Ukraine: Amending the Tax Code of Ukraine to ensure the balance of the budget revenues in 2018

On 7 December 2017, the Parliament of Ukraine voted to introduce a number of amendments into the Tax Code of Ukraine* (the “Amendments”) aimed at ensuring the balance of the budget revenues in 2018.

The parliament revised applicable tax rates set in absolute figures, namely, increasing (i) the ecological tax by roughly 11%, and (ii) the royalty for usage of water resources, forest resources and usage of subsoil for purposes other than mineral extraction – roughly by 17%. The tax rates increase ought to balance the  anticipated consumer price index for 2018 of 11.2%.

The Amendments further introduce gradual increase in excise tax rates on tobacco and tobacco products, subject to Ukraine’s obligations under Ukraine-EU Association Agreement. The rates are expected to increase roughly by 30% in 2018 and, later on, annually by 20% in the 2019-2024 period and eventually to the level equivalent to EUR 90 per 1000 items. From 1 January 2025, the share of the total excise tax liability should constitute at least 60% of the weighted average retail selling price of cigarettes.

The Amendments introduce a number of additional tax changes among which:

  • Automatic blocking of the VAT invoices. The Amendments revert the system of automatic blocking of the VAT invoices back into testing mode until the order and criteria for blocking are adopted by the Government.
  • Export of certain grain cultures. The Amendments introduce VAT exemption for export of soy, sunflower and rape grain starting from 1 March 2018.
  • Import of equipment for own production. Until 1 January 2020, the taxpayers may apply for the instalment for 24 months of import VAT liabilities on certain imported equipment to be used in modernisation of own production.
  • Incentives for electric cars. For the 2018 tax year, the Amendments introduce temporary exemption from VAT and excise tax on import and supply of electric cars, as well as exemption from VAT on supply of transportation services using the electric cars.
  • Extraction of natural gas. The Amendments are decreasing the rates of royalty for extraction of natural gas and condensate from new wells, along with stabilising the level of tax burden on extraction of natural gas until 1 January 2023.
  • Royalty for transfer of software. The Amendments clarify the tax definition of royalty, explicitly excluding now transfer of the right to distribute copies of software without the right to reproduce them or when their reproduction is limited to the use by the end user. The Amendments further emphasize that the temporary VAT exemption on supply of software shall apply to any supply that does not fall within the tax definition of royalty.
  • Transfer pricing. The Amendments extend the list of controlled transactions for the purposes of Ukrainian transfer pricing rules, now including the operations of non-resident entities with their permanent establishments in Ukraine.

The Amendments are yet to be signed by the President of Ukraine and are scheduled to enter into force on 1 January 2018, except for changes related to automatic blocking of VAT invoices system which are to become effective immediately upon official publication.

* Information is given based on legislative drafts available as of the date of this publication. The final text of the Amendments may slightly differ from the above.