KIEV, Oct 18 (Reuters) - Ukraine is trying to reassure the International Monetary Fund that it can keep its budget deficit in check despite planning a change to how companies are taxed that may cause a $1.5 billion revenue shortfall, the head of a parliament tax committee said.
Ukraine’s quest for more aid has already hit a snag due to the country’s patchy record on implementing reforms and refusal to hike gas prices. The proposed switch to taxing firms on withdrawn capital rather than profits may put another spanner in the works.
Kiev is hoping to secure more IMF money before its $17.5 billion programme expires next year, when it must service a growing external debt burden and faces potential political instability from two elections.
Little information has trickled out about the current state of negotiations since an IMF mission came to Kiev in September. But lawmakers on the tax committee are privy to the government’s thinking as parliament begins debating the 2019 budget.
Ukraine last month asked the IMF to drop objections to the tax plan and asked the Fund to delete from their memorandum a clause forbidding Ukraine from changing its tax system during the programme, Nina Yuzhanina told Reuters.
The IMF and the finance ministry did not immediately provide comment for this story.
The finance ministry’s latest estimates, which have not been previously made public, show Ukraine may face a 42 billion hryvnia ($1.5 billion) budget shortfall for the tax tweaks, said Yuzhanina, head of the Committee on Taxation and Customs Policy.
“The Ministry of Finance has already presented to the IMF the option of a neutral impact on the budget,” she told Reuters in an interview. “This was at the end of September and the beginning of October.”
The government has the tools to make up for the revenue shortfall, “but the IMF until today does not see such opportunities. They have ceased to trust us,” she said.
Supporters of the tax change say it will free up companies to invest and grow their business, helping Ukraine recover from a deep crisis in 2014-2015 when its gross domestic product shank by almost 16 percent.
Dmytro Shymkiv, who was Deputy Head of the Presidential Administration at the time, in March published extracts from a letter from the Fund on his Facebook page, outlying the IMF’s objections to the proposal.
The IMF expressed “serious concerns about the loss in revenues” that could undermine Ukraine’s fiscal sustainability, and also worried the proposal could help companies avoid tax.
Yuzhanina said Ukraine believes the measure would actually reduce the scope for corruption and simplify the tax burden on companies. ($1 = 28.0200 hryvnias) (Reporting by Natalia Zinets; Writing by Matthias Williams; Editing by Hugh Lawson)