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Largest companies might leave Ukraine due to tax initiatives of new government

Author : Olena Holubeva

Source : 112 Ukraine

British American Tobacco, Rozetka, ArcelorMittal Kryvyi Rih metallurgical plant are under the risk
21:30, 23 October 2019

president.gov.ua

Dozens of enterprises might close in Ukraine due to the sharp tightening of fiscal pressure on business, which will begin with the adoption of bills No. 1210 and 1210-1. In particular, it has already suspended the work of its Ukrainian factory British American Tobacco. Other large tobacco companies also announced their intention to revise the operation of their production facilities. In addition, Dnipro Metallurgical Plant named after Petrovsky has stopped operating. Sukha Balka enterprise, iron ore mine named after Artem, and dozens of others might stop soon as well. Scandalous tax initiatives by the authorities can lead not only to the closure of businesses, budget shortfalls, and a worsening investment climate, but also to unemployment for tens of thousands of Ukrainians, mass emigration abroad, and social tension in cities.

Related: Court seizes property of ex-minister of income and tax Klymenko

BAT and PM will leave - Ukraine will lose more than 1,1 billion USD of taxes

The Ukrainian government intends to tighten fiscal pressure on the business. The Parliament has already registered a number of relevant bills. Both small and medium-sized businesses and large ones will fall under the distribution. Experts predict that not only sole proprietorships but also industrial giants will close in Ukraine.

Against the backdrop of such initiatives, one of the largest taxpayers in the country, British American Tobacco (BAT), closed its factory in Ukraine. According to the State Fiscal Service (SFS), in 2018, BAT paid 643 million USD of taxes to the budget, entering the top three taxpayers. Previously, due to the “unpredictable fiscal and regulatory policies of the Ukrainian government”, BAT announced plans to move the regional center from Kyiv to Romania in 2020. The company specified that the factory was suspended for an indefinite time and the exact date of its resumption is unknown. Employees still receive a salary.

October 4, bill No. 1049 was adopted, which regulates trade margin for cigarettes and prices for them could increase by 40% from January 2020, other major donors of the Ukrainian budget, Philip Morris (PM), also announced the closure of their enterprises and JTI. PM clarified that the company is seriously concerned about the provisions of Bill No. 1210 and the plan to increase excise tax rates on cigarettes. If the state so suddenly, without discussing with business, takes initiatives that can lead to a reduction in the legal market, it will be forced to review the operation of its facilities in Ukraine, assured Philipp Morris Ukraine. In 2018, the company paid taxes of 0,5 billion USD. It is the fifth-largest taxpayer in the country.

Related: Ukraine to lose Chinese market due to amendments to Tax Code

 

As you know, bill No. 1210 provides for an increase in the excise tax on cigarettes, which will lead to an increase in prices by 2.5-3 times - up to 80-100 UAH per pack of cigarettes. According to Natalia Bondarenko, Director of External Relations at Philipp Morris Ukraine, the widening of the price gap with neighboring countries and the low purchasing power of citizens will lead to a sharp increase in smuggling. According to the company, the illegal market can reach 27 billion cigarettes, about 59% of the legal market. Thus, legal manufacturers will significantly decrease sales volumes, and the state will not receive the expected excise tax revenues. “We already see the consequences of the policy of a 30-40 % increase in excise tax rates over the past 4 years. The illegal market has grown 7 times over this period. We believe that an increase in excise tax rates by 150% will not allow us to keep the legal market at the level that it is there is today," Natalia Bondarenko emphasized.

Bill No. 1210 also proposes a 4-fold increase in tax rates for tobacco-containing products for heating, as well as a change in the approach to taxing this category of tobacco products, which are a smokeless alternative to smoking. According to tobacco companies, more than 400 thousand smokers in Ukraine and 11 million people in the world have given up smoking cigarettes in favor of tobacco heating technologies. A significant rise in the price of products can push them to abandon the technology, thanks to which the body gives in to significantly less influence of toxic substances, and return them to old habits. Since 2008, PM has invested in products with a risk reduction potential (IQOS) of more than 6 billion USD. BAT has spent $ 2.5 billion on research and development on its GLO tobacco heating technology over the past 6 years.

Related: PM Honcharuk: Ukraine's government is planning to reduce taxes gradually

Mines will close - thousands of people will be jobless

Bill No. 1210 created serious problems for enterprises in the metallurgical industry. ArcelorMittal Kryvyi Rih metallurgical plant reported about stopping its iron ore mine named after Artem in the event of an increase in rent for the extraction of iron ore according to bill No. 1210. This was stated by Deputy General Director of the plant Volodymyr Tkachenko. The mine employs more than a thousand people. In early October, Dnipro Metallurgical Plant named after Petrovsky. Oleksandr Gerasymchuk, Director General of the Ingulets Mining and Processing Plant, announced the need to review budgets and plans for modernization and effective personnel management for 2020. Due to the difficult economic situation at the Sukha Balka mining and processing enterprise, the local management has been forced to transfer the control apparatus to a three-day operation mode from December 1. Chairman of the independent trade union of the enterprise Serhiy Barabashuk reported it. "If bill No. 1210 is passed, the situation will worsen, the enterprise will be on the verge of stopping, and 2.5 thousand employees will be forced to look for a job," Barabashuk said, emphasizing that Mining and Metallurgical Company enterprises are city-forming for Kryvy Rih.

Due to parliamentarians' attempts to adopt changes to the country's Tax Code, the tax burden on ore mining will increase by 5 times. That is, to produce products subject to increased rental payments and double taxation of processed products will become unprofitable.

As reported, due to higher rents, a third of domestic production is projected to close. In addition, Ukraine will lose 70% of its ore exports and, as a result, about 30% of all foreign exchange earnings. In this case, the railway industry might lose 40% of the freight traffic. The increase in the cost of iron ore production in Ukraine will lead to an increase in labor migration, experts emphasize.

Related: In case of tax code amendments implemented, Ukrainian companies will lose their international markets, – European Business Association

The increase in rent for iron ore mining will lead to increased social tension at the industry enterprises, Mykhailo Volynets, the member of the Committee on Energy and Housing and Utilities, the head of the Independent Trade Union of Miners of Ukraine, warned at a meeting of the working group of the Verkhovna Rada Committee on Tax and Customs politics.

Even Rozetka might close

Entrepreneurs are also very indignant at other tax initiatives of the authorities, which have been arising recently rather suddenly and unexpectedly. A big scandal erupted in connection with increased tax pressure on individuals-entrepreneurs. The laws on the introduction of software billing registrars, electronic checks and cashback to customers for an illegally issued check threatened to close the taxi service company and online stores.

This situation will lead to a further exodus of investors from the country, experts emphasize. First of all, Western investors will leave, for which transparency and predictability of the fiscal policy of the state are the main conditions for working in the country.

Related: Puppets of Kolomoysky: Why parliamentary tax committee is under oligarch’s thumb?

Interestingly, while the president is inviting investors, some "Servants of the People" are squeezing them out of the country.

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