dropped considerably. In fact, it additionally stopped costs on different items, that are not directly affected by their costs on petroleum in Ukraine, so it was completely the correct determination.

I do not keep in mind if I discussed it or not — all these measures are non permanent measures. It is only for the interval of the conflict, when the federal government declared martial legislation standing. As soon as martial legislation standing is terminated or canceled, all these excise taxes and common VAT charges will likely be relevant once more.

Sarah Paez: I additionally needed to ask, since you stated these are non permanent measures, with all these tax modifications and particularly reducing taxes in numerous conditions, how is the Ukrainian authorities guaranteeing the sustainability of public income, particularly throughout wartime?

Valeria Tarasenko: It’s extremely laborious to talk about sustainability in our state of affairs. It is a matter of survival. When the conflict began, the federal government really declared, “Enterprise, if you happen to can, please pay taxes prematurely.” Plenty of companies did. They paid taxes prematurely to help Ukraine and the state.

However now the economic system is dropping, and I noticed the studies from IMF that the Ukrainian GDP can shrink by 35 p.c for 2022. So, in fact it is very laborious to talk about sustainability of public revenues, however nonetheless the federal government does their finest to plan and to get some income from the taxpayers.

As I stated, for companies it is a key job to take care of workplaces for Ukrainian residents. Not like company tax, private revenue tax was not modified and no tax profit was supplied for people or for his or her derived revenue. When Ukrainian residents obtain a wage, it will likely be nonetheless topic to 18 p.c private revenue tax, 1.5 p.c army tax and social contributions. All these taxes will go to the state.

Secondly, how Ukrainian authorities tries to fill within the price range is it managed to problem army bonds and it efficiently bought the bonds to Ukrainians. And naturally, it is financing from different states and from worldwide establishments, reminiscent of IMF. We’re lending. Sadly we’ve got to lend cash now.

Sarah Paez: You have stated earlier than that the Ukrainian authorities, and by extension the Ukrainian tax system, has type of actually been in survival mode throughout this time. Are you able to discuss just a little bit about what the tax administration has been doing? Have they suspended any of their common scheduled actions? Are there issues they are not doing?

Valeria Tarasenko: Sure, I might say that Ukrainian tax administration is now very consumer pleasant. They terminated and canceled all tax audits and no tax audit is permitted now. Truly all their tips, how you can apply these new tax advantages which have been launched into the legislation, they’re offering clarification how it’s a must to apply, which is allowed, which isn’t. I might say that they are pleasant to clients, in contrast to it was earlier than as a result of their strategy was at all times fiscal. That is first.

Secondly its non permanent tax legal responsibility for violation of tax legislation — violation is just not submission of obligatory tax returns, sure tax reporting in time, or nonpayment of taxes in time as a result of a taxpayer did not have the capability to pay. Its penalties usually are not charged for these violations, however there’s an obligation of inside six months to adjust to the tax necessities after the extermination or expiration of the martial legislation standing. Now no tax penalties are charged that apply to the taxpayer, which can also be sure reduction as a result of in some areas, it was very laborious to conform. Even submitting a tax return was laborious.

Sarah Paez: What else has the tax administration performed to make the conflict efforts simpler? You talked just a little bit about how the federal government’s making an attempt to shore up its coffers. What about when it comes to donations to the conflict effort? What sorts of tax modifications have you ever seen there?

Valeria Tarasenko: Sure, in each jurisdictions we’ve got donation allowances. It is normally very small quantities. Parliament adopted the legislation, which permits each corporations and Ukrainian residents to deduct a part of the donations, which they donated for Ukrainian humanitarian wants, to Ukrainian charity funds, or to the Ukrainian army forces. When you donate, it’s a must to present sure proof and paperwork that you simply supplied a donation. Part of these quantities will be deducted upon tax reporting for 2022, which will be large quantities compared to what was allowed earlier than the conflict.

Sarah Paez: Now, many industries have suffered through the conflict, as you have stated, however really IT providers appear to be doing pretty OK. Are you able to discuss just a little bit about how IT providers are doing and what kinds of tax incentives the federal government has provided to them, notably the Diia Metropolis Legislation?

Valeria Tarasenko: Sure. I feel IT business is the one business which possibly in the long run will profit from the state of affairs as a result of for IT specialists, you simply want a laptop computer and that is all. You may relocate in anyplace, whether or not inside Ukraine or exterior Ukraine and proceed working.

Sure certainly, we had a really nice initiative from our president, Volodymyr Zelenskyy, which got here into pressure ranging from January 1, 2022, with so-called Diia Metropolis Legislation, which offers various tax privileges and authorized privileges to corporations that are working within the IT sector.

