Crux (#09 September 2016)

Legislative Update

The past summer was marked by important regulations of the National Bank of Ukraine that simplify the exchange of foreign currency cash, use electronic documents, copies of documents in electronic form when purchasing and making payments with foreign currency; and extremely important regulations of the Antimonopoly Committee of Ukraine which approved new Fining Guidelines. Ukraine continued its integration efforts and joined the Pan-Euro-Med diagonal cumulation area. The Government represented a new Draft of tax reform and submitted an initiative to provide compulsory state social health insurance. These issues became the subject for analysis by our experts.

 

Evgeniy Vazhynskiy,

associate, Redcliffe Partners

The National Bank of Ukraine simplified the exchange of foreign currency cash by an Order of 2 August 2016, No. 364. How can the liberalization of the requirements for exchange transactions affect the situation on currency market?

During the last few months the National Bank of Ukraine adopted a number of regulations aimed at gradual relaxation of the currency control regime.

The most noteworthy changes include the decrease of foreign currency proceeds mandatory sale from 75% to 65% and lifting the ban on repatriation of dividends from Ukraine accrued for 2014 and/or 2015, the total amount of which to be repatriated shall not exceed the higher of the equivalent of USD 1,000,000 and 10% of the total accrued amount (but in any event not more than USD 5,000,000) per month.

Another important change includes cancellation of the price evaluation act previously required to be obtained from the State Commodities Markets Monitoring Agency for payments pursuant to contracts for works, services and intellectual property rights in an amount exceeding EUR 50,000.

The NBU has taken certain steps in the liberalization of currency control restrictions for individuals, such as the increase of the limitation for the sale of foreign currency to one person from the equivalent of UAH 6,000 to the equivalent of UAH 12,000 per day and of the limitation on daily withdrawals of foreign currency from bank accounts from the equivalent of UAH 50,000 to the equivalent of UAH 100,000.

The NBU has also abolished the requirement for individuals to submit documents confirming their identity and residence when buying or selling foreign currency in the amount up to UAH 150,000.

The above-mentioned changes are welcomed and will facilitate foreign currency operations for business and individuals.

 

Bohdan Dmukhovskyy,

senior associate, AEQUO

The NBU has allowed banks and its clients to use electronic documents, copies of documents in electronic form when purchasing and making payments with foreign currency. How will this affect the operations of banks?

With Regulation No.366 of 4 August 2016, and effective as of 12 August 2016, the National Bank of Ukraine continues its foreign currency liberalization initiatives, which are important for the revival of Ukrainian economy. The Regulation removes requirements to provide original paper documents or certified paper copies of documents (contracts, invoices etc.) by the banks’ clients in order to purchase and transfer foreign currency. Instead, electronic documents or electronic copies of paper documents are allowed.

It is expected that the liberalization will cease inconvenient paper flow back and forth between the bank and businesses and, hence, push down the transaction and administrative costs. Prior to the liberalization, banks and their clients were forced to make endless iterations of paper form documents review with involvement of courier staff and a time-consuming documents delivery service. In addition, banks had to add the paper contracts, invoices and relevant documentation to their physical archives, which is an archaic practice in the current digital age.      

The change should not pose any additional information security or counterparty verification problems to the banks given that the Regulation requires business to verify electronic copies of documents with digital signatures and deliver them to banks through certified client communication software. Thus, the Regulation allows banks to speed up client services in foreign currency operations, automate document storage and processing; and eases transaction processing by Ukrainian business with its foreign counterparties.

 

Anzhela Makhinova,

counsel, Sayenko Kharenko

Ukraine has begun the process of accession to the Regional Convention on Pan-Euro-Mediterranean Preferential rules of Origin. How has accession to this agreement affected the export of national products? What kind of new opportunity for cooperation will Ukrainian business receive in commerce?

All countries try to deepen trade liberalization by concluding free trade agreements (FTAs), usually eliminating all tariff and non-tariff trade barriers. In order to enjoy the said privileges, goods should originate in one of the countries that is a party to the FTA and be directly transported between such parties. Use of imported raw materials and components in the products may considerably influence their origin status under the FTA.

To the best of our knowledge, the vast majority of FTAs (i.e. all FTAs concluded by Ukraine (including the Association Agreement with the EC) stipulate bilateral cumulation. That is, only imported raw materials and components, originating in either country that are parties to the FTA, should be used to define the country of origin status (broadly speaking).

However, quite often in practice it is more reasonable and/or convenient to use materials and components from third countries which are not parties to the relevant FTAs. In order to continue enjoying privileges set forth by the FTAs in such cases, some countries are now going to apply diagonal cumulation provided that (a) application of diagonal cumulation is directly set out by the relevant FTAs; (b) the said FTAs provide for identical rules of origin.

