€90 billion for Ukraine with a condition: EU insists on tax reforms – Bloomberg
29 April 13:12
The European Union is considering imposing stricter conditions on a €90 billion ($105 billion) loan to Ukraine, which would make certain payments contingent on the implementation of an unpopular tax change for businesses, Bloomberg reports, citing sources, according to "Komersant Ukrainian".
EU and IMF Requirements
The plan being discussed by the European Commission, the EU’s executive body, will affect €8.4 billion in so-called macro-financial assistance, which is expected to be provided this year as part of a program that is crucial for Kyiv to maintain control over the situation in the fight against a full-scale Russian invasion.
“These efforts coincide with Ukraine’s efforts to persuade another major donor, the International Monetary Fund, to at least postpone the introduction of a similar requirement for unlocking additional aid under a separate loan program worth over $8 billion,” sources told the publication.
Discussions focused on changes to the preferential tax regime currently applied to certain Ukrainian companies. Originally designed for self-employed entrepreneurs and small businesses, it allows firms to pay a minimum rate of 5% of their income. According to estimates by the Ministry of Finance, this change will add over 40 billion hryvnia ($907 million) to the budget annually.
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The Ministry of Finance and Ukraine’s major donors argue that this arrangement strains the wartime budget, distorts competition, and contributes to a significant shadow economy.
Under the proposal, the Kyiv government would have to impose a 20% value-added tax on companies currently operating under a preferential tax regime and with annual revenue exceeding 4 million hryvnias, sources said.
EU aid, which could potentially be affected by the new condition, constitutes only a portion of the total two-year package, which consists of approximately 60 billion euros in defense support, with the remainder divided between macro-financial assistance and the so-called Ukraine Assistance Package, which provides funds for general budgetary expenditures.
A European Commission spokesperson stated that the Commission is “working tirelessly” to finalize a memorandum of understanding that will serve as the basis for the financing conditions for Ukraine, but declined to provide details.
According to the spokesperson, the EU executive always coordinates its “reform agenda with the IMF, and this is also the case now.” The goal was to conclude negotiations “as soon as possible with an ambitious reform agenda to strengthen Ukraine’s economy” and accelerate its integration with the EU, the spokesperson said.
An Extremely Unpopular Decision
But this pressure is likely to cause tension in Ukrainian society, as the proposed measures are extremely unpopular. The standoff between parliament and President Volodymyr Zelenskyy also complicates their implementation.
Ukraine has long insisted that the EU approve disbursements from the aid package, which Hungarian Prime Minister Viktor Orbán had blocked for months. His defeat in parliamentary elections earlier this month cleared the way for disbursements to begin by the end of this quarter.
Although the new conditions will not affect key defense aid, they are still likely to face difficulties.
The IMF’s Excessive Concessions
Earlier this year, Parliament openly defied Zelenskyy by refusing to change the tax regime, specifically to expand the categories of foreign parcels subject to VAT—another requirement put forward by the IMF. Meanwhile, the Office of the President accused the Ministry of Finance of being overly accommodating toward the IMF.
“Further IMF disbursements depend on this and other fiscal tightening measures that Kyiv agreed to implement to curb the shadow economy. However, the country has already missed the March deadline for amending the legislation. It now has until June, when the next IMF review is scheduled,” the publication writes.
The Washington-based lender has so far allocated $1.5 billion under the current program. The next tranche of about $700 million remains in question.
Since parliament has reached an impasse over the adoption of tax changes, Ukrainian officials and the IMF discussed a possible delay in implementing VAT measures for self-employed entrepreneurs for about a year during the lender’s spring meeting earlier this month, sources said.
However, they said the IMF still insists that parliament pass the VAT hike on parcels by June. The Finance Ministry said Monday it would soon submit a draft bill to parliament. Nevertheless, the prospects for the amendments’ passage look slim, one of the sources said.
The Ministry of Finance in Kyiv and the IMF declined to comment.
Even if Ukraine manages to buy some time now, it will eventually have to reform its tax system to bring it into line with EU rules during accession negotiations. This will include eliminating certain tax breaks. For now, Kyiv’s international donors may consider other measures to generate revenue or curb the shadow economy.
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