Ukraine tax spat risks loans worth $4 bln for 2015

KIEV, Nov 2 (Reuters) – The Ukrainian parliament and the finance ministry are close to deadlock over planned tax cuts, lawmaker Nina Yuzhanina said on Monday, threatening reforms that are crucial to unlocking a further $4 billion in international loans.

Ukraine promised to revamp its tax system under an International Monetary Fund-led bailout programme to shore up its finances, crippled by a separatist conflict and years of economic mismanagement and corruption.

The latest clash centres on the proposed level of taxation for the 2016 budget: lawmakers want steep tax cuts that the finance ministry says are not sustainable.

“A critical situation is forming, we could end up in a dead-end. There should be a common approach with the government,” said Yuzhanina, who heads a parliamentary committee on tax and customs reform. “But if we don’t meet, if we don’t get the chance to talk, when will it be worked out?”

Discussions between the government and parliament on tax have not yet started due to what commentators say is a reluctance to make potentially unpopular budget decisions ahead of Oct. 25 local elections.

The disagreement is holding up next year’s budget draft, without which the IMF will not disburse the next tranche of $1.7 billion. A further $2.3 billion from the United States and European Union hinges on the IMF’s decision.

“The budget will only be submitted to parliament together with tax reforms. The government doesn’t see the point of submitting numbers … when the coalition doesn’t have a unified approach to tax reform,” Deputy Prime Minister Vyacheslav Kyrylenko said.

While parliament is pushing for tax cuts across the board, the finance ministry has focused on cutting high payroll taxes and simplifying a tax code whose complexity has encouraged tax avoidance and deterred foreign investment.

SUSTAINABLE REFORMS

“Tax reform is not only about low rates … It’s not worth risking macroeconomic stability to lower tax rates to some level that’s not sustainable fiscally,” Finance Minister Natalia Yaresko told Reuters last month.

“Most of the tax reform benefit comes from simplifying the tax code, from eliminating subjectivity which is a huge cause of tax administration abuse,” she said.

Under the IMF programme, Ukraine must balance lower tax rates with corresponding spending cuts to achieve a targeted budget deficit of 3.7 percent of gross domestic product in 2016, compared with this year’s level of 4.1 percent.

“I think we’ll be able to find (a) balance in cutting some expenditures and cutting some taxes and that of course is critical for us to agree internally, but also with the IMF for that tranche,” Yaresko said.

The parliamentary tax committee has proposed discussing tax reforms on Nov. 24-26.