In order to facilitate diagonal cumulation, the EU promotes conclusion of the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin (Convention). If a certain country adheres to the said Convention, it can join the Pan-Euro-Med diagonal cumulation area. The major advantage of the Convention is that the rules of origin contained in the Convention will then automatically replace the rules contained in the relevant FTAs entered into by that country. This will avoid amending each FTA individually in order to incorporate rules on diagonal cumulation and will ensure that identical rules of preferential origin apply.

It goes without saying that Ukraine’s participation in the Pan-Euro-Med diagonal cumulation area will stimulate the export of different products from Ukraine, especially value-added ones like steel products, machinery and some consumer goods. However, in order to make a system of diagonal cumulation operational, Ukraine should (a) join the Convention; and (b) negotiate FTAs with those countries of the Pan-Euro-Mediterranean area with which it would like to apply diagonal cumulation.

 

Iurii Rybak,

associate, Spenser & Kauffmann

The Ukrainian government establishes the Interregional Customs Office in the system of the State Fiscal Service of Ukraine. What enforcement powers will the new body receive? And how may the creation of the new body affect the efficiency of customs control?

The Cabinet of Ministers of Ukraine recently adopted Resolution on establishing the Interregional Customs Office within the system of the State Fiscal Service of Ukraine. The Government’s goal in such a measure consisted of strengthening control over places of customs clearance along with reducing the level of abuse in the customs field.

The particular, remit of the Interregional Customs Office still remains to be seen, as the Ministry of Finance of Ukraine has been prescribed and also is expected soon to enact the regulation on the Interregional Customs Office. Nevertheless, as the comments of state officials noted, the Interregional Customs Office will have the authority to analyze the risks in customs clearance and in the event of necessity without prior notification visit places of customs clearance. Remarkably, officers of the Interregional Customs Office could replace any other customs officer in the places of customs clearance for the duration of specified operations, exercise all functions in customs control sphere, check data in customs declarations together with the correctness of counted customs duties, eliminate any incidents of abuse from state customs services and economic operators likewise.

The forthcoming new authority is not expected to become a foundation stone in the reform of the customs field, as without complex changes in laws as well as in approaches of customs authorities each and every step will be a waste of the Government’s effort.

 

Yuriy Zaluskyy,

counsel, Baker & McKenzie

Recently the Ministry of Finance presented a Draft on tax reform. How would adoption of presented innovations affect SMEs?

The proposed Draft Act could hardly be considered comprehensive tax reform. Most of the proposals are aimed at perfecting the existing administration of taxes or rectifying deficiencies and inaccuracies. The ultimate goal of the Draft appears to be the relocation of powers from the State Fiscal Service to the Ministry of Finance. In particular, the Ministry’s remit would extend to administering taxes, issuing tax rulings and maintaining databases, which are presently carried out by the State Fiscal Service.

Moreover, the Ministry would take over responsibility of the “fiscal police”. While the Draft does not elaborate on the scope of the “fiscal police’s” functions and powers, we can reasonably conclude that it would replace the existing tax police, a department of the State Fiscal Service. Since this issue will be dealt with by a separate Draft, we can only assume that changing the name and subordination of the tax police would not be the only steps taken to remove this ineffective administrative body.

At this juncture, it appears that novelties related to online tax administration, such as the establishment of a fully-regulated online office of a taxpayer and publication of tax audit schedule on the site of the fiscal authorities would truly simplify tax compliance and might be the best this draft can offer.

 

Yaroslav Romanchuk,

managing partner, ILC EUCON

According to the Draft on tax reform, the introduction of an electronic account for taxpayers is proposed. How can this initiative affect the process of tax reporting?

A taxpayer’s electronic account has been functioning in test mode for some time, but all the alleged functionality has still not been implemented in full. Strategically, an electronic account should become a full service, by which taxpayers shall manage their payments, be able to check them at any time, as well as to receive relevant information from the tax authority in real time mode. All interactions between economic entities and fiscal authorities should take place through the electronic account. As of today, this service is more like a mailbox. While in its electronic account one can create, check and submit reports and declarations, as well as get receipts about successful filing. Periodically taxpayers were offered a new, more advanced version of this account, which they tested and got to know. However, invariably errors occurred, information disappeared or it could be viewed only in the form of characters. In short, the test mode revealed side effects.

The Draft Act of the Ministry of Finance, which stipulates changes in the Tax Code, requires legislation of some form of interaction with the taxpayer. Among useful features that are planned to be implemented to the account: informing a taxpayer on scheduling and progress of inspections, possibility of appeal against decisions on such inspections, registration, change of tax regime. And, importantly, the algorithm of taxpayer’s actions in case of all kinds of errors occurring is described in detail.

