20% of enterprises’ current assets will be placed in special accounts
On March 1 the President of Ukraine signed an order that binds every Ukrainian enterprise to open a special value-added tax (VAT) bank account on July 1, 2004. The edict also says that the cabinet and the National Bank of Ukraine (NBU) should work out within five months a procedure by which companies will have not only a current account but also a VAT account so that money could be transferred from the latter either to the budget as payment of VAT or to any other supplier’s VAT account. This news kindled great enthusiasm in Prime Minister Viktor Yanukovych. In his view, the introduction of special VAT accounts will make the system of assessing and levying this tax more transparent as well as boost budget revenues.
The point of this innovation is to combat VAT evasion. President Leonid Kuchma thinks this tax does not serve its purpose today because there is a host of ways to evade it. The most popular loophole is setting up bogus firms which, having performed the function of financial mediator in cashing-in operations, are liquidated together with their huge tax arrears at the slightest suspicion that problems with the authorities might rise. It is thus far unclear how the VAT account mechanism will be able to close this loophole. Yet, it is obvious that, if implemented, this idea will make it far easier for governmental bodies to manage this tax.
On the other hand, this innovation will not enrapture businessmen, for in this case enterprises will lose the freedom to handle their own funds. 20% of their money earned will be frozen in the special account. This could make Ukrainian firms drain their already meager current assets. Supposedly, a company will be able to transfer money once a month from its VAT account into its current account, but this will be just the balance after all arrears have been cleared. To do so, one will have to go through a cumbersome process of sending a request to the bank which must in turn follow a VAT account monitoring procedure still to be worked out by the NBU. Naturally, bankers themselves will not be overjoyed with this prospect as well.
There is only one country in the world, Bulgaria, where the mechanism of VAT accounts has been functioning and there for only eighteen months. Thus it is too early to judge its effectiveness. Russia is scheduled to also implement this idea from July 1, 2004. Its government has already made a decision to this effect. However, Moscow is now in the grip of a large-scale lobbying campaign aimed at deferring this act until six months later because neither the tax authorities, banks, nor business are prepared to work in this new manner. Taking into account that the influential oil and gas business is pressing hard for this deferment, the latter is almost sure to be granted. Otherwise, Russian business may rush to offshore areas en mass.
Obviously, Ukraine began to nurture the idea of VAT accounts under the influence of news from the east. But the economy of Bulgaria is too different structurally from that of Ukraine to serve as an example of implementing this innovation. This means our entrepreneurs are in for never-ending improvisations of the State Tax Administration concerning special accounts. It is difficult to say if five months will be enough to avert new scandals and the legal actions that usually accompany this kind of process. That there will be legal actions is beyond any doubt. First of all, the idea of VAT accounts may run counter to a number of laws. Simultaneously, any attempt to pass an applicable law is obviously doomed to failure. In fact, parliament torpedoed this kind of bill in 2001. It is perhaps for this reason that this time it is planned to solve the problem at the level of the cabinet and NBU.
To prevent this basically good innovation from becoming a bane for the state and business, the public should undoubtedly be given at least six months to thoroughly study the documents already drawn up and ready to be signed.
