Initiatives on compensating industrial investments through taxes will require transparency and control – Barristers
Legislative initiatives on compensating industrial investments through taxes (bills No. 13414 and No. 13415) will require a transparent application mechanism and control over the intended use of funds, believes Taras Onyshchenko, a lawyer at the law association Barristers Commercial. “These bills promise to become a ‘historic step’ in stimulating investment, in particular in the construction of new industrial facilities. The initiative provides for introducing a mechanism of partial compensation of investment costs through
Legislative initiatives on compensating industrial investments through taxes (bills No. 13414 and No. 13415) will require a transparent application mechanism and control over the intended use of funds, believes Taras Onyshchenko, a lawyer at the law association Barristers Commercial.
“These bills promise to become a ‘historic step’ in stimulating investment, in particular in the construction of new industrial facilities. The initiative provides for introducing a mechanism of partial compensation of investment costs through tax incentives, which is a common and successful practice in the countries of the European Union. At the same time, there are certain challenges and risks of implementation that will require careful attention,” he told the agency “Interfax-Ukraine“.
Among the positive expectations from the adoption of the bill, Onyshchenko named, in particular, a substantial stimulation of economic growth, “since the proposed investment compensation mechanisms can significantly reduce risks and increase the profitability of projects, encouraging capital investment in the manufacturing sector.”
“The EU's successful experience demonstrates the effectiveness of such instruments, which can contribute both to attracting new capital and to the return of investments that were withdrawn or relocated. In addition, new and modernized production facilities will inevitably lead to the creation of new jobs and growth in employment. Compensation of equipment costs will encourage the adoption of modern technologies and increase the competitiveness of Ukrainian products on the world market,” he said.
At the same time, Onyshchenko stresses that for the effective implementation of the proposed mechanisms “it will be important to carefully calculate the potential fiscal impact on state budget revenues, especially in the short term.”
“For successful implementation, it is necessary to develop a maximally transparent, efficient and non-bureaucratic mechanism for submitting applications, reviewing them, verifying costs and monitoring the intended use of investments, since the complexity of procedures can negate all the benefits of compensation. The clarity of definitions is also critically important, in particular the definitions of ‘manufacturing industry’ and ‘equipment under UKTZED’, in order to avoid ambiguities and abuse,” he said.
In addition, the lawyer considers it necessary to “ensure synergy so that the new mechanism complements, rather than duplicates or conflicts with, the already existing instruments of investment support.” Onyshchenko reminded that Ukraine already applies a number of instruments to support business and investment. Among them are the “Affordable Loans 5-7-9%” program, grants for processing of up to UAH 8 million, benefits for industrial park participants, as well as state support for “projects with significant investments” (from EUR 12 million), provided under a separate law. In addition, a system of investment insurance against military and political risks is in operation.
“However, bills No. 13414/13415 stand out for their comprehensiveness and accessibility, which makes them unique among existing instruments. Unlike the programs mentioned, they offer direct compensation through a wide range of taxes, significantly lower the entry threshold for investors (starting from EUR 100 thousand) and, which is especially important, apply to already operating enterprises. Such an approach creates a more flexible and all-encompassing incentive instrument compared with targeted programs or benefits that are mostly oriented toward very large investments or have specific conditions,” the lawyer said.
As previously reported, bills No. 13414 and No. 13415 focus on supporting the manufacturing industry, recognized as a key sector for creating added value and economic growth in Ukraine. It is envisaged that investors will be able to compensate a significant part of their investment costs. These costs cover a wide range of capital investments, including the construction of utility networks and related infrastructure, the acquisition, construction, modernization and technical/technological re-equipment of buildings and structures, as well as the purchase of equipment under UKTZED and of land plots.
The compensation mechanism will be implemented through a reduction of tax liabilities for the main taxes. In particular, this concerns corporate income tax, import VAT on equipment, import duty on equipment, property tax and land tax. The amount of compensation will depend on the scale of the investment project. The key innovation and a significant advantage of this mechanism is that it will be available not only to entirely new enterprises, but also to existing ones that invest in the development and modernization of their production capacities.
The initiator and co-author of bills No. 13414 and No. 13415, Dmytro Kysylevskyi, deputy chair of the Verkhovna Rada committee on economic development, said that the bills were registered jointly by 55 members of parliament from various factions and groups, including, in particular, Danylo Hetmantsev, Andrii Motovylovets and Dmytro Natalukha.
Bills No. 13414 and No. 13415 provide for amendments to the tax and customs codes regarding the compensation of investments through taxes.