Everything is intended to be very good, but much still depends on the features and quality of the software.

 

Oleksandr Voznyuk,

partner, Asters

The Antimonopoly Committee of Ukraine approved Fining Guidelines on the application of section 2, 5 and 6 of Article 52 of the On Protection of Competition Act of Ukraine, section 1 and 2 of Article 21 of the On Protection from Unfair Competition Act of Ukraine. How do you evaluate the following changes?

The updated AMCU Fining Guidelines demonstrate more than just the AMCU’s approaches to the calculation of fines. The Committee is striving to build a more precise and accurate model of calculations in order to ensure that the circumstances of each individual case are duly considered and that the amounts of fines properly reflect the consequences of the infringement for the public. Such an approach is highly welcomed despite the criticism of the alleged increase of the AMCU’s discretion, though time will tell whether this model is sufficiently efficient.

Nevertheless, business is concerned since the updated Guidelines also reflect a counterintuitive interpretation by the AMCU of section 3 of Article 6 of the On Protection of Competition Act of Ukraine which concerns implicit cartels that are proved by way of rebuttal of objective reasons for parallel behavior of competitors. According to the Fining Guidelines, unlike explicit cartels which are proved with direct evidence and classified as the most serious violations, the AMCU classifies cartels under Section 3 of Article 6 as a moderate violation with lower fines. Why would implicit cartels which are more time-consuming and harder to prove trigger lower fines? Or does it mean that besides implicit cartels the AMCU intends to consider independent parallel behavior or even follow-the-leader pricing as anti-competitive concerted actions under Section 3 of Article 6? The answer to this question could well be alarming for market players.

 

Yevhen Filonenko,

senior associate, FCLEX Law Firm

National Bank of Ukraine Order No. 369 of 15 August 2016, approved the Regulations on the Procedure for the Analysis and Verification by Banks of Documents on Financial Transactions and their Participants. How can these changes affect the efficiency of risk management?

The On Banks and Banking Activity Act of Ukraine expressly enshrines the principle that banks must create a system of risk management and moreover that they are not allowed to carry out risky activities that threaten the interests of depositors or other creditors of the bank. It is for the sake of the development of the legislation that the National Bank of Ukraine adopted Resolution No.369 on 15 August 2016, which approved the Regulations on the Procedure for the Analysis and Verification by Banks of Documents (information) on Financial Transactions and their Participants.

The provisions of the Regulation are in no way changes to the current legislation of Ukraine, but they imply additional (including bureaucratic) derrieres to the implementation by banks of their activities. In particular, there have been established different procedures and mechanisms aimed at the analysis and verification of documents (information) on financial transactions, and not only those to be implemented, but also those which are only intended to be implemented.

The content and meaning of the Regulation are of an ambiguous character. On the one hand, the rules of the Regulation reveal and explain the provisions of the Act. However, on the other hand, the procedures and rules introduced by the Regulation may lead to violation of property rights of persons, as in the result of their implementation the bank is given the authority to deny the persons in the relevant financial transaction; that is, the bank limits the rights of the persons to dispose of their money, which is a violation of the Constitution of Ukraine and other laws.

 

Olena Khytrova,

associate partner, ILF

The Verkhovna Rada of Ukraine registered Draft Act No.4981-2, which provides compulsory state social health insurance. How can this initiative affect reform of the health care sector?

Compulsory health insurance is not a panacea that can work for any country. Its implementation should be preceded by tax reform and transformation of medical service providers.

In Ukraine, salaries often come in “envelopes”, with relations between employer and employee remaining legally unregulated. These “off the book” payments will contribute nothing to CHI. There is a distinct possibility that the Compulsory Health Insurance Fund will suffer the same fate as the Pension Fund.

The Draft Act in question offers no solutions to this problem. More than that, it creates a legal void for persons without CHI, essentially forcing them to get paid services, which contradicts the principle of free health care guaranteed by Article 49 of the Constitution of Ukraine.

Even those who are insured might end up paying for medical treatment. The Draft only extends CHI to certain kinds of services, to be determined by a contract. As for the services not mentioned in the insurance policy, it does not state on what terms they will be provided.

Either health care reform should conform to Article 49 of the Constitution or steps should be taken to amend the Article.

The Draft also establishes procedure for state and municipal hospitals regarding CHI contracts. Those medical institutions will definitely be participating in CHI, though it is still unclear how the new legislation is going to work with existing public procurement laws. It is, for all intents and purposes, a new funding source for state and municipal hospitals, which make them reluctant to adopt any changes, exercise cost management and improve the quality of their services.

 

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