I might first talk about the important thing tax profit, which the Diia Metropolis Legislation offers. It offers very low taxes on incomes paid to workers or IT specialists engaged by IT corporations. It is solely 5 p.c private revenue tax, 1.5 p.c army tax, and really insignificant social contribution, which is round $55 monthly, which is nothing. Mainly, efficient tax charge for IT specialists working or engaged by IT corporations is 6.5 p.c, which could be very, very low.

I feel numerous IT specialists worldwide would like to work and keep and to be a tax resident of Ukraine and pay such a low tax. However to be a resident, like an organization, which might fall inside this Diia Metropolis regulation, it must be a pure Ukrainian firm. It must be a authorized entity registered in Ukraine and its actions need to relate to IT exercise.

There’s a very in depth record of actions, which is large: IT will be pc programming, cybersecurity consulting, sport improvement, design, and so on. Quite a bit, quite a bit. The record is actually in depth of actions. There are a minimal variety of necessities, however they’re very do-able, just like the minimal variety of workers must be not lower than 9. Common wage monthly, it must be round €1,200, which can also be very inexpensive.

Actions, as I stated, need to be IT-related. 90 p.c of income must be acquired from IT enterprise exercise. Solely 10 p.c will be different kinds of exercise, like dividends, for instance, like passive incomes or one thing like this. The founders or useful homeowners can’t be from the jurisdictions listed within the blacklist, from sanction record jurisdictions, or from Russia. That is all.

This regime continues to be very engaging as a result of a part of Ukraine continues to be roughly protected, particularly the western half. Plenty of Ukrainian IT specialists have been relocated to these areas and their corporations additionally re-registered to these areas. They nonetheless can apply this Diia Metropolis, a really favorable Diia Metropolis regime.

I see that I nonetheless have requests from some worldwide IT corporations or some multinational corporations, however with massive IT departments, to register a authorized entity in Ukraine for IT functions. I see that numerous job vacancies are open for IT sector as nicely, even now through the wartime, due to this very useful tax regime for the IT sector.

Sarah Paez: Have you learnt what number of companies have taken benefit of this legislation?

Valeria Tarasenko: I feel each IT firm working in Ukraine has already registered earlier than the conflict or tried to register now as a result of as I stated, it is very useful. It provides numerous advantages to the IT sector in Ukraine.

Sarah Paez: I needed to show now to kind of a future look, and generally it is laborious to kind of take into consideration what the long run might appear to be, however permit your self to think about. What tax laws is predicted within the postwar time? As you have stated, many of those legal guidelines that you’ve got gone over are going to run out as soon as martial legislation ends. What’s forward for the post-war interval?

Valeria Tarasenko: Sure, it is very laborious to foretell what modifications will likely be, however I am certain that after the conflict many modifications will likely be launched. It is dependent upon the wants in Ukraine.

Firstly, we’ve got to rebuild these areas which have been fully destroyed. We have now to construct new homes, new condo buildings for these individuals who used to dwell in these areas. I am certain there will likely be some particular tax preferences for building, for residential building, for infrastructure tasks. I am certain that will likely be. There is not any draft legal guidelines, however no less than I see {that a} tax committee of the Ukrainian parliament had discussions that we have to determine some mannequin which can permit Ukraine to rebuild as quickly as attainable the areas which had been destroyed.

Secondly, they notice that this aggression from Russia will keep even after we signal a peaceable settlement, so we as a nation and as a state have to actually make investments into the event of our army business. I additionally anticipate that there will likely be some particular regulation, possibly particular legislation for army business, together with some tax regulation for improvement of this sphere as nicely.

One initiative, a draft of legislation which is already within the parliament and into consideration, is about further taxation of multinational corporations which have each operations in Ukraine and nonetheless lively operations in Russia. Firms which haven’t withdrawn from Russia. They need to introduce a particular tax, one no less than now mentioned, a 1.5 p.c along with the company tax, ecology tax, property tax, these multinational subsidiaries financial institution in Ukraine.

I might say that this draft legislation is closely criticized now as a result of the standards. It isn’t very clear and it may be interpreted in several methods. Subsidiaries of multinational corporations that are working in Ukraine, they’re actually like, “No, it’s essential to not vote for this legislation.” However I feel topic to dialogue and a few amendments, it should most probably be adopted inside subsequent month.

Sarah Paez: Properly, thanks a lot, Valeria. That was a really attention-grabbing dialog and simply gave a very nice rundown of what is taking place in Ukraine on the tax facet.

Valeria Tarasenko: Thanks.